Anxiety over China syndromePrintAustralian Broadcasting...

Anxiety over China syndrome
Print
Australian Broadcasting Corporation

Broadcast: 28/10/2008

Reporter: Greg Hoy

The Australian share market remained steady today, however anxiety remains as global analysts forecast dire consequences for the economy if Chinese demand shrivels in wake of the global financial crisis.


Transcript
KERRY O'BRIEN, PRESENTER: And there was some respite on the Australian share market today, the good news is that it dropped only slightly.

The Reserve Bank intervened to keep a floor under the dollar at around 61 US cents. One big reason the dollar is being dumped on financial markets is because of Australia's reliance on its resources boom to help stave off the recession now threatening America and Europe and because commodity prices have also been forced down by the global slowdown.

Even China's miracle economy has slowed to nine per cent and its satiable hunger for Australian iron ore to feed its steel mills effectively keeping the economy relatively buoyant is also diminishing.

But will Chinese growth be able to resist pressures enough from without and within to save Australia from the worst impacts of the global crisis.

Greg Hoy reports.

PROFESSOR XIAOYE WANG, CHINA ACADEMY SOCIAL SCIENCES: Along we see economic reform China become stronger and stronger.

JONATHAN WU, PREMIUM CHINA FUND MGT.: There is an economic changeover or economic baton turn over from the West to the East, and it’s been more apparent in the last couple of months.

GREG HOY, REPORTER: The quarry for a hungry tiger, the rapid urbanisation of China's 1.3 billion people now consumes 85 per cent of global steel consumption.

With 50,000 new skyscrapers planned in 200 new cities within two decades, plus highways, railroads and 97 airports before 2020.

JONATHAN WU: In 10 years time we will be looking, if China maintains a growth pattern of 8-9 per cent, we'd be looking at China being the largest economy.

And we're talking between the World Bank forecasts or UBS forecasts, China is actually looking to outstrip the United States GDP by 2015 on a currency adjusted basis, and we are looking at around $US20 trillion and GDP.

GREG HOY: China's tiger economy has been roaring ahead at a voracious 10-12 per cent growth rate for five years.

So by holding on to the tail of the tiger, by feeding the furnaces of Chinese steel mills as the biggest supplier of iron ore, coking coal and steaming coal, Australia's terms of trade have soared by 50 per cent in four years.

Hoisting the trade balance into surplus, lifting Australia's gross domestic income by 32 per cent, emphasising the interdependence of the tiger and its quarry.

ZHANG PING, CHINA NATIONAL DEVELOPMENT COMMISSION (TRANSLATED): Now China and Australia enjoy a very good cooperative relationship. The economy between our two countries are strongly, mutually complementary.

GREG HOY: Yet fear on global markets that the China boom will soon bust as the downturn from the credit crisis bites the world economy has seen BHP Billiton stocks fall 39 per cent this year, Rio 58 per cent, dragging down the Australian share market and the Aussie dollar from a near parity high of 98 cents in July to just 60 cents today.

IAN MARTIN, STATE STREET GLOBAL MARKETS: They don't want commodity based currencies; we've seen a significant fall in global commodity prices.

This is likely to have a very significant impact on the Australian economy.

GREG HOY: Publicly the Chinese Government has appeared stoic.

ZHANG PING (TRANSLATED): We are very confident to maintain a steady growth in our future economic development.

GREG HOY: But privately in China there's growing concern.

PROFESSOR ALLAN FELS, AUST. & N.Z. SCHOOL OF GOVT.: If you are travelling with someone from the Government in your company, much more cautious about what they say.

But I have the impression that some Chinese businesses are now starting to suffer, and to have reduced sales and to expect further reductions in sales.

GREG HOY: Visiting Beijing, Professor Allan Fels, is a long time observer of the middle kingdom, where for years he's advised the Chinese Government on business reform.

PROFESSOR ALLAN FELS: Even if the Chinese economy continues to expand and have a strong demand, you will find that the collapse of demand in the rest of the world will tend to bring down the prices which can be charged to Chinese businesses by our exporters.

GREG HOY: So have the markets got it right in downgrading all things Australian so markedly? Or could they have overreacted by prematurely pronouncing the death of the resources boom and abandoning the Australian dollar.

For starters, according to the Bureau of Resource Economics, most Australian supply contracts were negotiated in American dollars at prices locked in until March of next year, so there's a temporary cushion.

But as regards the inevitable slowdown in China from the frenetic pace of recent years, while pessimism still pervades jittery markets, there is a rousing chorus of bulls in the China shop who say the end is not as nigh as the markets would have us believe.

DR GEOFF RABY, AUSTRALIAN AMBASSADOR TO CHINA: I think this year it will do better than eight or nine per cent because already in the first half of the year growth has been over 10 per cent.

I can't see it falling so precipitously in the second half of the year. But even growth rates of eight or nine per cent will still deliver quite substantial increases in income, and certainly China will continue to present itself as a strong export destination particularly for Australian exporters.

PROFESSOR XIAOYE WANG: Chinese growth rate it going down, I believe this is normal. Of course China cannot always, forever have a very high growth rate. This is not possible.

JONATHAN WU: China's main source of its GDP is internal domestic demand. For the last calendar year in 2007 its 91 per cent of GDP was actually generated from within the country.

GLENN STEVENS, RESERVE BANK OF AUSTRALIA: And that's a reminder that China has cycles just like everybody else. But even if they slow a lot, it seems to me that they will pick up again in due course and probably grow pretty quickly on average over many years.

GREG HOY: There remains an even bigger and more volatile challenge overshadowing the impact of the credit crisis.

JONATHAN WU: The main issue within China would still be polarisation, which is the systematic difference between the rich and the poor.

There's still is a population of a billion which is classified to be poor, and there's a very, very small population, albeit 20 million, which is classified as super rich.

What has happened is that over time, if that disparity keeps increasing between the poor and the rich, what we'll see is, what we'll start to see some level of civil unrest.

DR GEOFF RABY: There's no doubt income differential is growing and is seen by the central authorities as a major policy objective to address.

And I think that's going to be one major reason, as well as trying to prevent any rise in unemployment, why the central authorities will work to ensure that China's growth rates remain quite robust by any international standard.

GREG HOY: No question they've got the money to do it, and are prepared to use it.

JONATHAN WU: China is, has a massive treasure chest worth $1.8 trillion US dollars, of which approximately a trillion of that is invested in US Treasury notes.

PROFESSOR ALLAN FELS: China could half save the world if it stepped up consumer spending by releasing more money into the economy, and by boosting public spending.

GREG HOY: The great demand for Australian resources, it seems, is far from finished.

KERRY O'BRIEN: Greg Hoy with some assessments on whether China will help Australia ward off recession in the year ahead.