China's slump will hurt Australian incomes, and the pain is likely to linger
...This week, in Canberra, it was Treasurer Joe Hockey looking decidedly grey, as he fought with his Prime Minister and the Senate to inject some budget rectitude before the full force of China's construction slowdown hits. Prime Minister Tony Abbott told reporters that the end of history's greatest resources boom was really just a short term blip. "I accept the terms of trade are declining but these are cyclical factors, they are not structural factors," he said.
Those who watch the internal dynamics of the Chinese economy more closely, however, sense a severe case of denial.
...In the short run, says Dong Tao, chief economist for the Asia region at Credit Suisse investment bank, President Xi Jinping's anti-corruption campaign and the parlous state of local government finances "make it impossible to continue what they've done in the last five years". And in the medium term, he says, it will be even harder. Tao says the
"golden age" of endless infrastructure, housing, exports and government stimulus is over. "This is where people are too optimistic, believing that within one or two years things will be better."
China's transition to a services-based and consumption-driven economy means that its appetite for commodities such as Australian iron ore is going to "shrink dramatically", says Tao.
It's now well known that China's decade of hyper-industrialisation led to unprecedented prices for key Australian commodities. The most rigorous study, a recent Reserve Bank discussion paper led by Peter Downes, found the mining boom (effectively defined as China's acceleration of industrial output) delivered an extra 13 per cent in disposable income to the average Australian household for what was, in most cases, no extra effort.
...The biggest single beneficiary, however, was Canberra. These super corporate tax revenues were redistributed in the form of family benefits, baby bonuses and eight years of consecutive personal income tax cuts. Perhaps the Abbott Government's central political predicament is that those multi-billion dollar windfalls were much easier to give than take away.
The week began with figures showing Chinese manufacturing has slumped again and the country is on track for the lowest GDP reading since 1990. China is likely to fall short of the 7.5 per cent growth target for the first time in 15 years, according to Bloomberg's consensus forecast of economists.
But the Chinese GDP slowdown masks a much greater impact on the commodities prices which underwrite the Australian economy and particularly the budget. Wednesday's national accounts showed Australia has just endured an "income recession", with national income falling in the two quarters up until September. And that was before the prices of iron ore, coal and oil (which is linked to LNG pricing) really fell through the floor, reaching new lows this week.
...
China's most pressing economic problem is the most rapid accumulation of debt that any country has ever known. Standard Chartered calculations show that China's debt to GDP ratio has surged from 150 to 250 per cent in just five years. In other words, in the absence of reform,
China is stuck in a savage debt-spiral where ever-increasing volumes of credit are producing diminishing returns.
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http://www.smh.com.au/world/chinas-...pain-is-likely-to-linger-20141205-11zy1z.html
