China & what it means for our economy

This is not a property-related post, but many ask me – especially after a presentation – about such matters.  I apologise in advance.

China is the world’s second largest economy & currently Australia’s largest trading partner.

Changes in the Chinese economy have major implications for the global & Australian economy.

Sadly, we have tethered our horse to China, which I feel reflects the past & not the future.

It is ironic – or maybe just expected – that our federal government feels the need to electioneer in China, as if only the Chinese (and Labor) can provide us with prosperity & save us from austerity.

 

Regardless of political spectrum, few will argue that the world has entered a new era. 

The two previous periods – the post-cold war & what I will call “9/11”- (despite yesterday’s tragic events in Boston) have now past.

In this new era, Europe, economically, is doing it tough & is politically divided.

The European experiment – as defined in Maastricht – no longer defines Europe.  And like the Japanese ‘miracle’ before it, China’s rapid economic growth is drawing to a close.

The USA is withdrawing from overseas action & is reconsidering its relationship with the world.  The bomb blasts in Boston will only accelerate this bunkering down.

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The United States has entered this new era with still the largest economy in the world & with fewer actual problems than Europe & China.

It still is the biggest military power.

China cannot match America’s might, nor will China’s economic fortune allow it to do so for decades, if not a millennium, to come.

All three – Europe, China & the USA – are far more cautious now than they were during the post-cold war & 9/11 periods.  This will have a major impact on the world economy & national behaviour in the years to come.

For example, Europe is returning to its normal condition of multiple competing nation states.

Whilst Germany wants to retain the EU in order to protect its trade, Berlin (more pertinently, the German public) does not want to bail out European states.  Yet the EU nation-states will look at Cyprus & choose default long before losing sovereignty.  In short, we will see a rise in nationalism across Europe.

They will buy fewer imports – i.e. less trade with the likes of China.  The Chinese economy will suffer.

Likewise, America, and in particular with the increasing use of their own shale oil & coal seam gas, will internalise their production.  They, too, will become more insular.  The result will be the same for China.

 

China cannot keep its economy expanding at its current pace.

History shows us that rapid economic growth in an export-orientated economy requires upwardly mobile domestic customers.  It is nice to see pictures of new Chinese cities; the Chinese nouveau-riche & more Chinese tourists, but the vast majority of the Chinese population is impoverished.

China, despite trying many times, needs to revolutionise its interior.

A few weeks back China reported a trade deficit, as imports exceeded exports.  Yesterday’s new of much slower than expected Chinese economic growth received alot of media ink.  This might just be a temporary blimp on the radar or a sign of things to come.  China, right now, is maintaining economic growth by dropping profit margins on exports.  Exporting less does not help matters.  China’s growth isn’t as profitable as it once was.

This sort of growth in Japan, in the 1980s/early 1990s, undermined financial viability as money was lent to companies to continue exporting & employing people.  At the time, Japan’s miracle growth seemed to be endless.  And Japan didn’t have a billion impoverished people like China does.

China’s high growth rates were largely built on cheap internal labour.  Chinese labour is no longer that cheap.

For mine, a host of new countries will emerge to supplement (note, I have not said ‘replace’) China as the world’s low-wage, high-growth epicentres – Latin America, Africa & the less developed parts of Southeast Asia.

China is now caught in a catch-22, it will need to lower its costs – at exactly the time it needs to lift wages to help its poor – in order to compete & maintain profit margins.

It is these emerging countries that our Prime Minister & entourage, regardless of political nomination, need to spend more time with.

PS I cannot help myself – and maybe this is why I wrote this piece in the first place – Australia needs to reduce its cost of living; balance its budget & build business around our unique points of difference.  I cannot help thinking that these are centred on food & energy supply – think cultivating northern Australia & producing nuclear energy.

We cannot afford an NBN (regardless of speed); Gonski reforms (especially when they are going off the rails); unionised building labour or our current high level of welfare support.  We must work like Germans & stop living like we are on the Mediterranean.

……………

This Matusik Missive, like all of them, is commentary & not advice.  Readers should seek their own professional advice on the subject being discussed.
Michael is the director of independent property advisory Matusik Property Insights and writes the  Matusik Missive which is free, however, reprinting, republication or distribution of any portion of this material, or inclusion on any website, is strictly prohibited without the written permission of Matusik Property Insights and may incur a charge.

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Michael Matusik

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Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive


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