Australia's Dependence on China

The Economist in "The indispensable economy? China may not matter quite as much as you think" argues that while dependence on China is significant and growing, it might be overrated.  

It is hard to exaggerate the Chinese economy’s far-reaching impact on the world, from small towns to big markets. It accounted for about 46% of global coal consumption in 2009, according to the World Coal Institute, an industry body, and consumes a similar share of the world’s zinc and aluminium. In 2009 it got through twice as much crude steel as the European Union, America and Japan combined. It bought more cars than America last year and this year looks set to buy more mobile phones than the rest of the world put together, according to China First Capital, an investment bank. ...

China is now the biggest export market for countries as far afield as Brazil (accounting for 12.5% of Brazilian exports in 2009), South Africa (10.3%), Japan (18.9%) and Australia (21.8%).

But given that exports are only a little bit over 20 per cent of GDP in Australia exports to China as a percentage of GDP "are only 3.4% of GDP in Australia, 2.2% in Japan, 2% in South Africa and 1.2% in Brazil." It's important to remember that domestic spending matters most. While production for exports has a multiplier effect through the wider economy, this should not be exaggerated:

these “multipliers” are rarely higher than 1.5 or 2, which is to say, they rarely do more than double the contribution to GDP. Moreover, just as expanding exports add to growth, burgeoning imports subtract from it. Most countries outside East Asia suffered a deteriorating trade balance with China from 2001 to 2008. By the simple arithmetic of growth, trade with China made a (small) negative contribution, not a positive one.

Multipliers in Australia derivative from Chinese demand might be larger than this in Australia however. What this attempt to downplay the China boom  doesn't capture is the confidence effect of a booming China and the huge expansion of investment in Australia aiming to cater not only for Chinese demand but the considerable increase in demand in Asia as a whole. Let's not forget that Japan and South Korea remain vital sources of demand for Australian exports and India and Indonesia are growing rapidly as well.

There are some countries, however, considerably more trade dependent than Australia as the graphic below shows.



China plays a larger role in the economies of its immediate neighbours. Exports to China accounted for over 14% of Taiwan’s GDP last year, and over 10% of South Korea’s. But according to a number of studies, roughly half of East Asia’s exports to China are components, such as semiconductors and hard drives, for goods that are ultimately exported elsewhere. In these industries, China is not so much an engine of demand as a transmission belt for demand originating elsewhere.

The share of parts and components in its imports is, however, falling. From almost 40% a decade ago, it fell to 27% in 2008, according to a recent paper by Soyoung Kim of Seoul National University, as well as Jong-Wha Lee and Cyn-Young Park of the Asian Development Bank. This reflects China’s gradual “transformation from being the world’s factory, toward increasingly being the world’s consumer,” they write. Gabor Pula and Tuomas Peltonen of the European Central Bank calculate that the Philippine, South Korean and Taiwanese economies now depend more on Chinese demand than American.

Trade is not the only way that China’s ups and downs can spill over to the rest of the world. Its purchases of foreign assets keep the cost of capital down and its appetite for raw materials keeps their price up, to the benefit of commodity producers wherever they sell their wares. Its success can boost confidence and productivity. One attempt to measure these broad spillovers is a paper by Vivek Arora and Athanasios Vamvakidis of the IMF. According to their estimates, if China’s growth quickened by 1 percentage point for a year, it would boost the rest of the world’s GDP by 0.4% (about $290 billion) after five years.

The Economist argues contrary to the general opinion in Australia that a major downturn in the Chinese economy would not be devastating.

Since the crisis, China has shown that its economy can grow even when America’s shrinks. It is not entirely dependent on the world’s biggest economy. But that does not mean it can substitute for it. In April the Bank Credit Analyst, an independent research firm, asked what would happen if China suffered a “hard landing”. Its answer to this “apocalyptic” question was quite “benign”. As it pointed out, Japan at the start of the 1990s accounted for a bigger share of GDP than China does today. Its growth slowed from about 5% to 1% in the first half of the 1990s without any discernible effect on global trends. It is hard to exaggerate China’s weight in the world economy. But not impossible.

Given that so much of the optimism of Australia is based on the view that China (and India's) rise will continue long into the future, I'm not so sure that the impact on Australia would be so 'benign'. Australia would have benefited in the 1990s if Japanese demand had continued to expand. But I might just be a negative vibe merchant, with a vested interest in the concept of vulnerability!

For further commentary on this article see the always insightful Mark Thirwell on the Lowy blog site.