Good fortune in Chinese appetite
Australia's economy is much more dependent on China than it used to be. This is very fortunate. Imagine having had to rely on the US or Europe in the past few years - just ask the British and Canadians.
- (1888PressRelease) September 11, 2012 - China's appetite for commodities is a key reason why Australia has avoided the worst of the global financial crisis and currently has one of the bestperforming economies in the developed world.
Last week's GDP numbers confirmed that Australia's economy is 10 per cent larger than it was four years ago. The US is only 2 per cent larger, the eurozone has shrunk 2 per cent and Britain 4 per cent, partly reflecting its exposure to Europe. Even Canada, which has been supported by a booming commodities sector, has only managed to grow by 4 per cent in this period because its major trading partner is the lacklustre US.
Now let's look at China - its economy is more than 40 per cent larger than it was four years ago. Without strong ties to China, Australia's economy would have done a whole lot worse over the past four years. Rising commodity prices have been a key part of this story, with mining investment accounting for about half of Australia's growth over this period.
Now that China's growth is slowing, many have suggested that Australia may have become too tied to China and too reliant on the resources sector. I disagree. This ignores the fact that Australia's current strong position is exactly because it is reliant on China.
Remember that although China's growth has slowed from about 9 per cent last year to about 7.5 per cent, this is still significantly faster than almost any other economy in the world. We are still better off being tied to China's economy, even if it has slowed down, than to the struggling eurozone or the stagnant US economy.
Of course, China is not immune to the slowdown in Western growth and also has its own economic cycle. Australia's economy will now be more affected by China's cycles than before. But managing economic shocks from abroad is nothing new for policymakers and whether the cycle is driven by the US or China should make little difference to Australia.
Despite claims to the contrary, our view remains that the slowdown in China is cyclical rather than a permanent easing. This cyclical slowdown has been caused by both tight Chinese policy settings last year and the larger-than-expected slowdown in the West, mainly due to the European crisis.
HSBC's chief China economist, Qu Hongbin, still sees sustainable rates of growth in China that are well above the current 7.5 per cent pace, and perhaps closer to 9-9.5 per cent in 2014 and 2015. This is partly because, despite strong growth in investment in recent years, China still needs substantially more investment to lift it to Western levels of development.
Our estimates suggest that the Chinese capital stock - the complete value of all the roads, bridges, housing, factories and infrastructure that has been built so far - is still less than one-tenth of that in the US on a per-person basis.
Take subway systems as an example. China has 93 cities with populations of more than five million but only 13 of them have a subway system. The railway network in China also falls well short of Western standards, with a network that is shorter than the US had in 1890.
With a great deal more infrastructure yet to be built, we think China will remain a key source of demand for commodities for many years to come. This should help keep commodity prices well above the very low levels they reached in the 1980s and 1990s.
The current cyclical downturn will no doubt still be a challenge for Australian policymakers, though this is nothing they haven't dealt with before. Most of the shocks to the Australian economy originate from abroad. The floating Australian dollar and pro-active central bank should help to offset weakness coming from abroad. An approach to government taxation and spending that helps to support the economy in the face of weaker global conditions would also be helpful. It would not be good economic policy to maintain the current plans of significant fiscal contraction if global growth slows further.
But worrying about our increased reliance on China misses the key point - Australia's relative success over the past four years has been largely due to its strong economic ties with China.
This article originally ran in The Australian newspaper on 10 September.
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