Aussie Dollar Would Drop to Cushion China Downturn, Kent Saysby
RBA’s Kent: Australia should be alert to risks of slowdown
China’s productivity has slowed from early 2000s levels
Australia’s currency would likely depreciate in response to any negative developments offshore, as it has in the past, central bank Assistant Governor Christopher Kent said in a speech focusing on his country’s biggest trading partner, China.
In an address that traversed China’s economic past and potential pitfalls ahead, Kent said the Reserve Bank of Australia’s central scenario was that China’s growth would gradually moderate in coming years and remain close to its current level for the rest of this decade.
“China will continue to provide Australia with significant economic opportunities over the longer term, including in sectors such as agriculture, education, tourism and a wide range of business services,” he said, in the text of a speech in Brisbane today. “Along the way though, we should be alert to the risk of adverse developments that could lead to a sharp economic slowdown in China.”
The stakes are high for Australia, the most China-dependent economy in the developed world, with China accounting for about a third of its trade and earning the mineral-rich country about 5 percent of its gross domestic product. China’s pattern of development has given rise to significant imbalances: high and rising levels of corporate debt in the face of excess capacity and declining profitability suggest a greater risk of corporate defaults, which could ultimately lead to disruption in the financial system, Kent said.
Kent also raised concern that a trend of late has been that when a choice needs to be made between reform for long-term good and stimulus to ensure short-term growth, China’s policy makers tend to opt for the latter. In the text of his speech, Kent didn’t address Australian monetary policy.
“There have been many positive signals from the leadership about improving the sustainability of growth, including recent calls to implement so-called ‘supply-side’ reforms, with a view to facilitating deleveraging in the corporate sector and reducing excess capacity in key industries,” he said. “Nonetheless, the direction of policy so far has tended towards more, rather than less, accommodative monetary and fiscal settings.”
Kent said that “one prominent long-term factor has been the reversal of China’s ‘demographic dividend’,”, referring to the decline in the working-age population. He said a second persistent factor was the decline in the growth of productivity.
“Labor and total factor productivity had periods of rapid growth in the 1980s, 1990s and early 2000s following market-oriented reforms and increased openness to trade and investment,” Kent said, adding that urbanization also underpinned high rates of productivity growth as people moved from relatively unproductive jobs in agriculture to more productive jobs in cities.
“However, since the late 2000s productivity growth has declined, as the positive effect of earlier reforms faded,” he said.
Kent stood in for Deputy Governor Philip Lowe who was originally scheduled to deliver the speech.