14 May Oliver's Insights – China's economic recovery
This note looks at the signs of recovery in China and whether or not it is sustainable.
The key points are as follows:
– China’s economy is recovery on the back of a combination of fiscal and monetary stimulus, and signs the export slump is easing. It is on track for 8% gross domestic product (GDP) growth this year.
– Unlike developed countries which face structural constraints on growth, China’s low per capita consumption, low household debt levels, rapid urbanisation, low public debt and relatively sound banking system are structural tailwinds for growth going forward. While a quick return to 11% plus growth on a sustained basis is unlikely is the absence of much stronger export demand, strong consumer spending is likely to underpin medium-term growth in China of around 9% to 10%.
– Chinese shares have had strong gains from their lows. However, they are still well down from their 2007 highs and offer good long-term value.
– Australia will be a beneficiary of the domestic demand-driven recovery in China now underway. One key beneficiary in this regard is the Australian dollar (A$). Supported by stronger global economic data and commodity prices, along with signs that Australian interest rates will remain well above global interest rates, the A$ has now clearly broken above its post global financial crisis range of US$0.60 to US$0.7250. A rise in the value of the A$ to US$0.80-85 by year-end of the back of a stronger commodity prices and relatively high local interest rates is now looking likely.