There are two main fears about the possible implications for Australia in China’s latest five-year economic plan, but in reality, we have little to worry about.
In fact, Australia has much to gain from China’s rapidly evolving economy.
Key elements of the 12th five-year plan, approved by China’s National People’s Congress (NPC) last month, include a more modest annual growth target of 7% and a rebalancing of the economy away from growth driven by investment and exports and towards consumption.
The first worry in Australia is that slower growth and an emphasis on consumption over investment will reduce China’s demand for our exports of natural resources.
The second is that higher consumption will mean a smaller reserve of Chinese savings available to help fund investment projects here, most notably in the mining sector.
Concerns in Australia were also raised when, seemingly in unison with the five-year plan, China recorded a trade deficit for February, the result of stagnant exports and a surge in imports.
However, there are several reasons why Australia should not be too concerned. These reasons are quite apart from the fact that five-year “plans” are just that: what eventuates can be quite different from what was intended. For example, the annual growth target in China’s last five-year plan was just 7.5%. Annual growth during that period averaged 11.2%.
Consumption control
The measures outlined in the most recent five-year plan constitute China’s response to a fall in the share of household consumption in the country’s GDP to just 35%. In Australia last year the share of household consumption was 53%.
The domestic consumption boost is also being driven by a growing unwillingness on the part of other countries to continue supporting the large trade surpluses that China had been running.
The first thing to keep in mind is that changing the structure of the Chinese economy will be a gradual process. It may begin in the coming five-year plan but it will certainly not be completed in it.
While the Chinese government has shown an ability to influence investment — in no small part due to much investment being undertaken by state-owned enterprises supported by state-owned banks — affecting household consumption is a much harder task.
Chinese households have good reasons to save money. For example, the social safety net in China is poor. Unless the Chinese government is able to address such deficiencies, it is highly unlikely that households will voluntarily choose to increase their consumption and spend their savings.
The second is that even if only the modest growth target contained in the plan is realised, China’s economy will still be at least 40% larger at the end of 2015 than it is now.
It is worth noting that the 7% annual growth target can be considered a minimum acceptable growth rate to the Chinese government.
Addressing the NPC last week, Chinese Premier Wen Jiabao reaffirmed the government’s target of 8% growth for 2011.
Chinese leaders have routinely referred to 8% growth as being necessary for soaking up new entrants to the labour force and maintaining social stability.
Resource reliance
While the intensity with which China’s economy uses resources may fall as less emphasis is placed on infrastructure development, it is extraordinarily difficult to imagine a medium-term future in which a much larger Chinese economy requires fewer resources.
China’s emergence as a dominant player in world resources markets looks to be a structural rather than cyclical event. That is, China’s emergence as a net importer of resources means that demand and prices for Australia’s exports can be expected to remain high relative to their historical averages.
It is this reality that has underpinned, and will continue to underpin, investment in Australia’s resources sector by China and other countries.
The third thing to keep in mind is that Australia’s economic dependence on China should not be overstated. Continued robust Chinese growth and demand for our exports provided a welcome support for the Australian economy during the global financial crisis.
However, so too did expansionary monetary and fiscal policies. Domestic demand accounts for the majority of Australia’s GDP. According to Australian Bureau of Statistics data, in 2010 domestic demand amounted to $1.3 trillion, compared with exports of goods and services of $284.1 billion. Merchandise exports to China totalled $58.3 billion.
And while Australia’s trade exposure to China has increased markedly over the past decade — China now accounts for more than 25% of our merchandise exports — the structure of our international investment linkages remains very much traditional.
For all the interest that Chinese investment in Australia attracts, the reality is that China’s capital account remains highly restricted, particularly with respect to portfolio investment. For example, Chinese investors are not allowed to freely invest in Australia’s stock market, nor are Australian investors free to invest in China’s stock markets.
Reflecting this, ABS data shows that China’s stock of investment in Australia was $16.6 billion at the end of 2009. This was up from $2.3 billion in 2005. However, it still only amounted to 0.9% of the total stock of foreign investment in Australia.
In contrast, the shares of the United States and the United Kingdom were 27.1% and 26.3%, respectively. In dollar terms, investment in Australia from the United States increased by more than $180 billion between 2005 and 2009.
The story is essentially the same with respect to Australia’s investment abroad. Thus, a key channel through which developments in, say, the United States might impact on Australia, is largely absent between China and Australia.
China’s latest five year plan lays out many of the changes needed for the country to emerge on a sustainable growth path. Australia has much to gain and very little to lose from China successfully making this transition.