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The China boom may be coming to an end

The China boom may be coming to an end

China’s credit ratings have been downgraded, reflecting growing economic problems for Australia’s largest trading partner.

Moody’s Investors Service has downgraded China’s long-term local currency and foreign currency issuer from Aa3 to A1 and changed the outlook from negative to stable.

Moody’s said the downgrade was based on forecasts that China’s financial strength will erode in the coming years, with debt rising as growth falls.

The stable outlook is based on the assessment that, at the A1 rating level, risks are balanced.

GDP growth fell from 10.6 per cent in 2010 to 6.7 per cent in 2016, with Moody’s forecasting that it will fall to “close to 5 per cent” over the next five years.

The ratings agency has also forecast that government debt will rise from 36.7 per cent of GDP in 2016 to 40 per cent by 2018 and “closer to 45 per cent” by 2020.

However, Moody’s noted that China’s economy will remain very large and that its growth will remain high compared to other countries.

Australian economy strongly tied to China

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A slowdown in China could have serious consequences for Australia, given that China buys more of our exports than any other country – by far.

China took 27.5 per cent of Australia’s exports in 2015-16, according to the most recent statistics from the Department of Foreign Affairs & Trade (see table below)

If Chinese businesses and consumers reduced their overall spending, they would probably also reduce the amount of money they spent on Australian goods and services.

RankCountryExport share
1China27.5%
2Japan12.2%
3USA7.0%
4South Korea6.3%
5India4.1%
6New Zealand4.1%
7UK3.9%
8Hong Kong3.6%
9Singapore3.1%
10Taiwan2.4%

China hits back

China’s Ministry of Finance criticised Moody’s decision, which it said was based on “inappropriate” methodology.

The Ministry of Finance also said that Moody’s had made unjustifiably negative forecasts about the Chinese economy.

“These viewpoints, to some extent, overestimate the difficulties facing the Chinese economy and underestimate the capabilities of China to deepen supply-side structural reform and expand overall demand,” it said.

“China’s economy is expected to maintain steady and relatively fast growth thanks to the deepening reforms in state-owned enterprises, finance, taxation and pricing, in addition to the implementation of the Belt and Road [economic development] initiative.”

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