Vic Edwards

Read virtually any newspaper at the moment, and you’ll be told how China could be about to witness a sharp economic contraction, which could impact on Australia’s AAA credit rating.

New figures show China’s export demand has moderated and orders in construction and real estate have contracted. That has compounded fears China is mirroring a slowdown in the global economy.

Many commentators have indicated that China will have a hard economic landing. My view is that this is wrong, and China is more likely to have a soft or cushioned landing provided that the USA does not slip into a steep recession or depression.

A sharp slowdown in China would cause problems in Australia because of its large exports in minerals, pushing Australia’s current account into deficit.

The ratings agency Standard & Poor’s has warned that Australia’s AAA credit rating could be at risk – and losing ­Australia’s top sovereign debt rating would threaten banks ability to borrow offshore. These concerns have seen the Australian dollar falling almost one US cent, and the ASX trading below 4,000.

I attended the Fitch Ratings Credit Forum, and found its assessment of China’s future outlook was much more pessimistic than my view. I am optimistic about the future for China, and while the rate of growth may slow down, any threat to Australia’s credit rating is unlikely to come from the booming Middle Kingdom.

The Chinese purchasing managers’ index fell to 55.2 in May from 56.1 in April, according to new figures from the China Federation of Logistics and Purchasing. A reading above 50 still indicates expansion.

On my visits to China over the past few weeks it has become clear that China is successfully making the transition from an export oriented nation to one that is much more based on domestic consumption. Certainly, this will cause a drop in its growth rate from 11% per annum to around 8%, but this is still a favourable outcome.

The change to a domestic economy is one that is good for Australia, with China still importing many raw materials. A factor not accounted for in most of the recent analytics of China is the fact that the enormous effort in developing infrastructure has been greatly misinterpreted. Western analysts and some of the investment banks have pointed to what seems to be excess capacity in having empty office blocks and highways leading to nowhere.

However the massive construction projects that are going on in the second tier cities such as Qingdao, Tianjin, Changsha and Chengdu are pulling people back from Beijing and Shanghai and providing a future base for decentralisation. New very fast trains are now permitting rapid and cheap transport. This is a real plus for China’s future. It will decongest the cities of Beijing and Shanghai and lead to future growth and development of the poorer western regions. Throughout my latest visit, I have seen that the investment in infrastructure is paying off.

Vic Edwards is a Visiting Fellow in Banking and Finance at the Australian School of Business.