Many Australian businesses rely on China, directly for supplies and indirectly on exports to the region that fuel our economy. In particular, what happens in China matters a lot to Australian retailers.

Over the last few months, signals confirm a slowdown in the Chinese economy, impacting Australian exports and consumer confidence. This also raises the spectre of potential social unrest and structural changes in China that could make sourcing more difficult.

But, do we have real reasons to be concerned? Chinese economic growth currently hovers around seven per cent, seemingly pretty high by global standards. Australia’s GDP growth has been tracking at a mere 2.5 per cent. However, it would be a serious mistake to view China as if it were a Western economy.

Unlike the West, Chinese markets don’t regulate the allocation of capital. That’s left to the banks, which have been providing loans in an arbitrary manner. The result is bad loans worth possibly as much as $1 trillion dollars.

Opinions vary, but some economists believe that once China’s growth rate dips below seven per cent the bad loans will be severely tested and Chinese banks will be hit hard. Think of subprime. Now put that onto a population of 1.4 billion.

Reversing this decline in growth is unlikely as China is an export-dependent economy and there are limits to the world’s consumption. We witness here a structural, not a mere cyclical change in China. And, rather than making structural corrections to respond to the structural challenges, the Chinese government is taking reactive measures for short-term internal political gain.

Instead of pushing banks towards commercially driven lending and raising interest rates to compensate for past bad lending practices, China is reducing the percentage of cash banks have to keep in reserve. The result is the release of hundreds of billions of dollars in capital to stimulate their economy. This is not how it’s done in the West.

There are other worrying signs.

The housing and construction sector slowdown, or negative growth, will impact the financial stability and employment in the regions most exposed to construction-related industries, especially in the north and northeast.

Citigroup estimates that property sales account for 12 per cent of China’s GDP, but Moody’s Analytics argues that the figure is 23 per cent if construction and house renovation are included. It’s a sizeable chunk of the Chinese economy, which has slowed significantly from the double-digit growth rates of a decade ago.

Geopolitical intelligence firm Stratfor anticipates defaults by property developers, resource companies and building materials businesses this quarter. This coincides with anecdotes of localised economic and employment crises in the Shanxi province in northern China, the country’s mining and resources heartland.

Luckily, because China is such a fragmented economy and because of government initiated measures, these problems will remain isolated.

Regardless, due to the reactivity of the Chinese government’s approach, the long-term outlook remains dire. Avoiding structural adjustments, it’s using targeted fiscal and financial measures to boost certain regions and industries, mostly around services, agriculture and manufacturing.

Stratfor says that the current situation in China is reminiscent of 19th century Prussia, for example, or 20th and 21st century Singapore. Both countries managed to transform and become economic powerhouses. But, size and time are working against China; also, neither Prussia nor Singapore had to manage a population of 1.4 billion.

As China moves away from being a high-growth, low-wage economy, it will have to create a new sort of economic infrastructure to employ the displaced low-wage workers. This can only be incremental, it can’t happen overnight.

The question is whether the Chinese government will have the time and wherewithal to accommodate these workers, as the global economy is shifting with or without China.

It’s time for Australian retailers to hedge their bets by gradually reducing their dependence on China. Securing alternative sources of supply in countries such as Vietnam, Bangladesh and Sri Lanka needs to become a priority – to lower costs and to diversify manufacturing by moving at least a part of it away from China.

This may not be easy, but doing business with China 15 years ago wasn’t easy either.

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An award winning author and journalist, commentator, lecturer, and speaker, Leon covers a range of areas including politics, history, strategy, globalization, leadership and all the big trends ahead. For the last 30 years, his main focus has been on management issues. Leon writes for publications including The Fifth Estate, ProPrint, Public Accountant, and Acuity magazine. He also produces two podcasts for RMIT University, Talking Business and Talking Technology. Both podcasts are on iTunesU and attract a global audience, largely from America and China. Apple has ranked Talking Business as the best business podcast in the world Leon has worked for Fairfax, News Limited, AAP and the Herald and Weekly Times.
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