Friday, November 06, 2009

China: hold on for the ride

Reserve Bank Governor Glenn Stevens has warned of "heightened exposure" to China in the decade ahead as it entrenched its lead over Japan to become by far Australia's biggest customer.

Trade figures released yesterday show Australia earned a record $11.8 billion from China during the September quarter, easily eclipsing the $8.7 million it earned from its traditional chief customer Japan.

A year previously Japan easily out-rated China receiving 3 shipments of Australian commodities for every 2 that went the Chinese mainland.

In an after-dinner speech to a Melbourne Institute conference Governor Stevens warned that China would become even more important to Australia that it had been in recent months helping us avoid recession...

As Australia recovers and most-likely enters a new boom it will need a very heavy flow of capital from abroad to fund houses and resources for immigrants and to fund an even higher level of "already very high" mining investment.

"Absent offsetting changes elsewhere, Australia’s current account deficit could be considerably larger for some years than the 4 to 5 per cent of GDP we have seen on average for the past generation, which itself was a good deal bigger than seen in the generation before that," he said.

"Now of course the current account position we have had turns out, contrary to what most would have expected, to have been manageable and sustainable. Why would Australians alone take on all the risk of these massive projects? It is probably more sensible to share the risks. But these trends will take some explaining, not least to foreign and international organisations, many of which have a more traditional view of current account positions."

Mining is likely to become even more important to Australia's economy than during the last mining boom meaning "other areas will by definition shrink," the Governor said.

"This does not necessarily mean that they will shrink in absolute terms, particularly given the population is growing quickly, but certainly their growth prospects would be weaker than otherwise," said Mr Stevens before asserting that the "two-speed economy" debate of a few years ago in which some parts of the nation did better than others was "only a preview of what we could see if the resources sector build-up goes ahead".

Australia's trade would be concentrated around China, and while such concentration "would not be unprecedented and may well be worth accepting if the returns were high enough," Australia should start thinking about to handle the risks.

"The emergence of China and India is a benefit to Australia, but we stand to have a heightened exposure to anything going seriously wrong in those countries," he said.

"How then to manage an income flow that is higher on average over a long period, but potentially more volatile?"

Mr Stevens said the answer was beyond his brief today but presumably involved "thinking about the extent and form of saving by the community."

One option canvassed by academic economists including Warwick McKibbin and Saul Eslake is an investment fund along the lines of Noway's that stores taxation revenue from the mining boom offshore to be used as a buffer in the event of trouble.

Published in today's SMH

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