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China’s (and Australia’s) economic slowdown

China has been propelled to the position as a major global economic power in the last few decades. It has experienced sustained periods of unrivalled economic growth. Double digit GDP figures are something that the western world could only dream of, with the smallest positive print being hailed as a success.

What has fuelled the Chinese economic growth?

China has witnessed a consistent boom period,  that has thrust the country to the status as the world’s second biggest economy behind the United States.  The growth’s main elements are regularly touted as low-cost labour and a credit bubble.  The country exports goods around the world, with the “Made in China” in print noted on products of all types. Factories church out vast quantities of products that are shipped to every part of the globe.  This level of production and economic development has led to the fastest growing middle class on the planet, as Chinese residents demand the same luxuries that their western counterparts.

Australia’s mining boom

Australia is a major trade partner for China, providing the raw materials that are needed for Chinese development (infrastructure) and for the value-added exports. Australia is mineral rich, with an ideal geographical location for Chinese demand, which has led to the mining boom for Australia. Mining resources are finite, and the slowdown in China will be felt in Australia. The demand for raw materials has been a major factor in the Aussie Dollars strength, reaching all-time highs for a currency that has been free-floating for 30 years.

The other driving factor of the currency’s strength has been high interest rates on offer from a stable economy, while the western world has been in recession. The Reserve Bank of Australia has left rates unchanged at their July meeting, with the release of minutes on Tuesday expected to be dovish, and some analysts forecasting a rate cut of 25bps in August.

Chinese GDP

Over the weekend China released their economic data, showing that economic growth had slowed to 7.5% in Q2, down from the previous 7.7%. Though the continued decline is a concern, in comparison a figure like this for the UK at the moment, would most see Chancellor George Osborne paraded through the streets. Growth levels are still high, but it has been driven by credit.

The growth is slowing quarter on quarter, and there could be further disappoint this year as the slowdown in economic activity continues. The 2012 annual growth rate of 7.8% was the country’s worst performance in 13 years.

Economic outlook

Analysts and market commentators have discussed the Chinese boom and subsequent slowdown in depth. Opinions vary as to the severity of the Chinese slowdown, though the consequences for dependent economies such as Australia are pretty clear.

The slowdown is evident, though the direction from here is unclear. The PBOC has clearly signalled that it plans to loosen its grip on finance and to further integrate with the global community. China has purchased significant amounts of western debt throughout the EU crisis, but this is unlikely to continue if a slowdown continues. 

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