The days of China’s double-digit economic growth are over. But with its economy now entering a more mature phase, Australia will also see a changing of the guard among the key industries exposed to the nation’s largest trading partner.

The latest gross domestic product data released on April 17 showed an economy performing exactly as planned.

According to China’s National Bureau of Statistics, the world’s second-largest economy expanded by 6.8 per cent in the March quarter compared to a year earlier, in line with market forecasts and unchanged from the prior quarter.

The consistency is shown by the GDP data coming either in line or slightly exceeding market expectations by just 0.1 percentage point for every quarter since mid-2015.

China’s official growth target for 2018 is 6.5 per cent; however, economists see the economy slowing this year on a cooling of the infrastructure and property sectors.

In its latest “World Economic Outlook” report, the International Monetary Fund projected 6.6 per cent GDP growth this year and 6.4 per cent in 2019, down from 6.9 per cent GDP growth in 2017.

Risks to the outlook include a potential trade war with the US, rising US interest rates sparking a capital flight and the threat of war on the Korean Peninsula. Analysts have pointed to China’s rising debt level, which at 264 per cent of GDP is seen reminiscent of the US economy before the global financial crisis.

At a recent conference in Melbourne, Capital Economics’ senior China economist, Julian Evans-Pritchard, argued that China’s economy would expand by just 4.5 per cent this year and next, with growth likely to slow to an average of just 3 per cent over the next 10 years.

He pointed to the slowdown caused by the anti-pollution campaign, growing capacity constraints and tighter fiscal and monetary policies all weighing on the short-term outlook.

Longer term, Evans-Pritchard warned of “excessive optimism” over China’s supply-side reforms and Chinese President Xi Jinping’s ability to drive through structural change. He said state intervention was resulting in a “widespread misallocation of resources,” increasing debt levels and straining the financial system.

“A high degree of state control means that a full-blown financial crisis can probably be avoided. Instead, the cost of China’s structural problems will come in the form of disappointing economic growth,” he said.

For Australia, a slowing China threatens a trade and investment relationship that has surged in recent years. As of 2016, China was Australia’s largest two-way trading partner in goods and services, worth some $155 billion, being both the largest export market and biggest source of imports.

The stock of Chinese investment in Australia was estimated at around $42bn in 2016, the fifth-largest direct investor, diversified across agriculture, infrastructure, property, resources and tourism.

China’s emergence as the world’s largest consumer of resources has made the resource sector particularly vulnerable as China’s property and infrastructure spending level off, argues Capital Economics.

However, while the resources sector could suffer, demand from China’s expanding middle class for services such as education and tourism has grown rapidly, along with its desire for Australia’s “clean and green” agricultural produce.

Among the ASX-listed beneficiaries are dairy company a2 Milk (ASX:A2M), education provider Navitas (ASX:NVT), flag carrier Qantas Airways (ASX:QAN), casino operator Star Entertainment Group (ASX:SGR) and Sydney Airport (ASX:SYD).

Morningstar’s head of equities research, Peter Warnes, suggests while China’s GDP will slow to near 6 per cent this year and below 6 per cent in 2019, it still remains meaningful due to the expansion of its economic base.

“Predictions of a collapse in the Chinese economy have been wide of the mark and there are risks to forecasts of lower growth as the recently empowered Xi Jinping-led government can considerably influence policy and the pace of economic growth in the near term,” Warnes said in Morningstar’s “Forecast 2018” report.

He said the transition to a consumer-driven economy “has moved well past the halfway mark,” with fixed asset investment (FAI) continuing to moderate. However, offsetting lower contributions from FAI and the property sector will be stronger domestic consumption and exports, benefitting from improved global growth, particularly in Europe, China’s largest export market.

“Momentum within the Chinese economy is on the wane and the combination of a slowdown in credit growth, reduced fiscal support and a concerted environmental crackdown is likely to result in a slowing of GDP growth in the near term. However, economic growth will remain well above the forecast rates for other major economic blocs, including the US and a belatedly resurgent Eurozone,” Warnes said.

For Australia, China’s transition should see some new winners created, even while mainstays such as resources and energy continue to thrive amid Asia’s economic dynamism.

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Anthony Fensom is a contributor to Morningstar Australia.

Glenn Freeman is a Morningstar senior editor, based in Sydney.

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