MNI RBA Lowe: Australia's Largest Econ Risk Relates To China

By Sophia Rodrigues

     SYDNEY (MNI) - The largest economic risk facing Australia is something

going wrong in China as it deals with the challenge of bringing down debt level

while also reconfiguring the financial system, and the Reserve Bank is carefully

watching the process, Governor Philip Lowe said Wednesday.

     Lowe was speaking at a conference in Sydney and his speech was

titled,"Australia's Deepening Economic Relationship with China: Opportunities

and Risks."

     Lowe talked about the depth of Australia's economic relationship with China

as he pointed to the fact that Australia exports not just resources but also

services to China, and the service exports is now greater than those to the U.S.

and UK combined.

     But as the relationship has deepened, the risks have grown and it mainly

relates to the Chinese financial system.

     "If a major economic shock were to originate from China over the coming

years, its origin is most likely to be in the Chinese financial system," Lowe

said.

     For Australia, the largest economic risk is something going wrong in China,

he said. 

     "And perhaps the single biggest risk to the Chinese economy at the moment

lies in the financial sector and the big run-up in debt there over the past

decade. Given the significance of this risk and the RBA's natural interest in

finance, we study this area very closely," Lowe added.

     At the most recent board meeting in May, the RBA had a deep dive into the

Chinese financial system. 

     Lowe's main worry is the fact that the build-up of financial risks like

those seen in China is almost always followed by a marked slowdown in GDP growth

or a financial crisis. While such outcomes are not inevitable, it is

understandable that concerns have been raised.

     "The complex web that has developed in China is characterised by opaque

risk transfers, implicit guarantees and complex connections. To the extent that

experience elsewhere in the world is any guide, it is difficult to escape the

conclusion that this complex web in a highly indebted economy is a risky

situation," he said.

     The Chinese authorities are moving in the right direction so far but it is

too early to tell whether they will be successful in managing the transition

from a growth model heavily dependent upon the accumulation of debt to one where

credit is less central. 

     "The experience of other countries suggests caution and, elsewhere, there

have been serious accidents along the way," Lowe reiterated.

     Among the measures taken by China, Lowe said the lower economic growth

target for 2018 of 6.5% is a positive development as it suggests some tolerance

for a gradual slowing in growth.

     "This is a positive development, given that over recent years there was a

concern that the authorities would fail to address the financial risks for fear

of damaging the economy in the short term," he said.

     Lowe also pointed to President Xi Jinping's call for a gradual reduction in

the debt-to-GDP ratio. "This marked a significant change from earlier statements

from officials suggesting the target was only to slow the growth in leverage.

The authorities are clearly taking the issue seriously and they are making

progress," Lowe said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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