The Reserve Bank of Australia (RBA) expressed its concerns about the economic outlook for China, Australia’s largest trading partner, in the minutes of its recent meetings. The word “China” or “Chinese people” appeared multiple times in the minutes, indicating the significance of this concern.
One of the major worries mentioned in the minutes is the rapid deterioration in China’s economic growth. This decline has the potential to negatively impact service exports, such as tourism and international students visiting Australia, as well as lead to lower export prices. The RBA acknowledges that a decline in China’s output growth could also have a global impact on output growth, affecting not only the prices of Australian imports but also a wide range of Australian exports. However, the RBA believes that a weaker Australian dollar could partially offset these impacts and increase government revenue for the country.
The recent financial struggles of Chinese developer Country Garden also caught the attention of the RBA board members. Although they praised the Chinese government’s support efforts, they noted that the real estate sector still faces significant challenges, including developer financial stress and potential defaults that could pose a risk to economic activity.
The minutes also highlight the challenges China faces in slowing structural growth and rebalancing its economic growth sources. These challenges, coupled with evidence that inflation is on track to return to the RBA’s target range of 2-3%, make it difficult for the RBA to keep the cash rate unchanged. While the minutes mention “stronger” options than raising the rate to 4.35%, the recent increase in petrol prices could make the process of achieving inflation targets uneven.
RBC Capital Markets strategist Robert Thompson believes that the RBA has become increasingly concerned about the downside risks from China in recent minutes. He expects the cash rate to rise by another quarter of a percentage point, but acknowledges that an increase is imminent. Despite recent positive data on GDP and the labor force, it is unlikely to change the RBA’s stance.