If you listen to the some of the commentary in Australia and overseas, China is now something of a threat to Australia's well being, especially with the lower target growth rate of 7.5%.

As well, many analysts claim the still weakening level of home prices in China presents a problem to the country's banks and economic well being, oblivious to the fact that the government has cleaned up a string of bad debts twice in the past two decades, and will do so again, if has to..

But, somehow many analysts think that the lowered growth target and the push by the Chinese government to boost domestic consumption could be a big problem for commodity producing countries like Australia.

That's far from the truth, if anything the slowing growing rate will narrow the competition to countries like Australia and Canada from new supply sources for iron ore and coal in coming years because the new areas won't be economic.

But whatever the case, China is certainly a major force in Australia, absorbing $US59 billion or 23% of exports last year.

That was close to the rest of East Asia (minus China and Japan), which took $US61 billion of our exports.

Despite the concerns offshore about China, Reserve Bank Governor, Glenn Stevens, doesn't seem too worried by China.

He told an investment conference in Hong Kong yesterday

"The slowdown in Chinese growth - from 10 per cent to a mere 8 per cent! - is a major talking point and some see it as portending a major crash.

"But some slowing was required to reduce inflation and, therefore, put growth on a more sustainable path.

"One can certainly think of ways in which China could have a 'hard landing' at some point.

"It is very difficult for anyone to know (doubly difficult, I think, if trying to know while sitting in a trading room in New York or London).

"But if the Chinese economy does slow 'too much', one could expect that the Chinese authorities will have both the will and the capacity to respond, the more so now that inflation has moderated.

"China will have cycles like other economies, but it seems likely that the Chinese economy will grow pretty strongly on average for a while yet. It will be a very large economy.

"Even at the new growth target of 7½ per cent, a lower target than in the past five years (all of which were, of course, exceeded), Chinese GDP will equal that of the United States, in Purchasing Power Parity terms, in about a decade. It will exceed that of the euro area within the next few years," Mr Stevens said.

Very few of these doomsayers and handwringers have stopped to think about what sheer size of the Chinese economy and how little the lowered growth rate will impact that economy.

Did you know that a 7.5% growth rate this year in China (it won't, it will be around 8.5%), will add more than $US520 billion in extra value, based on GDP of $US7 billion in 2011?

At an 8.5% growth rate the impact is close to $US600 billion (or more than 40% of the Australian economy this year!).

Back in 2010, when the economy grew by 10.4%, the growth rate was roughly the same as growth this year at 8.5%.

In other words, China is slowing, but the absolute size of the economy and the still high levels of growth, mean the economy will want as much, if not more iron ore, coal and a host of other commodities this year, in 2913 and for some years to come.

Mr Stevens understands that, but wonders why Australians in particular, are having trouble seeing the strengths of their economy.

He told his audience in Hong Kong there are differing views of the Australian economy: from inside the country and from offshore.

"At the moment, the viewpoints of those inside Australia differ somewhat from those of people outside Australia.

"Viewed from abroad, judging by what people say, observers see an economy that experienced only a relatively mild downturn in 2008-2009, that made up the decline in output within a few months, and that has continued to expand, albeit at only moderate pace, since then.

"They see an economy that has not experienced a significant recession for 20 years, that has strong banks and little government debt - and that debt remains AAA-rated.

"Some observers worry about high levels of housing prices and household debt.

"This is understandable given the problems that have occurred in some other countries.

"But then others point out that the arrears rate on mortgages, at 60 basis points, is quite low, and that the rate of new construction of dwellings in recent years has been low relative to population needs.

"Foreign investors see a country that remains quite open to them, and that, reflecting its economic circumstances, offers rates of return that are high by international standards, even though they are low by Australian historical standards.

"They understand the potential returns on the mineral and energy wealth stored in or around the Australian continent, and that our terms of trade have over the past year been higher than at any time for more than a century.

"There has been increased appetite for Australian dollar denominated assets, particularly sovereign debt, and the Australian dollar has risen strongly, to be at its highest level in three decades.

"Those at home see this as well. As consumers, they have responded to the higher exchange rate with record levels of international travel.

"As producers, however, they also see, with increasing clarity, that the rise in the relative price of natural resources amounts to a global and epochal shift, which carries important implications for economic structure in Australia, as it does everywhere else.

"Some sectors of the economy will grow in importance as they invest and employ to take advantage of higher prices.

"Other sectors will get relatively smaller, particularly in the traded sector, as they face relatively lower prices for their products and competition for inputs from the stronger sectors.

"The exchange rate response to this shift in fundamentals is sending very clearly the signal to shift the industry mix, though this would occur at any exchange rate.

"The shift in relative prices is a shift in global prices that is more or less invariant to the level of the Australian dollar.

"In other words, while the global shift in relative prices is income-enhancing for Australians overall, it is also structural change-inducing.

"A former leader once quipped that 'microeconomic reform' was such a common topic in Australian discussion that even the parrots in pet shops were talking about it.

"I think the same is increasingly true of structural change: it is a term that will be on everyone's lips over the next few years.

"Structural adaptation is hard work. Few volunteer for it. But we have little choice but to do it, not just to make the most of the new opportunities that have been presented, but to respond to the changed circumstances that some industries face as a result.

"In this sense, Australia, though blessed with many natural endowments, is in the same position as most other nations.

"We have to adapt to changing times.

"This perhaps helps to explain the sense of concern in some parts of the Australian community and the tendency to focus on the difficulties, rather than the opportunities, which come with our situation.

"This difference in perceptions between foreigners and locals is quite unusual.

"For most of my career, the difference has tended to be in the opposite direction.

"We always seemed to struggle to get foreign observers and investors to give us credit for performance we thought was pretty reasonable.

"And it is only little more than a decade ago that Australia was being described as an 'old economy'. Now perceptions have changed, at least in a relative sense.

"The shift in global portfolio allocation that seems to be associated with this is potentially very important.

"In a more risk-averse world, the supply of genuinely low-risk assets seems smaller.

"Countries that have offered a reasonably stable economic environment and relatively sound public finances - of which Australia is one - are attracting greater flows of official capital now than they did a decade ago.

"This has recently been adding to the upward pressure on the exchange rate, independently of the rise in the terms of trade.

"As is so often the case in economics, there are two sides to this.

"On the one hand, the additional rise in the exchange rate pushes our cost structure in the tradable sectors of the economy up relative to other countries.

"This is a contractionary force and adds further to the already considerable pressure for structural change.

"On the other hand, it amounts to a reduction in the cost of international capital for Australian borrowers, particularly government borrowers.

"At the margin, this has to make the task of ensuring fiscal soundness a little easier.

"Even for private borrowers the unusually low level of long-term rates for the official sector offsets a good deal of the widening in spreads due to perceptions of higher private credit risk (that being, of course, a global phenomenon).

"A greater flow of cheaper capital to a country is an advantage. It is important, of course, that it is used wisely.

"When risk appetite is strong, and risk assessment by lenders too loose, such conditions can result in problems.

"For example, it has been argued that the flow of capital to the United States looking for low-risk assets was channelled by the US financial system into structured products that had the illusion of high quality, but which ultimately resulted in the sub-prime mortgage crisis.

"At this point, however, we do not seem to have that problem in Australia.

"If anything, households, businesses and governments are looking, to varying degrees, to reduce their debt.

"The financial sector is quite risk averse in its lending practices, particularly towards some of the business sectors that might be willing to take on additional debt.

"In such circumstances, the competitiveness-dampening effect of the higher exchange rate on the traded sector that results from the portfolio shifts may, for some period of time, outweigh the expansionary effect of a lower cost of capital.

"The economic background to this shift is an economy where a range of indicators had been tending to suggest that growth was running close to average.

"Key business surveys, for example, have suggested average performance compared with the past 20 years; the rate of unemployment has been little changed at what remains, by the standards of the past three decades at least, a reasonably low level.

"On the other hand, recent national accounts data suggest growth in the non-farm economy somewhat below trend over 2011.

"Overall, recent economic performance in Australia is not too bad, particularly when compared, over a run of years, to a number of other advanced economies.

"But neither is it so good that it cannot be improved.

"The full range of policies - macroeconomic and structural - need to play their part in seeking that improvement.

"Monetary policy can play a role in supporting demand, to the extent that inflation performance provides scope to do so.

"But monetary policy cannot raise the economy's trend rate of growth.

"That lies in the realm of productivity-increasing behaviour at the enterprise, governmental and inter-governmental levels.

"Improving productivity growth is just about the sole source of improving living standards, once the terms of trade gain has been absorbed.

"This is increasingly being recognised in public discussion, but it is important we do more than just debate it.

"Nor can monetary policy obviate the pressure for the production side of the economy to change in response to altered relative prices.

"These changes in relative prices are essentially given to us by the world economy; they are not driven by any policy in Australia.

"So in Australia, reorienting our economy, adapting to structural changes and improving productivity performance are challenges we face.

"But we are hardly alone in facing adjustment challenges.

"More generally, reorienting economies in the Asian region, and around the world, remains a major challenge."

Copyright Australasian Investment Review.
AIR publishes a weekly magazine. Subscriptions are free at www.aireview.com.au