The Dark Underbelly of Australia’s Resource Boom: Chinese Resource Demand

Read from here…

China’s GDP chugged along at 8.9% in the third quarter. The big driver for GDP growth was massive growth in fixed asset investment. It grew by 33.4% in the first nine months of the year, according to China’s National Bureau of Statistics.

But the meat of the story is that urban fixed asset investment in primary industry – the kind that consumes huge quantities of Aussie exports – was up a whopping 54.8% in the period. This is China’s vaunted stimulus in action. And as you can see from the chart below, China’s import volumes are headed off the charts this year, although the effects of the stimulus are petering out (which could be ominous).

China’s Import Volumes

The Chinese government unleashed a $600 billion stimulus spending spree on shovel-ready projects last November. That alone would lead to soaring commodity imports. But because China pegs its currency to the U.S. dollar, its monetary policy must match the Fed’s. That means China’s monetary policy has been every bit as loose and stimulative as Ben Bernanke’s in the last year.

For example, UBS reports that new lending in China reached a record US$1.27 trillion in the first nine months of this year. This kicked off rallies in Chinese stocks, real estate prices, and construction. It also alarmed at least some Chinese officials that their dollar peg forces them to import inflation from the U.S., which can be politically destabilising. So now, they are walking themselves back from the ledge.

In yesterday’s Financial Times, Qin Xiao, the Chairman of the China Merchants Bank (the country’s sixth-largest bank) wrote that the government should not be afraid of a moderate slowdown in the economy. He wrote that, “Monetary policy must not neglect asset-price movements,” he writes. “Therefore it is urgent that China shifts from a loose monetary policy stance to a neutral one.”

Just how Chinese central planners aim to do this is unknown. Can they be neutral as long as they peg? When you peg your currency to keep your exports cheap – because industrial production and exports drive your growth which keeps employment full and the population from getting restless – it’s hard to be neutral when the Fed is anything but. But that subject – when it’s in China’s interests to allow its currency to appreciate – is a whole other subject for another week.

For today we’d only like to make the point, or raise the possibility, that this decades-long China boom Ken Henry is counting on may be a lot more fragile than he thinks. Is there any reason to believe economic authorities in China are smarter than their buddies in Europe and America? All of them seem to be reading from the same play book. Inflate, stimulate, spend, build…and leave the bill for later

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But don’t tell that to Ken Henry. He sees four long-term “structural implications” because of India and China’s demand. In his speech yesterday in Sydney he said that, “I have spoken about the structural implications for the Australian economy of their strong contribution to the global demand for mineral commodities. That demand has supported a considerably higher level of our terms-of-trade.”

By the way, Henry says that Australia will run a higher level of terms-of-trade for years. This means the country will get paid more for what it exports and pay less for what it imports. This is a preliminary first-strike on current account deficit hawks. Henry says the current account deficit will rise because of the improving terms-of-trade and that the Australia will import capital because investment will exceed savings.

We don’t want to get into it too much in a confined space, but this is an argument worth having. America ran a massive current account deficit. Alan Greenspan blamed excess savings in the developing world for fuelling the surplus in America’s capital account. He claimed that foreign investors were happy to pour savings into the U.S. stock and bond markets because it was a better investment.

This surplus in the American capital account kept interest rates low. The housing bubble began to inflate. Household savings rates fell. Spending increased. And at the end of the day, the current account deficit blew out. Americans financed a leveraged boom with foreign money and now have to pay the piper.

Henry says not to worry because Australia will import capital for “investment.” That’s all well and good if it’s real productive investment. But as far as we can tell, Aussie banks are importing foreign capital and pumping it right back into commercial and residential housing, blowing an even bigger property bubble. Meanwhile, Aussie households are encouraged to take on more debt, reduce savings, and believe nothing’s amiss here.

Time will tell if Henry’s right. After all, by itself, a current account deficit is not evil. But it is pretty odd that a country that prides itself on its exports runs a trade deficit. Importing the capital that gets deployed in your economy isn’t a sin either. But if you plow it all into a property bubble, it’s a disaster waiting to happen.

But let’s not be too troubled about deficits today. Henry says that, “It would be reasonable to consider that, while the Global Financial Crisis has taken some of the heat out of our export prices, we should get used to the idea that we could have structurally higher terms-of-trade for quite some time – possibly for several decades.” He says this, among other factors, could lead Australia to a period of “unprecedented prosperity.”

And the euphoria? Henry concludes that, “The Australian economy has just demonstrated to the rest of the world that, for some time now, it has quite possibly been the best governed, most flexible, most resilient of all industrialised economies.”

That last statement from Ken Henry strikes me as extraordinary triumphalism, and probably premature. He could look a right nong in 12 months time.

There’s more here

And from Crikey today…

Rising $A smashes exports

Glenn Dyer writes:

The rising value of the Australian dollar has had a dramatic impact on the value of our imports and exports in the three months to September and over the previous 12 months.

Today, the Australian Bureau of Statistics revealed a 9.6% fall in the Export Price Index for the September quarter and a 20.7% drop for the year to September.

The Import price index fell 3.0% for the September quarter and 2.3% for the year to September, indicating most of the decline was concentrated in the three months ending September 30.

In fact, helped by a combination of sharply lower contract prices for coal and iron ore, plus the impact of the rising Australian dollar, the 20.7% plunge in the export index in the year top September was the largest recorded since the Bureau of Statistics started measuring it in 1974.

The dollar, which is up 62% or since the lows of early February so this year against the US dollar and up more than 30% on a trade weighted index, has already starting hurting exporters, such as mining companies, rural shippers and manufacturers. It was trading around 92.80 US cents just before midday.
But importers, such as car companies and retailers and wholesalers, are seeing benefits with prices starting to edge down in shops.

The stronger dollar has clipped the rise in the price of oil internationally and its impact on our petrol prices as well.

These figures show that import price pressures won’t have a big impact in the quarterly producer price indexes out next Tuesday, nor the Consumer price Index numbers for the September quarter, out the next day on Wednesday.

But should the dollar continue at current levels into 2010, it is going to make a mess of Australian export income, especially from the resources sector.
Tourism figures show a steady rise in the number of Australians travelling overseas this year, and an easing in tourist numbers arriving because the dollar is starting to make Australia an expensive place to visit compared with London and the US. Some are clearly opting to stay at home.

The ABS said the fall in import prices “was driven mainly by the appreciation of the Australian dollar against all major trading currencies, as well as lower prices paid for general industrial machinery and equipment, and machine parts, -7.4%.

“These falls were partly offset by rises in prices paid for petroleum, petroleum products and related materials (+15.1%).

The fall in the export price index “was driven mainly by falls in prices received for coal, coke and briquettes (-34.2%) and metalliferous ores and metal scrap (-12.1%), as well as the appreciation of the Australian dollar against all major trading currencies.”

The ABS said the 20.7% fall in the Export Price Index was “the largest annual decrease since the current series began in September quarter 1974.”

Wonder if you can get them cyclone rated, for the future climate change to wilder weather…?

Canberra pollies?

It might even be a sustainable industry for Canberra, on account of all the BS they produce…

Perhaps people could write ETS protests on it and send them to Canberra?

NEW YORK – Coal miner Peabody Energy Corp said it would double exports from Australia in the next five years, as it looks to the Asian power generation market for growth.

Economic commentators cheer loudly.