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China's slowdown bottoming out, according to Australian gauges

China's economy looks headed for a soft landing. At least that's what BHP Billiton Ltd. and Australia's central bank chief Glenn Stevens are signaling 3,500 miles away.

[SYDNEY] China's economy looks headed for a soft landing. At least that's what BHP Billiton Ltd. and Australia's central bank chief Glenn Stevens are signaling 3,500 miles away.

Being the most China-dependent developed economy Australia is highly attuned to the ebbs and flows in the world's biggest trading nation. While China's growth has slowed, the best estimate of Aussie exporters and policy makers is that housing demand from the migration of rural Chinese to cities will help avert an abrupt further slump in expansion.

BHP, the world's biggest miner, forecasts a moderate recovery in Chinese demand for steel in 2015. The Reserve Bank of Australia chief says that growth in the second-largest economy is impressive. And one measure favored by some investors, iron-ore shipments from the remote northwest Port Hedland - the largest exit point for such exports - have stabilised near a record level.

"Australia's data show that China's economy is set to remain strong in 2015," said James Laurenceson, professor of economics and deputy director of the Australia-China Relations Institute in Sydney. "I look at all the numbers - resources, agriculture and services - and see solid indicators across the board." One measure from China itself Wednesday offered evidence of a trough in what's been a downturn in industrial expansion. The preliminary purchasing manager's index for February from HSBC Holdings Plc and Markit Economics showed a rebound. The Aussie dollar - which tumbled 15 per cent in the past six months as China's slowdown deepened - gained after the release.

"The real thing that is impacting us at the moment is the slowdown in residential construction" in China, John Edwards, a member of the Australian central bank's board, said in a Feb 17 interview. "There are some signs that that is beginning to turn around. It will have to turn around, otherwise China won't be able to achieve its aims in respect of urbanization in the next decade or two." Chinese policy makers have taken steps to shore up the property market, lowering interest rates last year and cutting lenders' required reserve ratios this month. An embrace of greater liquidity helped spur a third straight gain in China's broadest measure of new credit in January.

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Officials also are preparing measures to counter a housing market slump and will roll them out if the economy needs support, people with knowledge of the matter say.

Chinese residential construction is a boon for Australian resource producers. Rio Tinto Group, the world's second-largest mining company, estimates China's 1.3 billion people were 54 percent urbanised at the end of last year, and predicts that proportion will reach 70 per cent by 2030, supporting steel output and demand for iron ore.

Crude steel production in China increased to about 830 million metric tons in 2014 and is on course to reach 1 billion tons a year by 2030, Rio said in its earnings statement Feb 12.

While China's economic growth slowed in 2014 to 7.4 per cent from 7.7 per cent a year earlier, Australian policy makers say efforts by the Chinese to boost consumption at the expense of construction and to stamp out corruption bode well for the long term.

"One would hope that they will come out of this recalibration of their economy being stronger and in a better place to be an engine of growth," John Fraser, who recently took office as Australia's secretary to the Treasury and is a former chief executive officer of UBS Global Asset Management, told a parliamentary panel Feb 25.

The Treasury in December forecast growth in China of 6.75 per cent in 2015 and 6.5 per cent in 2016.

Australia's links to China tightened in the past decade as exports to what's now its largest trading partner almost quadrupled in five years. It exports 5.8 per cent of its gross domestic product to China, more than the combined 4.7 per cent France sends to Germany and Italy, according to data from the World Bank and the International Monetary Fund compiled by Bloomberg.

For the RBA's Stevens, growth in China of about 7 per cent, down from 10 per cent years ago, is still good.

"They are by now, I think, the largest trading economy in the world," he said in testimony to a parliamentary committee Feb 13. "An economy of that size growing at 7 per cent is still quite an impressive performance if they can do that." China's leadership is forecast to adopt a growth target of about 7 per cent at a gathering of the nation's leadership in Beijing next month, down from about 7.5 per cent last year.

"It is important not to get too bearish on commodity exporters," said Stephen Jen, co-founder of SLJ Macro Partners LLP in London. While he said it's possible that China's expansion slows to below 6 per cent in the next five years, it will continue to spur growth Down Under. "In absolute terms, China's incremental growth even at a slower pace could be material for countries like Australia."


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