Reserve Bank speech
The Reserve Bank Governor Philip Lowe delivered a speech at the Australia-China Relations Institute in Sydney last night.
What does it all mean?
- Governor Lowe noted that while the ascent of the Chinese economy has been positive for Australia, it is also not without its risks: “If a major economic shock were to originate from China over the coming years, its origin is most likely to be in the Chinese financial system…the experience is that the build-up of financial risks like those seen in China is almost always followed by a marked slowdown in GDP growth or a financial crisis. It is important to point out that these outcomes are not inevitable and that China is able to learn from the experience of other countries, including Australia… one of these concerns is that during the big run-up in debt, a lot of bad loans were made.”
- The reform of the Chinese financial system has featured in Reserve Bank statements and indeed it is one of the key international risks for the Australian economy. But it is a case of ‘so far, so good’. The Chinese authorities are dealing with the challenges before they materialise – something many other economies haven’t done, waiting instead until a crisis has developed.
- The Chinese economy is rebalancing. The authorities are grappling with an economic juggernaut. Efforts are being made to liberalise and deleverage the financial system. Growth has decelerated but is robust and stable. The current focus is on ‘quality’-type growth which targets unemployment of around 4.5 per cent and reduced pollution through supply-side reforms.
Key points from the speech
- China’s economic rise has boosted Australia’s income and prosperity: In his speech entitled “Australia’s Deepening Economic Relationship with China: Opportunities and Risks”, Dr Lowe is quick to stress the importance of Australia’s economic ties with its largest trading partner: “The deepening of our economic relationship with China has greatly benefited Australia. It has created new opportunities for us and significantly boosted our national income. It was also one of the factors that helped our economy through the global financial crisis.”
- Deep economic ties and cultural respect can bind the two countries. The Governor states, “We will, of course, have differences from time to time, but we will surely be better placed to deal with these if we understand one another well. Building strong connections across business, finance, politics, academia and the community more generally is important to deepening this understanding.”
- On trade and protectionism: “Together, we can also be a strong voice for the importance of an open international trading system and for effective regional cooperation.”
- On the importance of China as Australia’s largest trading partner: “Our trade with China has expanded very rapidly over the past decade, to the point where China is now Australia’s largest trading partner. China accounts for nearly one-third of our exports and around one-fifth of our imports”.
- Growing export diversification: While Governor Lowe acknowledged the significant contribution that Australia’s bulk commodities, iron ore and coal (57 per cent combined total exports), make to national income, he stressed that it “… would be a mistake to view the trade relationship solely in these terms. Our exports to China are much more diverse than this.”
- On Australia’s services sector bonanza: “Over the past decade, Australia’s service exports to China have grown at an average annual rate of 15 per cent…the growth has been particularly strong in the areas of tourism and education.”
- Record Chinese tourists flock ‘Down Under’: “Last year there were 1.4 million visitors from China to Australia, up from around 400,000 a decade ago…they now account for around 25 per cent of total visitor expenditure in Australia, a considerably larger share than any other country.” said Dr Lowe.
- The Governor also emphasises that education is Australia’s third largest export: “On the education front, there are currently around 200,000 Chinese students studying in Australia. Education exports to China now account for around one-third of Australia’s total education exports.”
- The ‘Dining Boom’ continues: “China has become the largest single export market for a range of Australia’s manufactured food items. Exports of dairy products and alcoholic beverages have grown especially strongly, as have a range of other food and health-related products (of which vitamin sales are often remarked to be growing strongly).”
- On China’s foreign investment: “Chinese investment accounts for only a small share of the total stock of outstanding foreign investment in Australia – just 3 per cent.”
- Strengthening financial sector linkages: “The RBA sees first-hand the stronger financial relationship between our two countries. Since 2012, the RBA has had a currency swap agreement with the People’s Bank of China, with the goal of giving market participants in Australia confidence that renminbi (RMB) will be available for trade settlement and other payment obligations. The RBA also now holds 5 per cent of our foreign currency reserves in RMB.”
- Chinese population growth and growing cultural ties to Australia: “Over the past decade, the Chinese-born resident population in Australia has grown at an average rate of around 8 per cent per year. According to the latest Census, people born in mainland China account for 2 per cent of Australia’s population (around 510,000 people)…. Mandarin is now the second most commonly spoken language in Australian homes and Cantonese the fourth most common.”
- On China’s economic rebalancing: “It is too early to tell whether the authorities will be successful in managing the transition from a growth model heavily dependent upon the accumulation of debt to one where credit is less central. It is a very significant task.”
- China’s growing debt load poses significant risks: “If a major economic shock were to originate from China over the coming years, its origin is most likely to be in the Chinese financial system…the experience is that the build-up of financial risks like those seen in China is almost always followed by a marked slowdown in GDP growth or a financial crisis. It is important to point out that these outcomes are not inevitable and that China is able to learn from the experience of other countries, including Australia… one of these concerns is that during the big run-up in debt, a lot of bad loans were made.”
- On shadow banks: “Another concern is the growth of the so-called ‘shadow banking’ system… non-bank financing now accounts for 45 per cent of total debt, up from 25 percent a decade ago….the smaller banks have played an important role in the growth of shadow financing. This is evident in the rapid growth of their claims on non-bank financial institutions…the complex web that has developed in China is characterised by opaque risk transfers, implicit guarantees and complex connections.”
- China is attempting to deleverage: “At a recent policy meeting convened by President Xi Jinping, the leadership called for a gradual reduction in the debt-to-GDP ratio… these various measures provide a strong signal that the Chinese authorities are serious about addressing the vulnerabilities. Consistent with this, the lower economic growth target for 2018 of 6.5 per cent suggests some tolerance for a gradual slowing in growth.”