Speaking at the Energy, Oil and Gas Investor Summit in Sydney yesterday morning, Perpetual Investments head of investments Matt Sherwood highlighted factors including China’s urbanisation being more than 50% complete, high real interest rates and an exchange rate adjusted for inflation that has risen 35% since 2005.
“That’s a lot of headwinds for what has been the major driver of global growth for the past 15 years,” he said.
“I don’t think it will end up in a financial crisis. It will though end up in weaker growth. We have growth in China slowing into the 5’s [percentage range] within three years. High 5’s relative to 2% or 3% in America, 1% in Europe and1% in Japan, that’s still pretty good growth for the second largest economy.
“What we don’t want is for China to continue growing economic productive capacity at a time when there’s not a lot of growth in global demand. That could repeat the mistakes of both Japan and Asia in the early 1990s, which did lead to financial crises.”
Sherwood participated in a panel discussion on the impact of the Chinese slowdown on the energy sector with UBS chief economist for Australasia Scott Haslem and Think Global Consulting chief executive David Thomas.
Thomas noted that it was a common mistake for analysts to rely too heavily on the growth rate figure, while trends in consumption and innovation presented other opportunities.
“I think it’s good that we’re having a discussion about China slowing below 7%,” he said.
“There was a time when we used to say that that would be an absolute disaster. Now we’re talking about 5% as being the new normal. I’m glad because I think we all got hysterical about the growth rate and forgetting what a big economy it is now.
“The key now is the quality of growth.”
For the energy space, the panel found that weaker GDPs globally could allow for continued reliance on traditional energy commodities.
However, pressure on oil and gas prices was expected to remain a reality for the foreseeable future.
“It’s very clear that Australia is going to become an even greater energy exporter and the price of energy is going down,” Haslem said.
“There are still strong global thematics toward cleaner energy. There’s still desire to have gas over time, so I don’t think this is a multi-decade event. This is, I imagine, a four to five-year down market for all these energies.”
Sherwood was relatively optimistic about oil in particular, noting the unfolding balancing play between the US shale output surge and an OPEC strategy to squeeze expensive operators out of the market.
“The only commodity I see where the downward pressure is kind of limited outside some kind of cataclysmic event is oil,” he said.
“The reason for that is we already had the price adjustment and oil seems to be sitting around $US45 a barrel.
“I think oil looks better than some other commodities.”
For Australia, the panel seemed to conclude that a diversification of the economy was necessary, not just beyond a huge dependence on Asian trade, but in expanding more non-extractive industries such as agriculture.
Thomas also emphasised the need for more pragmatic and more culturally understanding ties with China in order to fully realise the potential economic benefits of the country’s growth.
“The oldest law firm in China is 22 years old, King and Wood, which recently merged with Mallesons,” he explained.
“So they’ve operated in an environment for generations where there was no rule of law and no legal system to rely on. How do you do business in that kind of situation? You work with family and friends and people you know. You form little cliques, and you do things in a way that we don’t particularly understand because it’s not part of our culture.
“At the end of the day, there’re a billion of them and 20 million of us, so I know we can stick rigidly to the way we do things, but I think we also have to start thinking about how we engage with Chinese investors.
“There’s a middle ground we have to start finding our way to or we’ll miss out.”
