FEDERAL BUDGET 2012: Chinese debt trap

Karen Maley8 May 2012, 8:34 PM6

Treasury’s forecasts are underpinned by expectations of strong China growth rates, which, if disappointed, could see the current accounts caught in a dangerous snare.

You must be logged in to read this article

Not a member yet? Register today ›

Business Spectator is available on all of your devices so you can access the latest news and commentary where and how you like

Register now ›

Australia could face a balance of payments crisis if a sharp slow-down in China results in a slump in export earnings at the same time that imports of capital goods soar as miners hurry to finish their major investment projects.

According to the latest budget projections, Australia’s current account deficit is expected to swell to 4.75 per cent of GDP in 2012-13, and to 6 per cent of GDP the following year.

According to Treasury, the deterioration reflects the fact that the trade balance is likely to fall into deficit as miners step up their imports of foreign-made investment equipment while export earnings sag as a result of lower commodity prices.

At the same time, Treasury expects that Australian consumers will take advantage of the strong Australian dollar by spending more on overseas travel and imported consumer goods. Import volumes, it says, are likely to rise by 7.5 per cent in 2012-13 and by 5.5 per cent in 2013-14.

Even though commodity prices appear to have peaked in the third quarter of 2011, Treasury expects that our export earnings will remain relatively buoyant in the next two years, due to continuing strong demand from China and India.

Australia’s coal and iron ore exports are likely to rise, following major expansions in resource projects in Western Australia and along the east coast, while rural exports are expected to remain at historically high levels.

Still, the strength of the Australian dollar is proving to be a handicap for exporters of elaborately transformed manufactured goods, and for firms that sell services – such as tourism and education-related travel – to foreigners.

But Treasury’s forecasts are based on the assumption that China’s economic growth will remain robust, even though its largest export market, the European Union, is slumping deeper into recession. Treasury is forecasting that China will notch up a growth rate of a little over 8 per cent a year for the next three years.

If China’s growth rate stumbles, we could see an alarming blow-out in Australia’s current account deficit.

The problem is that the extremely long lead times involved in developing major resources projects means mining companies are committed to spending huge amounts of money buying foreign-made capital goods and equipment. As Treasury itself notes, despite the continued uncertainty over the global economy, "the resources sector has committed to, or commenced construction on, over half of the estimated $456 billion resources investment pipeline.”

Even if a sharp drop in Chinese demand caused global commodity prices to slump, it would be difficult for the large mining companies to pull out of major investment projects now under way. As a result, miners will find it difficult to scale back their purchases of foreign-made capital goods and equipment, which will mean that our import bill will continue to soar.

A slump in commodity prices, however, would see our export earnings collapse. Already Treasury is expecting that increased global supply will weigh on commodity prices in the next two years, and that our terms of trade (the relation between export and import prices) will decline by 5.25 per cent in 2012-13 and 3.25 per cent in 2013-14.

The risk is if Treasury’s assumptions about China’s growth prove to be overly optimistic. If the brutish combination of surging imports and a collapse in export earnings were to push our current account deficit to, say, 8 or 9 per cent of GDP, we could see international investors become very anxious about lending to Australia. In that situation, our banks could find it much harder to raise money in offshore markets, and would likely have to pay higher interest rates to access funding.

Meanwhile, the Australian dollar would collapse, pushing up the cost of servicing our foreign debt. And it would probably take some time before Australia’s tourism, education and manufacturing sectors felt the benefit of the lower exchange rate.

Australia would be caught in a current account deficit trap, unable to curb its voracious appetite for imports, despite a slump in export earnings.

Print

Log in to post comments

Comments on this article

Comments Policy

John Hampshire, Fri, 2013-02-22 07:01

Aren't there some major gas export projects meant to be coming on stream over this period, which would boost our export income (FEDERAL BUDGET 2012: Chinese debt trap, May 8).
And given the current Australian dollar trend back to US dollar parity, perhaps fears of the effect of a stronger Australian dollar are overstated.

Peter Carabot, Fri, 2013-02-22 07:01

I am worried that Chinese growth will actually decrease (FEDERAL BUDGET 2012: Chinese debt trap, May 9). The US is not any better now that it was 12 months ago, and Europe, bar Germany, is a basket case.
A new Socialist (communist?) president in France, a Kerfuffle in Greece with no indication on who is going to govern and all "Fudget 2012 Assumptions" are wrong. China will have to slow down. There is nobody out there that want to buy whatever they produce!

Jeffrey Gillis, Fri, 2013-02-22 07:01

The biggest disappointment is government has done absolutely nothing to stimulate investment in our own capital goods manufacturing industries; in fact they have done just the opposite (FEDERAL BUDGET 2012: Chinese debt trap, May 9). No wonder we have a growing balance of trade risk, but that's the problem when you fail to plan, you end up planning to fail.

Tim Bullen, Fri, 2013-02-22 07:01

Given that these projects take years to complete, coupled with China slowing, my sense is Australia has missed this boat... and a weaker Aussie will hurt us in ways many can't see (FEDERAL BUDGET 2012: Chinese debt trap, May 9).

Ken Mcalpine, Fri, 2013-02-22 07:01

Karen, if Mr Swan was CEO of FMG, would you buy shares in the company? How about if he was CEO of BHP? The reason that I ask, is that Australia is doing just that (FEDERAL BUDGET 2012: Chinese debt trap, May 8).
Our GDP is based on Treasury's assessment, of growth in resources. Nothing more - just that.
Ah! And who is China selling to? Okay, let's not go there. But let's look at Australia's energy policy, let's look at the way exchange rates follow, $US oil, prices.
What do you mean, you don't understand? Okay, lets make it real easy, how much iron ore will Australia sell if oil is $A130 per barrel? Exactly! A $50 billion deficit, at last, you realise how a non energy, secured economy works. Forget the rest of the rubbish, leave that to Treasury to philosophise about.

Ken Mcalpine, Fri, 2013-02-22 07:01

John, one of Australia's biggest structural problems, is our reliance on exports. Gas could help change that (FEDERAL BUDGET 2012: Chinese debt trap, May 9).
We import massive amounts of oil, so selling our best asset (gas), is nothing short of intellectually challenged. We should be spending money converting our energy requirements to gas, thus reducing our (oil) import bill and improving our terms of trade.
Oil is (potentially) more damaging, to economies that any other factor, we have no control over the price or supply, of oil importation. Therefore companies cannot project their impending energy costs.
All business and consumers benefit from energy self sufficiency. However a spike in oil costs would (potentially) cause a collapse in the Australian dollar's value. This would make our accumulated debt very hard to service and we could be caught in an inflationary debt spiral.
Our current (projected) budget surplus, could rapidly turn into a massive deficit, due to the rise of oil prices.
We have no idea, what resources, import level China can sustain. To assume that China will grow more rapidly (than currently) defies logic. A safer prognosis would be a gradual reduction in growth.
Australia, despite our resources boom, is very vulnerable – gas could lead us into a golden age of self sufficiency. However, oil dependency will lead us into uncharted waters with the constant fear of an oil shock.
Economies run on faith, depressions run on fear.

Index	Last	Chg	% Chg
DOW JONES	15318.23	+138.4	+0.9
S&P 500	1651.81	+12.8	+0.8
NASDAQ	3482.18	+30.1	+0.9
FTSE 100	6374.21	+43.7	+0.7
NIKKEI	13007.28	-25.8	-0.2
Hang Seng	21225.88	0	0

Latest stories

Latest stories

Latest stories

Latest stories

Latest stories

Latest videos

Featured stories

FEDERAL BUDGET 2012: Chinese debt trap

You must be logged in to read this article

Not a member yet? Register today ›

Already a member? Sign in here

More from Karen Maley

Related articles

More from Business Spectator

Comments on this article

Information

Policies

Advertising

BS Main menu

User login