In a new Westpac note, the bank’s Head of International Economics, Elliot Clarke, argues that China’s biggest economic opportunity is also its biggest challenge: getting more of the country’s industrial success into the hands of ordinary consumers.
Mr Clarke says China’s manufacturing sector remains exceptionally strong, with the country’s trade surplus back near record highs, high-tech investment continuing at pace and exports remaining resilient despite global uncertainty.
But he argues those gains still haven’t translated into stronger household spending, with consumers held back by a continuing weak property market and sluggish income growth.
… the primary cause of consumer hardship is instead the disconnect that has emerged between aggregate household income and the growth of Chinese industry.
If consumers are to find their feet, the benefits of trade must pass through.
We expect this to occur but as a multi-stage, likely multi-year, structural process beginning with pro-active stimulus later this year.
Initial steps are likely to focus on additional support for the housing sector and renewed subsidies for discretionary consumption.
Westpac expects Beijing to roll out more stimulus later this year, likely focused on housing and consumer spending, but says rebuilding consumer confidence will be a gradual process rather than a quick fix.
Mr Clarke argues that if policymakers can successfully revive household demand, China’s economy could continue growing above 4.5 per cent.
If not, growth is likely to slow and become more fragile.
If authorities take the initiative in coming months and reset the consumer story, GDP growth can be sustained at or above 4.5%, even as the impetus from trade fades.
But, if the Government only guards against the downside, growth is likely to slow to 4.0% and become increasingly fragile.
He also says the shift has implications for Australia.
The implications for Australia and our dollar are difficult to discern at this juncture.
China continues to expand not only its production chain but also its sourcing network across Asia, Africa and Latin America.
As such, while commodity prices should remain supportive, Australia is unlikely to receive a material, lasting dividend from increased commodity export volumes.