Australia’s political and business leaders are convinced the nation will ride on the back of a fast growing China for the foreseeable future.
Having climbed off the sheep’s back during the 1980s and moved from being an economy dependent on agricultural exports to a ‘clever country’ exporting high value services and products, in the late 1990s Australia turned its back on building a modern economy and decided to stake the future on a never ending coal and iron ore boom driven by Chinese industrialisation.
Smarter than Bill Gates
Australia’s success in riding China’s coattails allowed the Reserve Bank Governor Glenn Stevens in 2010 to boast how he and the nation’s politicians were smarter than Bill Gates who nine years earlier warned Australia about being over reliant on commodities.
Despite the hubris, there are real risks in the Chinese economy that the blue sky mining school of Australian economic management needs to plan for.
The warning to US Presidential candidates on trade with China by Professor Patrick Chovanec of Beijing’s Tsinghua University’s School of Economics and Management is a good starting point.
In his warning Professor Chovanec points out that Chinese growth in recent years has been driven by the construction sector, even if building activity were to stay constant this would shave off half of China’s growth rate. The options for stimulating the economy in manner similar to 2008 have narrowed.
China’s economy is not just slowing, it is entering a serious correction. The investment bubble that has been driving Chinese growth has popped, and there are no quick “stimulus” fixes left. There is the very real possibility of some form of financial crisis in China before year’s end.
China’s stimulus package was the world’s biggest response to the 2008 Global Financial Crisis, followed by the South Koreans (another Australian commodities customers) and Australia itself.
While the Chinese commodities boom drove most of Australia’s trade, it was domestic spending driven by the Rudd government’s stimulus package that saved Australia from entering recession.
Squandering a century’s boom
One of the notable things about Australia’s commodity success in the 2000s is just how little a dent the booming coal and iron ore exports put in the trade deficit. Despite record terms of trade, Australians still manage to spend as much on imports as they make on exported goods.
Not that this worries Australia’s leaders who seem to spend all of their time worrying about pandering to a tiny number of marginal seat voters who listen to fear mongering talkback radio hosts which is what has driven the last two weeks’ obsession with a few hundred asylum seekers.
Professor Chovanec points out the Chinese leadership is distracted as well with their struggles over a messy change of Politburo leadership, risking that the policy makers might miss any opportunity they have to engineer a ‘soft’ landing for their economy.
The biggest risk is that of a crisis engineered to distract a discontented population warns Chovanec;
in a worst case scenario, China may be tempted to provoke a conflict in the South China Sea to redirect popular discontent onto an external enemy.
Already such things are happening, as anti-Japanese demonstrations step up around China over an island dispute.
There are no shortage of island disputes in the South China Sea and almost all scenarios involve allies of the United States – the only one feasible dispute that doesn’t is Vietnam and China’s leadership has had their nose blooded in such disputes with their southern neighbour before.
Even if we don’t see military tensions between the US and China, we certainly are going to see trade and political disputes in the next few years as both countries adapt to their places in a changed world.
For Australia’s business and political leaders, it means being prepared for a world more complex than one where a country can get by just lazily skimming a few dollars of easy iron ore exports to China.
We have to hope Australia’s leaders are capable of dealing with the challenges of a much more dynamic and difficult world where huge growth of one friendly trading partner is not assured. The stakes are too high to be distracted by suburban apparatchiks scoring meaningless political points off each other.