Hidden benefits of China's slower growth China is encouraging the development of a mass consumer society If you wanted to know where the prime ministers of New Zealand and Australia were last week all you had to do was watch their countries" respective currencies. The Aussie dollar rose nearly 2 per cent while the Kiwi was up nearly 3 per cent, in a week when the leaders of both countries happened to be in China, signing trade and investment deals and basking in Beijing's beneficence. Then on Monday, at precisely 10am in Beijing, both currencies plummeted in unison as China released disappointing first-quarter growth figures showing that the economy had grown at a much slower pace than expected. According to the International Monetary Fund, China accounted for 50 per cent of global growth over the past five years, and for commodity exporting countries in particular China has become the single most important factor in their economic success. For these countries, the fact that China has entered an era of lower growth following three decades of 10 per cent annual expansion is bad news. "We can see that China's long-term potential trend growth level has already dropped from circa 10 per cent to about 8 per cent," says Helen Qiao, chief China economist at Morgan Stanley. Some analysts say the new potential growth rate is even lower. The question is how low growth will go in the coming years, where that growth is going to come from and what slower Chinese expansion will mean for other, non-commodity exporting, countries as well as China itself. "Any producer of industrial commodities is going to suffer in the next few years," says Mark Williams, chief China economist at Capital Economics. But for the likes of the US and UK, a slowdown in Chinese growth and investment spending matters very little; in fact if it pushes Beijing to implement structural adjustments to boost consumer spending then it could be a good thing for those economies. The global commodity supercycle over much of the past decade was largely thanks to China's extraordinary boom and, in turn, China's boom was driven by three very significant policy reforms introduced at about the turn of the millennium. For the likes of the US and UK a slowdown in Chinese growth and investment spending matters very little Mark Williams, Capital Economics The first of these was state enterprise reform, which shut down or privatised large swaths of the state sector and freed the rest from the burden of having to provide schools, housing and hospitals for their workforce. The second important reform came with China's accession to the World Trade Organisation, which allowed cheap Chinese products to flood global markets and accelerated the shift of manufacturing eastward. The third, and possibly most important, was the creation of a commercial real estate market resulting from a decision in the late 1990s to transfer ownership of most Chinese apartments from the state to the individuals who lived in them. These three reforms account for virtually all of China's impressive rise from an economy that ranked seventh in the world behind Italy in 2000, to the world's second-largest economy now. But, more recently, a combination of weaker external demand and an overheated domestic real estate market has reduced the effect of these powerful drivers, and since the 2008 global financial crisis China has increasingly turned to credit as a way of juicing growth. The total outstanding ratio of credit to gross domestic product in China rose to 195 per cent at the end of the first quarter, compared with 129 per cent in 2008, according to Capital Economics. "It's not so much the rate of credit growth that matters, it's the expansion of credit relative to the size of the economy and on that measure China is looking very exposed," Mr Williams said. In the first quarter, the economy saw growth in total new financing of 58 per cent, compared to the first three months of 2012. Analysts say such explosive expansion may temporarily boost overall growth in the economy in the coming quarters. But they also say the amount of credit needed to create the same level of growth is rising rapidly as new financing is used to pay off, or roll over, existing loans that went to unprofitable projects predicated on continued double-digit Chinese growth rates. The Chinese government's response to the fading of its main growth engines and deteriorating credit intensity is to implement, in the words of China's newly installed President Xi Jinping, "a transformation of China's growth model." In practice, this means encouraging the development of a mass consumer society, boosting services sectors and shifting away from investment in heavy industry, real estate, manufacturing and export capacity. The new Chinese government acknowledges this will be a long and arduous transformation and officials freely admit that the days of double-digit economic expansion are over. But if China is able to convert its model to a slower but more sustainable growth path, the opportunities for other countries could be just as great as they have been for commodity exporters over the past decade. "As China's traditional growth drivers fade, other countries and companies need to look at the areas where they can benefit tremendously," says Ms Qiao from Morgan Stanley. They should focus on what really bothers Chinese middle class households and where China really needs to fix its problems - problems like pollution, bad traffic, food security, poor-quality medical services and substandard education.