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The Great Southern Province of China: Part I

SATYAJIT DAS
30 January 2012

Econo-Leaks (a new service involved in the exclusive gathering of economic intelligence) has intercepted the following secret cable transmissions from the Chinese envoy to the leaders in Beijing on the prospects for Australia. The first cable covers Australia's vulnerability to China and the European debt crisis.

Your Excellency, I am pleased to present the requested report on the economic outlook for the Great Southern Province of China, currently referred to by the local population as "Australia". For convenience I will refer to the country by this older name.

Deep dependence on our great nation means Australia's future is inextricably linked to China. Given that the white European colonisers historically feared the "yellow peril", the irony of the situation will be not lost on the Politburo.

Despite recent engagement with us and the rest of Asia, Australia's focus seems confused. The country's head of state remains an octogenarian British Queen. Australia also believes its security is guaranteed by the United States of America with whom it has extensive defence links.

The locals continue to believe in both its sovereignty and also its bright economic prospects.

Escaping Acronyms...

The popular narrative is that Australia escaped the GFC (global financial crisis - the locals are acronymic) through their own planning.

The country was certainly in a better position to cope with the problems. The Federal Government did not have much debt. However, some State governments have significant borrowing. Governments also systematically shifted some of their debt into public private partnerships ("PPP"). Because of the strategic nature of this infrastructure, these projects de facto enjoy the indirect support of governments. Private household debt is also high.

At the start of the crisis, Australian interest rates were relatively high, providing greater flexibility.

But Australia did not escape the crisis unscathed. One major bank lost nearly a billion Aussies (colloquial term for the Australian dollar, the local version of the Renminbi). Investors, including a number of charities and local councils, suffered significant losses from investments in various financial products. A number of highly leveraged infrastructure and commercial real estate investors failed.

Local banks escaped the problems of their overseas counterparts. The near death experiences in the recession of the early 1990s encouraged them to stay home eschewing overseas adventures and complex financial structures. That said, another year or so, they would not have been so lucky.

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Read more - http://www.abc.net.au/unleashed/3798886.html

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A fork in the economic road …

The commodity boom has created a "two track" economy – as your Excellency know economists prominent in the media love glib "sound bites". The mining and commodity boom benefits a small part of the economy whilst simultaneously creating problems for other parts.

The mining and energy sector account for less than 10 per cent of the Australian economy. This is smaller than the Australian finance sector or manufacturing industry.

Mining and mining-related sectors, such as construction, manufacturing and services industries which benefit from mining activity, make up about 20 per cent GDP. These sectors will contribute approximately two-thirds of the projected 4 per cent GDP in 2011/12. The remaining 80 per cent of the economy will contribute one-third of growth.

Mining employs 1.5 per cent of the workforce reflecting its capital intensive nature. Unfortunately, a portion of the equipment needed is imported adding to the current account problem, especially in the short run. A combination of high domestic costs and the strong Australian dollar means that a significant portion of project related work is now done offshore.

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Debt levels remain high. Between 1991 and 2011, household debt rose from around 49 per cent to 156 per cent of disposable income. In 1989, when mortgage rates were 17 per cent, the ratio of interest payments to disposable income was nine per cent. Currently, despite the fact that mortgage rates are around 7.5 per cent, the ratio has increased to around 12 per cent.

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There are other unresolved problems. Housing prices remain high based on traditional measures such as affordability and rental returns.

According to the latest Economist survey (published on November 26, 2011), Australian house prices were overvalued by 53 per cent based on rents and 38 per cent measured against income levels relative to long run averages. According to The Economist, Australian home prices are overvalued by at least 25 per cent based on the average of these two measures. The level of overvaluation is greater than in America at the peak of its housing bubble.