Uncertainty around China's economic outlook is "a key risk for global growth at present and could be a contributor to a further correction in share markets".
That's according to economist Shane Oliver, who is the head of investment strategy at AMP Ltd (ASX: AMP).
Oliver says there is fear within share markets of a potential "Japanification" of the Chinese economy.
He's referring to Japan's 1980s economic boom that gave way to decades of poor growth and deflation.
A sharp downturn in China would be a "double whammy for the Australian economy", with obvious negative implications for our share market.
Let's review the state of play, as we know it, in China.
The Chinese economy is slowing
Oliver says the problems in the Chinese economy are numerous.
We're seeing lower industrial production growth, investment, and retail spending.
Bank lending and credit growth have slowed despite some monetary easing.
The country is exporting and importing less, and business conditions have declined.
Youth unemployment has risen from about 12% to 21% over the past five years.
And now the economy is staring down the barrel of deflation.
Oliver says:
After strong growth and a big run up in debt there is fear that it's going down the same path as Japan …
As the world's second largest economy what happens in China has significant ramifications globally and in Australia.
Property sector a major concern
Property sales are down and home prices are falling as a result of tightening policies and oversupply.
Oliver summaries the situation:
This has led to big problems at: developers (eg, Evergrande and Country Garden) that relied on high debt & a steady flow of new buyers; companies that issue investment products which helped finance developers; local governments that rely on land sales for revenue; & households who have seen property related investments sour.
Also contributing to lower property demand both now and into the future is China's falling childbirth rate and its ageing workforce.
What could all this do to the share market?
In short, nothing good. After all, China is our biggest trading partner.
It buys the bulk of our metals and minerals, and we import oodles of cheap goods for our consumers.
If its property sector were to collapse, Chinese demand for our iron ore to make steel would obviously drop significantly, and so would the global iron ore price.
This would lead to lower earnings for ASX miners, which make up a huge component of the ASX 200.
But Oliver doesn't think this is going to happen. He reckons it's likely that the Chinese government will implement further stimulus to enable economic growth of 5% this year and 4.5% next year.
He says:
Our assessment though is that the Government is well aware of the need to support growth given the risk of social unrest and will ultimately do so – probably after the summer travel boom comes to an end soon.
Furthermore the Chinese Government is unlikely to allow a GFC style collapse in property developers and is likely to continue to manage the problem.
The share market on Thursday
The S&P/ASX 200 Index (ASX: XJO) is up 0.54% at the time of writing to 7,187.3 points.
The ASX 200 has risen just 3.47% in 2023 so far and is only up 2.7% over the past 12 months.
