China no saviour

Doug McTaggart

China won’t be the saviour of the world economy as some people believe, QIC chief executive Doug McTaggart told an Association of Superannuation Funds of Australia lunch in Melbourne yesterday.

“China is still growing at 10 per cent a year as it has done for the past 30 years, but that is catch up with the US,” he said.

“China is using its capital and resources efficiently, which is why productivity is going up.

“However, China’s productivity is not rosy, as it is using its exports for domestic growth.”

McTaggart said the same had happened in Japan and Korea in the 80s and this was followed by a period of stagnation.

This has meant China is not exporting as much manufactured goods, such as televisions and refrigerators, as in the past.

He said China was exporting a lot of materials within Asia but not finished goods that were for home consumption.

The International Monetary Fund has revised China’s growth down and it is expected to be about 9.3 per cent this year.

He said the belief that China had diverged from the US was wrong and certainly not as great as some people are claiming.

However, Australia is showing signs of decoupling from the US economy, which McTaggart put down to our greater connections with Asia.

“Traditionally, US, UK, Canadian and Australian economic performance have acted in a block,” he said.

“The US is virtually in recession and we might follow, but China is becoming an important economic trading partner with Australia.”

McTaggart said the US slowdown would not have a great impact on China unless it goes into deep recession.

One factor that is affecting possible global growth performance is the terms of trade, which are at record levels.

McTaggart said there is the possibility of a super cycle driven by China being created.

“The consumption of steel and aluminium is rising per capita in China in a way similar [to] Korea and Japan in the 80s.

“But Korea has a much smaller population than China, so the demand for resources could continue for many years.”

But in Australia, this commodity boom, which is driving growth in Queensland and WA, is not all it seems.

“If Australia has an export boom due to resources, why is our trade balance diabolical?

“In 2004 our trade deficit was positive, but since then it has plummeted, which you don’t expect in an export boom.”

McTaggart said Australia’s export boom is being driven by a high dollar.

Our export volumes have not grown, our export prices have become the boom, he said.

McTaggart said the Australian dollar was over-valued and had to fall as it was squeezing out our manufacturing exports.

Again, because of the demand for resources by China and the fact it takes longer to get minerals out of the ground, a classic supply and demand situation has developed globally.

“The global stocks of commodities are low so prices are high,” he said.

“The result is more resources will be [taken] out of the ground and prices will then fall.”

However, the Australian Dollar has to fall before then to help Australia lift its export volumes and not rely on export prices to keep the economy going.