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Swans, rhinos and bears, oh my! Why the Chinese President is worried about animals

Xi Jinping
The risk of unexpected 'black swan' events hurting China's economy has president Xi Jinping worried.
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While it might have sounded like a recap of a trip to the zoo, Chinese President Xi Jinping’s recent comments about ‘black swans’ and ‘grey rhinos’ are actually a sombre warning for the global economy.

In a speech given to senior members of the ruling Chinese Communist Party (CCP) on Monday, Mr Xi cautioned that the nation’s economy is slowing and those in power need to remain vigilant to protect from shocks that could hurt the country’s GDP.

So what do waterbirds and pachyderms have to do with economic output? Similarly to stock traders using zoological terms like bull and bear or ‘animal spirits’ to describe market conditions, ‘black swan’ and ‘grey rhino’ are terms applied to different kinds of economic risk.

‘Grey rhino’ is used to describe risks that politicians, markets and investors are aware of and understand how devastating their impact could be, but simply choose not to act on. A common example of a ‘grey rhino’ is climate change.

On the other end of the spectrum are ‘black swan’ events, risks that can’t be predicted and instead appear suddenly and with huge impact (such as 2008’s Global Financial Crisis, which tanked markets around the world almost overnight).

A rhino and a swan.
“Black swan’ and ‘grey rhino’ are terms describing different kinds of economic risk.

Mr Xi, who is often compared to an animal in the form of beloved children’s book character Winnie the Pooh, used these two animals to signify the challenges his government will need to watch for as China’s GDP growth tapers off.

What are the risks to China?

Mr Xi’s comments came off the back of new data showing China’s GDP growth for 2018 was its lowest in almost 30 years, but at 6.4 per cent it’s still well above the kinds of growth seen in Australia or the US over the past decade.

According to University of Technology Sydney Professor James Laurenceson, deputy director of the university’s Australia-China Relations Institute, the Chinese government believes it needs to create more than 10 million new jobs each year to maintain “social stability”, and by their estimations that means a growth rate of 6 per cent is needed to generate those jobs.

As wages in the country increase, however, many of the traditional manufacturing jobs available in previous years are being lost to countries like Vietnam and Bangladesh and making that growth goal harder to maintain, and big swan or rhino shocks could put them below target.

China faces a ‘grey rhino’ risk in the form of its growing debt problem, which is “grinding away” the nation’s economic output, Professor Laurenceson said.

The other big risk factor is US President Donald Trump, whose unpredictability has become so predictable that the risk he presents to China’s economy doesn’t fit neatly into either the swan or rhino camps, instead hanging awkwardly somewhere between the two.

“The Trump stuff you know is there, so it’s not entirely a ‘black swan’, but exactly what’s Trump going to do? That is kind of ‘black swan’-ish; you never know what he’s going to do next,” he said.

Australia safe and sound

Should China fall victim to the swans or rhinos of the world, the effect on Australia’s economy is unlikely to be as big as the average person might think, Professor Laurenceson said.

“If China had a hard landing [a sharp economic turndown that’s not quite a crash], it might knock about 0.5 percentage points off Australia’s growth,” he said.

Australia’s average annual growth rate is 3 per cent, so that would mean a “material” dip, but it’s “hardly disastrous” and certainly wouldn’t guarantee a recession.

Research from Oxford Economics similarly found that fears of declining rates of consumption within China are somewhat exaggerated.

“A rash of headline stories on Chinese consumers downgrading their consumption by cutting discretionary spending, cars in particular, and turning to cheaper substitutes, such as shifting from Apple to Huawei, has received international attention. However, while overall consumption growth has softened, it has not weakened sharply,” Oxford Economics said in a statement.

“While we expect consumption growth to slow, we think that the anxiety about China’s consumers is largely overdone.”