We often hear that our ‘Australian’ future may well be made in China. As part of our commitment to remain up-to-date with our advice to clients we recently sought a briefing from experts on one of the burning topics of global investments; China and its impact on the Australian Economy. Here we provide a short overview of the experts’ insights.
About the Experts:
Dr Chris Caton is Chief Economist of BT Financial Group. Dr Caton advises clients on the financial implications of economic trends, policy pronouncements and major political developments. Dr Caton is a leading analyst of the current and future state of both the Australian and international economies, and their potential impact on individual industries. Katie Whiffen is Director of Product and Research Consultants in the Australian market for Fidelity Worldwide Investment, with over 17 years’ experience in the financial services industry.
It is relevant to firstly understand the context of China.
- Huge Population that is Moving Towards Urbanisation – China’s population is a massive 1.3 billion people, with 87% earning less than $US3000 per annum. Poverty is driving a trend towards urbanisation, with millions of people moving to the cities in search of higher-paying jobs. In 1949, when the Communist Party took power city dwellers accounted for just 11% of China’s population. Today, for the first time in history, the population in towns and cities outnumbers that in the countryside, with 51.3% of the population now urban dwellers. This trend is expected to continue for some time.The implications of China’s urbanisation include the creation of an enormous demand for infrastructure, housing and industrialisation. In the next 5 years, the Chinese government plans to spend US$1.23 trillion on railways, airports and roads. China’s growth in coal fired power generation in the next 5 years is the equivalent of 6 times the entire Australian national power generation network. China’s installed floor space is expected to double by 2025, an annual construction of 2.5 – 3.0 billion square metres. Thus China dominates the global growth in demand for commodities such as iron ore, coal, gas and copper.
- China is Already the World’s Number 2 Economy and Manufacturer and Number 1 Exporter – China’s rise to become the world’s No.2 economy behind America has been nothing short of spectacular. Just 10 years ago, its economy ranked sixth in the world. In 2009, China overtook Germany as the world’s biggest exporter, with export growth averaging around 20% a year over the past 20 years. China has already overtaken the US as the world’s largest energy user, and is set to overtake the US as the world’s largest manufacturer in about 12 months – currently China accounts for 18.6% of global value-added manufacturing. However, China’s dependence on exports is changing. The government wants to make domestic demand a bigger driver of economic growth than export. Consumption’s share of GDP is low, perhaps less than 40% of output, whereas consumption in Australia and the US is about 70% of GDP. As incomes in China increase, so too does demand for luxury goods. In 15 years, it is thought that China could account for over 30% of global luxury goods sales.
What This Means for Australia:
The expected long duration of China’s urbanisation and the rise in incomes and consumption that will result implies a prolonged period of strong demand for commodities. Australia can benefit from the rise of China as we supply many of the resources that China needs to support its growth, such as iron ore, coal, gas and copper. Talk of a hard landing (a sharp fall in economic growth) is unduly pessimistic, at least for the next five years or so, but beware the dangers of extrapolating past China growth figures forever into the future. It is worth reminding ourselves that although Chinese growth is slowing, the world’s second-largest economy is still growing at a huge rate. From an Australian exporter’s perspective, the projected growth means that in 2012 China will need more iron ore, coal and copper than it did in 2011. And it will need more again in 2013 and very likely in each year of its next five-year plans.