The Australian Financial Review has just posted an article examining Australia’s extreme dependence on the Chinese economy:
Australia has become more reliant on China as a buyer of its exports than any other trading partner in the last 63 years, surpassing even the dependence on Britain after World War II…
Not since the wool boom of 1950 has Australia been so reliant on a single trade relationship. Even Japan in the early 1970s and late 1980s was not as significant…
The chart below tracks Australia’s exports since the late-1980s. As you can see, the share of Australian exports going to China recently hit a record 36% – well above second place Japan (18% share):
As for the implications of Australia’s extreme China dependence:
“As you become more exposed to one country, you become increasingly vulnerable to short-term shocks,” said Scott Haslem, a senior economist at UBS in Sydney…
Michael Pettis, a renowned “China bear”, said the surge in demand for iron ore is “wholly unsustainable” and will “reverse sharply”.
“I think there is a real possibility that we will return to the price levels of the turn of the century [$US50 a tonne]”…
According to Mr Pettis… the problems for Australia won’t end with a plummeting iron ore price. He believes a sharp economic slow down in China will see a surge in capital flight from the world’s second biggest economy, which will find its way to Australia.
“Australia could suffer from both a sharp drop in mining revenues and a relatively stronger currency than it needs,” he said.
Even former Morgan Stanley Asia Stephen Roach, the unofficial leader of the “China Bulls”, said Australia was in for a difficult period ahead. He doesn’t think China’s level of resource demand will fall but “the growth rate of resource demand will most assuredly drop.”
“The open ended hyper growth driving the super commodities cycle … is going to prove more challenging in the years ahead as China moves to services-led economic growth which is far less reliant on resources.”
The lack of diversification and the increasing reliance on China is my biggest concern with the Australian economy. While it has benefited the nation greatly over the past decade as the China-led commodity boom ripped, it places Australia in a precarious position should the Chinese economy slow abruptly and/or become far less commodity intensive.
