China asks, Australia produces, and China shall receive. But for how long will Australia safely be able to rely on China's hunger for our resources, and do we have any other options?
Exports from our island nation to China grew from about 5 per cent in 2000 to 22 per cent in 2009, according to International Monetary Fund figures. China is now, very obviously, our biggest export market. And Australia is surfing the wave at its highest peak, perhaps forgetting that the wave will have to hit the beach eventually.
China's growth outlook is, essentially, Australia's economic outlook. Our rising terms of trade are being driven by higher export prices from higher resource prices. And our dollar has been close to or above parity since the end of 2010.
The Reserve Bank has expressed its pleasure that the downward trend observed over the 20th century hasn't continued. Governor, Glenn Stevens, recently said that with the terms of trade at their current level, Australia's nominal gross domestic product (GDP) is about 13 per cent higher than it would have been had the terms of trade been at their 100-year average level.
St George's chief economist, Besa Deda, said the rising terms of trade trickles through the rest of the economy.
"And the high level of the exchange rate means that those trade exposed areas that are not benefitting directly from the mining boom are under a lot more pressure, and because inflationary pressures are moving higher we have had higher interest rates over the last year, and there is the prospect of more interest rates [rises], and that leaves interest rate sensitive sectors a little bit more sensitive to further rate rises."
Ms Deda said that although about 60 per cent of Australia's exports go to Asia, not all of the demand is from China alone. And although she agrees with forecasts of a slowdown in China this year, it won't be a dramatic drop.
"If anything, in the past, China has tended to print above expectations in terms of growth, rather than shock by having growth under expectations."
The mining boom will most likely end because of a slow down in resource demand and an increase in resource supply.
"China itself has its own supply and it is buying mines around the world, so I guess you've got to look at the implications of when and if the mining boom ends, and it will end just as the other four mining booms in Australia's history have ended," she said.
"The other four mining booms tended to end after 15 years but we might get a longer run this time, because there's probably more growth potential there in China and India."
Arjun Divecha, chairman of the GMO board, a global investment management firm takes a side approach when looking at who gains from China's growth. He said building overcapacity in China is generally good for the consumer, but bad for the producer.
"Thus," he said, "building multiple high-speed rail lines in China almost certainly improves the quality of life for the average Chinese, but it is inconceivable that the return on capital on those rail lines will be high, in pure financial terms. If it were, the US would surely have built plenty of high-speed rail lines by now.
"After all, the ability of the U.S. consumer to pay for transportation is considerably higher than that of the Chinese consumer. The fact that no high-speed rail lines exist in the US tells you something about the potential return on capital on high-speed rail in expansive continental geographies."
He recommends not taking a focus on growth, but rather on profitability.
"Obviously, as value investors, the single most important thing we look at is valuation – we are willing to pay a premium for profitability, but not to overpay for it."
The head of research for Macquarie Private Wealth, Riccardo Briganti, says Australia simply has no option but to ride the wave created by China's hunger for our resources.
"What's our alternative?" he said.
" We have a mining sector that is doing well. So would the alternative be to we say we'd prefer that not to be the case, or should we have government intervening to boost other sectors? That would then just raise other risks, so I think the issue is more that I'm not sure we've got a choice."
Mr Briganti said he thinks Australia's option is in fact to manage the situation it is in, to the best of its ability.
"It's probably not the best thing for the Australian economy, the best thing for the Australian economy would be to have a nice, diversified economy, which had a whole lot of different sectors that were all doing really well, like a strong manufacturing sector and a strong healthcare sector, but that's not the case. I don't think you can engineer it through government intervention, so your best outcome is to try to manage the situation we've got."
- Rebecca RichardsonContinue reading: "Riding off China's coat-tails Part II: What the ride means for investors".
