Vic Edwards

There are reports that China could be about to witness a sharp economic contraction.

Figures show China’s annual economic growth has slowed to 7.5 per cent in the second quarter of 2013 from 7.7 per cent – the second straight quarter of slower growth. In the past month the Australian dollar has fallen sharply on fears about the Chinese economy.

Never the less, I would like to play down fears of a hard landing in China. Growth at 7.5 percent really isn’t that bad, and certainly not for the world’s second-largest economy. Certainly there are some downward projections for China but these aren’t too severe.

However last week China reported an unexpected fall in its exports and imports, adding to concerns of a slowdown in its economy. Exports fell 3.1% in June from a year earlier, indicating weak global demand for Chinese goods, and this contradicted forecasts of a sharp increase in shipments.

China’s growth this year is below last year’s level as weakening external demand has hurt investment and exports. China has been keen to rebalance its economy, after a decline in global demand hurt its export-led growth, and that is causing pressure on Australia.

This raises concerns about the country’s future economic growth, raising questions about whether the country’s economy is tailing off more rapidly than anticipated. However at least inflation has slackened more rapidly than expected.

China is also the world’s biggest energy consumer and steelmaker, however steel production is slowing. The World Bank has forecast that inflation will fall further, as its economy comes down from the peaks seen last year.

Certainly the markets treat the Aussie dollar as a proxy for China so that slowdown in exports in China is perceived by the market as being a bad sign for Australia. Australia will need to improve its trade standing with China in order to preserve its position as a major supplier of raw materials, as China is actively pursuing other sources particularly through its new BRICS arrangements, particularly with South Africa and Brazil.

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