Amidst the widening global financial turmoil, a strong Chinese economy is certainly one positive for the Australian economy.
But should we believe it is only factor that will save the day? The answer is no.
The tendency to assume that Australia is strong because China is strong is overblown, in my view. The Australian economy has a lot going for it.
While the Australian economy is undoubtedly more dependent on China than at any other time previously, the nature and strength of this dependence is, in general, poorly understood.
The first point to note is that developments overseas can be transmitted to the Australian economy via both trade and investment linkages.
For example, in the post-Second World War period, Australia has never been particularly connected to the US via trade – at least not compared to the likes of Japan – and yet it was long taken as a given that our economic fortunes were crucially influenced by developments in the US.
Nowadays, despite what the headlines say about the latest Chinese purchase of an Australian mine or farm, investment linkages between the two countries are almost entirely absent.
The latest Australian Bureau of Statistics data show that in 2010, the stock of Chinese investment in Australia was $19.5 billion, or just 1% of the total stock of foreign investment.
Meanwhile, the share held by Singapore, with a population of just 5 million, was more than double that of China, with a population of 1.3 billion. No other countries came close to rivalling the US and UK shares of 27.9% and 24.0%, respectively.
And while it is true that the stock of Chinese investment more than doubled between 2008 and 2010, increasing by $11 billion, the stock of US investment increased by nearly 10 times that amount, or $107.8 billion.
The second point to note is that the Australian economy is not overly export-dependent. It is perhaps for this reason that academic studies have shown that Australia’s GDP growth and Japan’s GDP growth have never been highly synchronised.
The latest national accounts data (March 2011) show that exports equate to 20.8% of Australia’s GDP. This compares with the 72.5% share of domestic consumption. Australia’s merchandise exports to China equate to 4.4% of GDP.
Thus, by sheer weight of numbers, it would be quite extraordinary if Australia’s GDP growth were driven by exports to just one country, even one as significant as China.
The third point is that the export price boom that Chinese demand for our natural resources has delivered, which has greatly boosted our national purchasing power, is principally a structural rather than cyclical event.
That is, China’s emergence as a net buyer of these goods on international markets is not going to reverse itself, and therefore, the prices we receive for our exports are not expected to revert to their historical averages.
Even if China’s GDP growth experienced a dramatic cyclical slowdown, say from 10% to 5%, its economy would still be 5% bigger next year than this one. An economy that is 5% bigger will demand more natural resources, not less.
It is important to note that export prices are determined by both demand and supply, and as more supply comes on line, prices may well fall back from their current historical highs. But this has nothing to do with developments in China reducing Chinese demand.
Also, as the global financial crisis period showed, China’s government stands by ready to support the economy in the event of a cyclical slowdown, often in ways that boost demand for our exports of natural resources, such as funding infrastructure development.
The final point is that China may well be delivering a boom for some sectors of the Australian economy, notably mining, education and tourism, and the states in which activities are located, such as Western Australia.
But it is contributing to a bust in others. For example, as labour is drawn into minerals productions, other sectors face higher wages costs as a result. The strong Australian dollar also makes it difficult for Australian manufacturers to compete on international markets.
The above is not to say that, overall, Australia’s economy is not better off as a result of its links to China. It most certainly is.
However, it will be some time yet before it can be accurately stated that “When China sneezes, Australia catches a cold”.