What a Slowdown in China Means for Australian Business
We have all become accustomed and comfortable with China’s rapid growth and development and it was China’s appetite for commodities that helped Australia escape the worst of the GFC.
Post GFC, we have to ask ourselves: how long can China fuel the Australian economy and how big will the impact of China’s slowdown be on our mining industry (the only industry that is keeping our macro-economic figures looking reasonable)?
What would a China slowdown mean for Australian businesses?
If mining exports shrink, so will the money flowing into the Australian economy. If you need to access capital (debt or equity), you must prepare your business for the inevitable crunch.
Some simple steps need to be undertaken: these include conducting a stress test of your business, having a realistic cash flow forecast and putting in place a plan that takes into account capital shortages.
You will need to work out how to do things in your business in the most cost effective and efficient way and how you will differentiate your business when it is a competitive market for raising capital.
Take the time to work out what makes your product or service stand out from the crowd and make sure you use that competitive advantage to drive your business.
Is there real cause for concern with China?
China’s economy is slowing. China’s GDP figures are still high, but 9.6% growth in the first half of this year is the lowest since 2009.
There is a weakening trend of external demand for China’s products, which has led to the Manufacturing Index declining for four months in a row now.
This is no surprise, considering China’s two biggest customers are the Eurozone (with many countries in recession and potentially heading for a breakup) and the US (with its own troubles and crises).
China’s trade surplus with the European Union was $12.9 billion in September, down from $14.8 billion in August; it remained unchanged with the US.
The trade surplus is now in a narrowing trend pattern. Exports rose 17.1% last month from a year ago, slowing from a 24.5% gain in August, and imports rose 20.9%, compared with a 30.2% increase in August.
China’s commodity imports are also slowing. Crude oil shipments fell 12% from a year-earlier record level, after holding steady in August.
For iron ore imports, annual growth more than halved to 15% compared to August.
Another aspect causing concern among analysts is that China’s rapid expansion in recent times has been fuelled by a credit boom, with Chinese banks lending record sums of money in an attempt to ensure that the country’s high growth rate continued. This raises concerns about asset bubbles.
Patrick Chovanec, a professor at Tsinghua University in Beijing, is concerned that those investments are financed by expanding money supply which is causing a rise in inflation (currently standing at 6.2%).
“A lot of the investment that is going out, there is a real question being raised about whether it is going to generate return and a lot of it has started to show up as bad debt in the banking system,” Professor Chovanec says (BBC Business News, http://www.bbc.co.uk/news/business-14117778, 13 July 2011).
He warns that the current path of growth in China is unsustainable: “What we are seeing is not necessarily a strong economy, it’s an economy that has been pumped up on steroids.”
The four biggest banks in China have just been bailed out and there is widespread discussion about the emergence of a ‘shadow banking system’ in recent years, which has fuelled much of the credit boom. The real concern is that it is not regulated.
There are some obvious correlations to be drawn between the unregulated credit boom we’ve seen in the US and the unregulated credit boom taking shape in China.
Clearly the signs are there that China’s “economy on steroids” cannot be maintained in the short-term and smart businesses will be taking steps to protect their enterprises from the fallout.
Vantage Performance is one of Australia’s leading business transformation and turnaround management firms – solving complex problems for businesses experiencing major change.