On the outskirts of Melbourne Australia’s biggest tyre factory this week declared that it had to close, throwing 600 Australian workers onto the streets. Its owner, Goodyear, is able to import tyres for much less.
And in Canberra the Treasurer Wayne Swan opened the door to tightening Australia’s previously very liberal foreign investment regime by suggesting that state-owned corporations might face tougher restrictions than purely private investors.
The common link in these three very different stories is China. And this week wasn’t too different from any other.
Overseas we learnt that China now has more internet users than does the United States. It has twice as many mobile phone users. Its population of millionaires jumped 20 per cent in the last year. Its billionaire population doubled.
It is undergoing a seismic shift: a once-in-a-planet event a bit like the ending of an ice age.
Much of the world will find itself hurt by the shockwaves. Not Australia. Most probably. But even we will have to make adjustments.
Marvin Goodfriend from Carnegie Mellon University says it is “a one-off in the history of the planet earth”...
“Taking China and India together, roughly half the planet is becoming modern,” he says.
“We have never had it before in thousands of years of planet earth and we are not going to have it again in a few thousand years.”
“It has to happen. The relative prices of food and fuel are going to adjust. We will never be able to go back go back.”
The ANU’s Warwick McKibbin, an academic economist so highly regarded that he is only one who sits on Australia’s Reserve Bank board, says we are witnessing a sudden jump in the China’s standard of living to western levels. He expects it to be complete by 2100.
For the past 400 years it has been pitifully below those levels. As recently as 2003 citizens of the United States earned $US25,000 on average. Citizens of China earned $4,800.
But McKibbin points out that a sudden jump to parity would actually do no more than restore China to its former place, the one it enjoyed for the first 1,600 years of the modern AD calendar.
“In year zero, China and India had 58 percent of the global population and 59 percent of global GDP in that year; and the respective numbers in year 1600 were 53 percent and 52 percent,” he says.
But much slower growth in the past four centuries has pushed them way behind.
“By 1973, China and India’s share of world GDP had fallen to only 7.7 per cent although the two countries accounted for 37 percent of world population.”
Things began improving as China and India began to open up their economies to the rest of the world at around the start of the 1990’s.
What’s under way right now is the last dramatic lift in their standard to living to the best the world has to offer.
In 2003 China accounted for 20.5 per cent of the world’s population and but only 15 per cent of its income. McKibbin expects it to make 20 per cent of the world's income - population parity – by 2100. He expects India to get there by 2150.
The maths make it seem inevitable. Chinese income is growing at the rate of 10 per cent a year. India’s is growing at 8 per cent.
Singapore, once regarded as a less-developed country that Australians visited for cheap holidays, now enjoys a standard of living more than a third higher than Australia’s. It is the fifth richest nation in the world in terms of purchasing power per citizen - just behind Qatar, Luxembourg, Norway and Malta.
Australia is in 20th place, not too far away from Japan, another country that just 50 years ago was impoverished by comparison.
Singapore’s transformation began when it was expelled from Malaysia in 1965. Japan’s gathered pace after the second world war.
What sparked China’s?
It is a question Austrade’s Chief Economist Tim Harcourt has been pondering on each his repeated visits to a nation he says is changing almost beyond recognition each time he visits.
“We expected it to grow quickly and we keep forecasting that, but each year our forecast have been overtaken by what’s been happening on the ground,” he says.
“It overtook Japan as our top trading partner last year. We now have as many small and medium sized enterprises exporting to China as export to all of Europe.”
“It is no longer true to say that we are Japan’s beach and China’s quarry.”
“China in the midst of an enormous mass migration from the country to industrial cities. That’s where Australian businesses fit in, in the second and third tier cities – the so-called country towns of 8 million people.”
“Australian architects and infrastructure companies are doing well there. The Communist party is trying to move income distribution from Beijing and Shanghai in the east to the west. It is trying to open up the west to industry, and that’s where we are doing quite well.”
“But what made it happen, what switched it on?” I ask, somewhat naively.
“The Party. It makes broad announcements, like – we’re going to build the west, or become more green and so on, and off they go,” he replies.
“It’s not like in Australia. In China announcements are translated into action. Four or five years ago the Party decided that now as the time to industrialise, and that they would make it happen, and joined the World Trade Organisation to make sure their goods could be sold.”
Much of the foreign money that China is accumulating as a result of exports is simply being stored. China’s foreign exchange reserves, worth $US30 billion back in 1990 are now worth $US1,760 billion – and are said to be accumulating at the rate of $US100 million per hour.
It is enabling China to lend money to fund the world’s debtor nations, such as the United States and Australia. Australian and US home loans, once the result of domestic savings, are now likely to be “made in China”.
Countries such as the US and Australia can console themselves with the knowledge that it is quite likely to be their own money that they are borrowing back. They sent it over to China in return for well-priced goods. But the money is controlled by China – often by its Communist Party government.
Should China want to, it could pull the plug on debtor nations such as the US at any time by simply refusing to refinance their loans. It is a power that it has shown no inclination to exercise, but one that it has only enjoyed for the past few years.
More worrying for Australia in the meantime is the use to which Chinese state-owned investment corporations are putting their newfound investment powers. They are attempting to buy up Australian resource companies. They even had a go at Rio Tinto itself earlier this year.
In play at the moment is the West Australian iron ore miner Murchison Metals, facing a bit from China’s Sinosteel. On Thursday the Treasurer Wayne Swan indicated that while he welcomed investment from China, he would protect the national interest amid reports he was planning to limit investment bodies owned by foreign governments to 49.9 per cent stakes in local firms.
If China succeeded in a bid for a company such as Rio Tinto it is easy to imagine that Rio Tinto would find itself settling for smaller price rises for Australian commodities than the 85 per cent increase in the price of iron ore it announced on Monday.
There’s more to it than iron. China’s appetite for copper seems insatiable. Each new Chinese city apartment eats up kilos of copper wire. Its new power stations and transmission lines use much more. It is already buying one quarter of all the copper produced in the world each year and its consumption of copper is growing at the rate of 13 per cent per year.
Its demand for copper, lead, iron ore, liquefied natural gas, uranium and wheat – all produced by Australia – appears insatiable.
Oil appears to be about the commodity that Australia is unable to supply to China, along with thermal coal in which China has until now been self-sufficient. That self-sufficiency is about to end, and as a result Australia’s Bureau of Agricultural and Resource Economics is forecasting a doubling in its price in the next twelve months with Australian income from thermal coal sales jumping 70 per cent.
The forecasts, released on Monday suggest that Australia’s income from coking coal will jump a further 123 per cent, our income from iron ore pellets will jump a further 72 per cent, our income from liquefied natural gas will jump 67 per cent and our income from alumina and aluminum will jump 20 per cent and 12 per cent.
These price rises are on top of a jump of 40 per cent over the past four years in Australia’s terms of trade, which is a measure of the price received for exports as a proportion of the price paid for imports.
The jump began at about the time as China began rapidly industrialising. The Treasury and the Reserve Bank are forecasting a further jump in our terms of trade in the coming financial year of 20 percent, which with compounding will result in a 70 per cent jump over five years.
The reserve Bank Governor Glenn Stevens told a closed Treasury seminar in March that Australia was living through “one of the largest transformations in the structure of the global economy, as far as Australia is concerned, for a century”.
“But while the Korean War boom of the early 1950s was temporary, all the indications are that the rise of China is not just a cyclical event, but a structural change of the first order,” he said.
“China certainly has a business cycle, like all other economies, and will slow at some point. Even so, it is highly likely that, short of some catastrophic event, the rise of China will not be a flash in the pan of economic history.”
“In essence, we are seeing a very large change in relative prices in the world economy, and a relative price change that is more important to Australia than to almost any other country.”
Alone among industrial nations Australia produces almost all of the things that China needs in order to lift itself up to a Western standard of living.
Australia’s terms of trade have climbed faster than those of any other nation in the four years of China’s rapid industrialisation. Only oil-rich Norway has come close. Canada has been a distant third.
The United States and Europe have good reasons to fear the consequences of China’s rapid industrialisation. It is permanently increasing the prices of commodities such as oil that they need. And by selling good products cheaply, it is hollowing out their local industries. It wasn’t that long ago that US congressmen were smashing Japanese radios in protest at what they were doing to US manufacturing.
Thanks in part to the farsightedness of a former Australian Ambassador to China Ross Garnaut, Australia has already lost many of the firms that would have suffered as a result of China’s industrialisation. As Prime Minister Bob Hawke’s economic advisor in the 1980s he drove the tariff cuts that helped move some of those firms to China early.
If the 19th Century belonged to Europe, and the 20th Century belonged to the United States, the 21st is likely to belong to China.
And as unsettling as many of us may be finding the transition, it is taking us along for the ride.
