China and the World, Talking Point

Everybody needs good neighbours

How Australia’s economy is fast becoming a proxy for Chinese growth

Everybody needs good neighbours

A non-ferrous export

It’s no longer just Kylie singing about it. The Aussie singer made her chart debut with ‘I Should Be So Lucky’ and her native land is revisiting its reputation as the Lucky Country.

On what basis, you might ask: the beach-and-barbecue lifestyle, the annoyingly consistent sporting prowess, or just as a nation in which everyone expects a ‘fair go’?

All wrong, if you look back at the man who penned the phrase. Back in 1964, when social critic Donald Horne first introduced the term (in his book of the same name) he was actually putting the boot in. Horne lambasted a complacent country, run by “second-rate people” and overly dependent on natural resources. Other nations were clever, he complained. Australia was merely fortunate.

Horne died in 2005, with many of his younger countrymen unaware of the label’s unflattering origins. And now there’s a new take, which has flourished in the two years since the global financial crisis. It celebrates a new factor in the lucky streak Down Under – Australia’s trade ties with the Chinese.

How’s that luck, today?

Holding pretty solid, it seems. Australia was the only advanced economy to avoid recession after the global financial crisis; it has the strongest job creation of any of the advanced economies this year (unemployment has declined to just above 5%); and it expects to be back in fiscal surplus by 2012.

In a positive research note (“Onwards and upwards”) released last month, HSBC also predicts better times ahead, upgrading its projections for this year’s economic growth substantially to 3.4%, from 2.8%. Growth will accelerate again next year, HSBC thinks, by 4.1%.

Much of this resilience stems from deepening trade ties with the Chinese. In 1999, China made up less than 5% of Australian exports. But by last year, it accounted for one in five of Australia’s direct export dollars, as well as many more by pushing up prices across the board for Australian commodities.

No wonder, then, that some of the locals are prone to a little confusion as far as China’s economic status is concerned. According to Andrew Shearer at the Lowy Institute, a Sydney-based think-tank, more than half of Aussie respondents to a Lowy poll earlier this year wrongly picked out China as the world’s leading economic power (ignoring much higher contributions to global GDP from the EU and the US). They were the only nationality to make the mistake, Shearer says, from a series of similar surveys in South Korea, India, Turkey, Mexico and Indonesia, where the US was still top pick.

But maybe they are just looking ahead?

Possibly. Especially when the outlook for the Oz resources sector is so “resplendent”, as HSBC research put it earlier in the month.

In fact, Australia’s commodity exports are not up as much in volume terms over the last five years as you might expect, at around 15%. Instead, rises in resources prices have been responsible for much of the heavy lifting. Last Friday the latest data was showing price increases for metal ores of 70% in the year to September, for instance, as well as coal by 34%, and gas 56%.

Volumes were constrained by infrastructure bottlenecks, although a doubling of mining investment over the same five-year period is bringing on new sources of supply, especially in coal and iron ore. That leads Australian politicians to talk of a “Mining Boom Mark II” ahead. Treasurer Wayne Swan even predicted the biggest upturn “since the 1850s Gold Rush” in a speech to the New York Stock Exchange earlier this month.

Dollars diverge…

So the policymakers are professing confidence, talking of a multi-year expansion in Chinese demand. This is taking the country away, some say, from a decade of closer alignment with US economic data. Now it’s better to look at other indicators, like the correlation of Aussie GDP with China’s electricity consumption.

Certainly a parting of the ways shows up in Australian house prices, which are displaying much greater resilience than American ones, and in interest rates, which look like climbing over the next few quarters. Not something that many foresee for the US.

But Australian vim is most apparent in the sustained run-up in its currency, which breached parity with the US currency this month for the first time since being permitted to float freely in 1983. Although it has since come off to a fraction below parity, the Aussie dollar is still well above the longer-term average of about 70 US cents held from 1983 until the beginning of the commodity price boom in 2003, or the higher 80 US cents from 2003 until its more recent run up.

Some analysts now view Australia’s dollar as a proxy for China. Measured from the depths of the financial crisis in 2008 it has surged 66% versus the greenback. Here, perhaps, is how the renminbi might be behaving, should it be allowed to find its real market value.

The difference, of course, is that Australia’s politicians have refused to intervene in the currency markets, albeit in the knowledge that a strong Aussie dollar can lead to what Prime Minister Julia Gillard has called a “patchwork economy”, in which some sectors struggle.

Tourism and manufacturing exports are already being hit, and international education, now one of Australia’s top earners, is also under pressure. Research from the John Curtin Institute of Public Policy says annual spend by foreign students had doubled in the five years from 2004 to A$18 billion (well above tourism‐related travel). And again, China is a key contributor, providing almost a third of overseas enrolment. But as the Beijing-based Legal Evening News warned earlier in the summer, Australia is now the most expensive place for Chinese to study overseas. The newspaper expected sign-ups to fall by as much as 20% over the next year.

But closer ties ahead?

It looks like it, even though WiC has chronicled some occasionally fractious episodes in Sino-Australian relations in recent months – in the wake of Chinalco’s failed bid for a bigger stake in Rio Tinto (see WiC19), and anxiety over the trial of Rio’s Stern Hu (WiC24).

Beijing also harbours suspicions that Chinese investment proposals aren’t always getting the fair go promised by Australian regulators. Not so, says Canberra’s Foreign Investment Review Board. Between November 2007 and March this year, 180 Chinese proposals worth $54 billion were approved. Only 5 were subject to conditions, and none were rejected outright.

Not all Australians are comfortable with the new closeness in ties, and some jibe about becoming China’s ‘23rd province’. Mandarin-speaking former prime minister Kevin Rudd’s labelling as the “Manchurian candidate” resonated with many of the country’s Crocodile Dundees too. How long, some muttered, before speaking Chinese becomes a qualification to become PM?

But one bonus for relations is that the two economies at least have a more complementary feel than the more competitive backdrops shaping some of China’s other bilateral ties.

Of course, those in Lucky Country’s Horne camp might still have reservations about the commodity contribution to Australia’s current trade surplus with China. Critics also ask what happens in the event of a China slowdown or a wider trade war, in which Australia would be caught in the crossfire, even if bilateral ties were healthy. When Chinese growth slips, demand for iron ore, coal and gas will drop with it.

Still, it’s hard to blame Australia for seizing the opportunity that has come its way, and one that Philip Lowe, an assistant governor at the Reserve Bank of Australia, sees as having “some decades to run”.

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