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Weighing the risks for Australia as China rebalances; Golden opportunity for Australia as a billion Chinese middle class demand a share of our agriculture, manufacturing, services
Topic Started: 25 Aug 2014, 03:52 PM (315 Views)
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Weighing the risks for Australia as China rebalances

22 August 2014, 6.17am AEST
James Laurenceson

China’s leaders have been vocal in their support of a new growth model, one where consumption leads the way. Economic commentators fret about what this means for Australia.

One view is that economic pain lies ahead. As the rate of resources and energy-hungry investment in China falls, commodities such as iron ore and coal will not fetch anything like the prices they did a few years ago. Investment in the natural resources sector will dry up.

As a result, in Dog Days: Australia after the boom, Ross Garnaut warned that without urgent policy attention Australia faced the prospect of a prolonged period of declining real wages and living standards.

Similar fears have since been expressed in Andrew Charlton’s Quarterly Essay, Dragon’s Tail: the lucky country after the China boom.

For good measure, The Economist picked up on the same theme and said that we are the country in Asia most exposed to the risks.

Australia has a clear stake in China’s economic rebalancing: the latest trade data reveal the annual value of our merchandise exports to China now exceeds $100 billion. This is more than double the value to our next most important customer, Japan.

But are the risks of China shifting towards consumption-led growth really so dire?

Sometimes even serious commentators can discount substantial bodies of research. In fact, other data suggests that any negative implications of rebalancing in China will be modest, and overall it is likely to be distinctly positive.

In 2011 and 2012, economists at the International Monetary Fund (IMF) modelled the international impact of Chinese rebalancing. They found the consequences for Australia would be negligible. Once again, it was our flexible exchange rate, the standout reform from the 1980s, that would buffer the Australian economy.

On the key point of commodities prices, the IMF and our own Bureau of Resources and Energy Economics (BREE) are in agreement: while prices may come off the boil, there is no bust in sight.

Consider iron ore, our largest export earner. Both expect prices out to 2019 will remain stable at around $90-$100 a tonne. Remember, the historical average is $20-$30.

In May, a detailed analysis by Treasury concluded our overall terms of trade (the ratio of export to import prices) will decline by 16% between 2012-13 and 2017-18, and then stabilise. Bad news at first blush, but factor in the exceptional increase of 80% in the previous decade and things don’t look drastic.

Investment in the resources and energy sector will fall as current projects are completed – BREE notes that committed project investment is already down from a peak of $268 billion in April 2013 to $229 billion a year on.

Yet these falls are going to be offset by the extra output that new mines have made possible. BREE forecasts that in 2018-19 the value of our resources and energy exports will be up $108.4 billion. They add that while the investment phase of the commodities boom lasted for roughly five years, the output and export phase will last decades.

And there’s a bonus argument. China’s rate of investment is only one factor that determines its demand for resources and energy.

Another is its growth rate. Andrew Charlton raised concerns about it falling away but the best estimate of the World Bank continues to be that growth will remain solid at around 7% until 2020 and 5-6% in the decade after.

The 300 million new residents arriving in cities over the next 15 years will underpin it.

This feeds directly into demand for iron ore, coal and LNG.

Despite some commentary suggesting otherwise, rebalancing in China is unlikely to be sharp or sudden.

In each of the last five years, the rate of investment has been stuck at the the same level. There was some excitement in the first quarter of this year when consumption made almost double the contribution to growth that investment did. But by the end of the second quarter the two were again close to level pegging.

Any trend to greater consumption will accelerate the rise of China’s middle class.

Research by the Brookings Institution indicates the middle class will grow from 10% of the population in 2009 to more than 70% in 2030. That is, an increase of around 850 million people. This is six and half times the entire population of Japan, our second most important export destination. In a scenario where the rate of consumption is higher, the forecast rises by a further 100 million.

The opportunities for Australia will be golden - as nearly one billion new middle class Chinese demand their share of our non-resources sectors: agriculture, high-end manufacturing and services.

The real worry for Australia is that China will fail to rebalance. The dangers of a continuation of investment-led growth have been on ample show this week. After embracing the concept of consumption-led growth for a decade, let’s hope China’s leaders are finally up to the task.

Read more: http://theconversation.com/weighing-the-risks-for-australia-as-china-rebalances-30671
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Mike
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But Bears would have us believe we are only a mining town, we could not possibly ship food or offer services as well, what about energy too.

What will the 1,300 million Indians want from us or the 800 million in ASEAN which is the next wave of nations to develop. Over 3 billion Asians we can sell food, energy, resources, services too for many decades to come.

I thought Australia was a one trick pony, with no future and an economic depression just around the corner. Seems not.
http://mike-globaleconomy.blogspot.com.au/
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Lou Ellen
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This entire argument is not much more than an institutionalised appeal to authority, the fallacy of argumentum ad baculum, and really is a poor effort.

1. The dollar isn’t correcting. If it were, I’d be less bearish.

2. The IMF, BREE and Treasury are kidding themselves about the impacts on the economy because they underestimate the impact of falling terms of trade (ToT) on income growth and income is the key to domestic activity in the Australian economy.

3. Yes, the ToT will remain elevated versus history but while it falls so will income and falls ahead remain substantial on iron ore and LNG.

4. Volume growth is no substitute for price, because income still falls.

5. The World Bank did not predict the fall in Chinese growth and is under-estimating it again.

6. Services exports will grow via tourism and education, agriculture will be OK too, but let’s cut the shit about manufacturing (see point 1). The sum total is not “golden” because the sectors are not big enough. They’ll be dwarfed anyway by LNG, which isn’t even mentioned, and suggests this article is operating from to some extent from cliche.

7. The danger for Australia is in both China rebalancing and not doing so.
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Perthite
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Shifting gears: Is Australia going backwards or forwards?

Adam Carr

The sharp moderation in wage growth experienced over recent years has many worried that our standard of living is plummeting. Wage growth in the June quarter was a measly 2.6 per cent -- the lowest rate of growth since records began (admittedly only in 1997). Still, that’s not a good result. The idea is that this modest wage growth and high levels of unemployment are symptomatic of the nation’s falling income overall. According to this view, the country is going backwards because there is nothing left to fill the void once the mining boom ends. Well, it’s already ended apparently so this is happening in real-time I guess.

Now I realise this is a very common view. Some very important men with lots of baubles are more than happy to tell you about it. But, there is not a lot in the way evidence to back this claim up. The United Nations, in particular, has a very different view.

According to the UN, Australia currently enjoys an extremely high standard of living. Indeed we are ranked second in the world with only Norway enjoying a higher standard than we do. Now the UN bases this on the human development index (HDI), which is “a summary measure of average achievement in key dimensions of human development: a long and healthy life, being knowledgeable and have a decent standard of living”. In practice that means averaging scores from three indexes on health, knowledge and income.

On the income side, Australia actually scores very well. National income per capita is about $42,500 (on a purchasing power parity basis), which puts us 12th in the world (fourth in US dollar terms). Now that’s up from 10 years ago when we were 15th in the world, although the exact rank is perhaps a little misleading as nations tend to group. So for instance of eight of the top 11 have a very similar gross national income (GNI) per capita -- a few grand either side. A decade ago 12 of the top countries’ GNI per capita was indistinguishable. Looked at that way, the fact is, Australia’s rank -- just on income per capita -- hasn’t really changed all that much over the past two decades. Nor has our overall score on the HDI I might add (at number 2).

That consistency is actually a very important point. If that ranking has been consistent over time -- a few decades -- then it can’t be true to say that the mining boom has been responsible for any significant lift in the nation’s standard of living. That being the case, it must hold that the end of the mining boom -- if that even is a reasonable scenario -- won’t bring with it any material decline.

Against that backdrop we shouldn’t worry about a modest decline in wage growth. Wage growth is not low because of weak economic growth, or because the mining boom is over, or that the labour market is weak (see my piece Take Australia's unemployment rate shocker with a grain of salt August 13).

Wage growth is soft because of Australia’s crisis of confidence. Households have been browbeaten into thinking the country is on the precipice of recession in every year for the past five years and business isn’t investing as they should (Don't believe the negative economic spin August 15)

National income, and the outlook for, is otherwise very good. We are well positioned for the Asian century and the ongoing growth surge under way for our northern neighbours. Moreover, and as we’ve seen this earnings season, our corporates are making good profits -- growth is solid. While wage growth may be modest now, that isn’t going to last. The growth surge in Asia, combined with the ageing population will ensure that the more pressing issue will be finding adequately skilled workers. A more immediate cyclical impact will be the surge in construction and the upcoming non-mining investment boom (Australia's coming jobs boom August 5). Wages are going up, nothing can stop that.

In the meantime, we’re living longer, we’re healthier, and our personal wealth is already at a record. Net wealth is just off records and is more than six times larger than disposable income and about four times larger than our debt. We’re travelling overseas in record numbers and our cars and houses are bigger, better and have more flashing lights.

So as to what will stop our standard of living plummeting? Well, and not to put a too finer point on it, I think reality will stop our standard of living from dropping. You know, the real world, where the prospects for our great country are still outstanding.

Read more: http://www.businessspectator.com.au/article/2014/8/22/australian-news/shifting-gears-australia-going-backwards-or-forwards
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