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Why China’s ‘painful’ outlook is not all bad news

The Australian economy is hopelessly dependent upon China, and China is in trouble.

August was a universally awful month for the People’s Republic, with a share market collapse causing the government to cut the cash rate and devalue the currency, in an attempt to stimulate the economy.

Australia’s exports to China account for 27 per cent of total exports. That means when China is in trouble, we’re in trouble.

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But economists almost unanimously agree that, despite the continued gloom, the Reserve Bank of Australia will keep the cash rate on hold when it meets on Tuesday.

A survey of 32 economists by comparison website finder.com.au found that all bar one expect rates to stay at two per cent. Most (78 per cent) believe it will stay at two per cent for the rest of the year.

Glenn Stevens

Reserve Bank governor Glenn Stevens is expected to keep rates on hold on Tuesday. Photo: AAP

In this they are in line with market expectations. On Friday, 90 per cent of futures traders expected rates to stay on hold.

Industry Super Australia chief economist Stephen Anthony agreed that a rate cut was unlikely this month. However, in news that mortgage holders will welcome, he said further cuts were not out of the question later in the year.

“There is a case to be made for further easing in the Australian economy,” he told The New Daily.

“There are certainly no price pressures here. Clearly growth is sub-trend. That said, it’s just a question of timing. The national accounts are due on Wednesday. Maybe the governor [Glenn Stevens] just wants to take a little bit more time to see the lay of the land before he does anything further.”

Another looming event, said Mr Anthony, is a potential interest rate hike in the United States. If the US Federal Reserve did lift rates, the US dollar would likely rise, which would push the Aussie dollar down, thus making another RBA rate cut less likely.

China’s growing pains

But for Australia, the big story is China.

Mr Anthony said that China’s current GDP growth of around seven per cent or just under will soon be a thing of the past. He warned Australians to expect growth figures “with a five in front of them”.

“So there’s a rebalancing going on in the Chinese economy, a structural rebalancing from an export and investment-led growth model, to something that’s more driven by the services sector and household consumption. And that will play itself out over the next few years, and will probably cause some growing pains.”

Despite the inevitable squeeze on Australia, he said the Chinese authorities’ move to devalue the economy is “probably a good thing” for Australian exports.

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Joe Hockey has copped a lot of flak for his apparent unwillingness to risk attempting major economic reform. Photo: AAP

“Anything that’s likely to make Chinese production more desirable in terms of cost competitive, is more likely to draw in more Australian inputs into their production. So in other words we should sell more exports.”

He said that, despite making our exports more expensive, the net result should be positive.

Monetary policy, or economic reform?

Mr Anthony said the RBA’s actions have been the right ones.

“We’d all be in a much worse situation in terms of percentage points of output if the Reserve Bank hadn’t done what it’s doing now,” he said.

But he said there is much more that can be done in the way of economic reform.

He said one area in which the government can do to stimulate the economy is capital investment, particularly in infrastructure. Governments, he said, often confuse their capital budget with their expenditure budget. The expenditure budget – e.g.welfare payments and public sector wages – should not exceed income in the long-term.

“But on the capital budget side of things, the so-called economic golden rule of fiscal strategy is to be prepared to borrow to the extent that you can generate a higher financial return over whatever borrowings you make.”

He said the government’s unwillingness to borrow in order to invest has no economic basis – particularly since rates are so low – and so must have some other basis.

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