Crouching Tiger Ready to Pounce - When will China Usurp the United States?
In 2009 China evaded the economic recession that engulfed much of the world’s economies. Powered by an aggressive government-backed stimulus package, China’s economy recorded an impressive GDP expansion of 8.7%, with fourth quarter growth of 10.7 percent.
China’s outlook for 2010 is very optimistic. In the first quarter preliminary estimates for first quarter GDP growth are around 11.9 percent.(1) For this Year of the Tiger most international institutions and commentators expect at least 8% annual GDP growth. China’s economic rise seems unstoppable.
World’s Biggest
China’s ability to maintain high growth, even in times of an economic global downturn, has reinforced a view that China is on track to outstrip Japan and ultimately the USA to become the world’s biggest economy.
Writing in Foreign Policy, Robert Fogel makes the following prediction:
“In 2040, the Chinese economy will reach $123 trillion, or nearly three times the economic output of the entire globe in 2000. China's per capita income will hit $85,000, more than double the forecast for the European Union, and also much higher than that of India and Japan. In other words, the average Chinese mega-city dweller will be living twice as well as the average Frenchman when China goes from a poor country in 2000 to a super-rich country in 2040.” (1)
It’s a prediction endorsed by others, including Goldman Sachs, who nominated 2027 as the year when China will have the world’s largest economy and the Carnegie Endowment which predicted in 2008 that China’s economy will surpass that of the United States by 2035 and be twice its size by mid-century
There are serious concerns about the Chinese economy, including inflationary pressures (especially in real estate), rising labour costs, the value of RMB, and perennial concerns about the true financial state of China’s banks and lenders. Yet the engine of Chinese growth continues to roar ahead after the GFC and in 2010.
Australia’s Largest Export Market
Sustained growth in the Chinese economy is good news for Australia. China is now our largest export market, thanks to booming Chinese demand and record high prices for our mineral resources. Will the positive outlook for China’s economy in 2010 usher in another boom in demand for Australian coal, iron ore and resources, and create another surge in Australia’s national well being?
Putting aside the current debate over the Australian Federal Government’s mining tax, and what impact it may or may not have on new investment and the health of the minerals sector, all the signs point to sustained, robust growth in Chinese demand for minerals and raw materials.
In March The Australian reported growing demand for mineral sands and quoted minerals sands miner Matilda Zircon saying significant price increases were expected in 2010. Prices for iron ore and coal were reported to be rising in late 2009 and into 2010.
The trend was confirmed in April 2010 when Australia’s exports surged to record levels, generating an unexpected trade surplus. Australian resources – notably coal and iron ore were major contributors. Bloomberg Business Week (June 2) reported from ABS data “Exports including farm goods gained 11 percent to A$22.7 billion ... Metal ores including iron ore rose 25 percent and coal shipments surged 40 percent. Increasing demand from Asia is fueling an investment boom in Australia’s resources industries that is forecast by the central bank to last more than a decade.”
Reserve Bank of Australia Governor, Glenn Stevens (3), confirmed the surge in demand and prices for Australian commodities. Stevens predicts that Australia’s 2010 terms of trade are likely to reach the historic peak seen in 2008. He also cautions that demand from Asia – and China in particular is also likely to ease somewhat from current highs.
Yet Australian assessments of China’s economic performance mean strong demand for our coal, iron ore and LNG will continue for the foreseeable future. The RBA offered the following recent overview of China: (4)
“China continues to be at the forefront of the recovery. Growth over the first few months of 2010 was strong, and recent indicators suggest that this momentum has continued. Investment in the manufacturing sector and in infrastructure has, if anything, surprised on the upside. The main issue continues to be the potential for the Chinese economy to run too hot, putting upward pressures on the prices of goods and services and on housing prices. Recently, the Chinese authorities have been responding to this risk, especially through steps to rein in the property market.”
China Key Reason for Avoiding Worst of GFC
The importance of China to Australia has thus moved beyond its attraction as a growing export market or potential source of new investment capital, tourists or fee paying students. The continued health of the Chinese economy and sustained demand for raw materials and inputs is now critical to the overall health of our national economy.
Among the key factors that contributed to the relatively mild impact of the global financial crisis on Australia and our strong recovery in recent months is China. China’s unexpectedly robust rebound from the GFC throughout 2009 and into 2010 (along with other emerging economies in Asia) has helped Australia avoid the problems that engulfed other developed economies, many of which are yet to see signs of real recovery. Predictions of a strong Australian economy in 2010 and into 2011 rest in no small measure on China continuing to grow strongly – and continuing to purchase our raw materials.
Footnote for Doing Business with China – Revaluing the RMB
After months of speculation, China’s central bank announced on 19 June that China would introduce a more flexible approach to managing the value of the Yuan (RMB). The Yuan had been pegged to the $USD since mid 2008. The move came after intense pressure on China from the international community – especially the United States – to allow the Yuan to appreciate on international markets.
China’s decision immediately drew positive international responses from the United States and others. Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF) summed up the international mood "A stronger Renminbi is in line with findings of the G-20 Mutual Assessment Process, to be presented in Toronto next week, and will help increase Chinese household income and provide the incentives necessary to reorient investment toward industries that serve the Chinese consumer."
Expectations are that a stronger Yuan will be good news for China’s international business partners, including Australia. A stronger Yuan potentially gives Chinese consumers greater spending power to buy foreign goods – which could assist foreign companies to export more to China. For Australia a stronger Yuan may boost China’s buying power for minerals and natural resources, an expectation that has initially helped push Australian mining stocks higher. Economists also tip some benefits for China, principally an opportunity to shift economic reliance on exports (which had arguably been propped up by an artificially low Yuan) to a more sustainable domestic growth model.
Despite the move, the details of how the flexibility will be managed are still unclear and China’s move does not constitute an official revaluation of the Yuan. Economists expect a gradual appreciation of the Yuan against the $USD and other currencies.
(1) Reported by Reuters 2010
(2) Foreign Policy Jan/Feb 2010
(3) Address to Western Sydney Business Connection June 9 2010 / RBA Website
(4) Philip Lowe Assistant Governor (Economic) Keynote Speech to ColonialFirstState Investment Forum Sydney - 13 May 2010
