26 Oct 2018
Say something often enough and eventually everyone stops questioning it. Take the oft-quoted ‘Australia is the economy most exposed to China’.
Australia sends 30 per cent of its goods exports to China - a higher share than any other country. But this simple statistic does not give any sense of how important exports are to different economies. If we scale exports to China as a share of gross domestic product (GDP) Australia ranks third (5 per cent) in terms of exposure.
The top-five goods exporters to China as share of GDP are Korea (9 per cent), Saudi Arabia (5 per cent), Australia (5 per cent), Japan (3 per cent) and Germany (3 per cent) based on IMF data. This analysis however is very static. Other factors are important.
"If China has a serious problem it’s unlikely there are any countries that will be unaffected.“ - Richard Yetsenga
Consider the Australian dollar. Not all countries benefit equally from currency depreciation. In emerging markets, because inflation expectations often are not well anchored and domestic savers are sometimes less attached to their home currency as their ultimate store of value, currency deprecation can often be economically destabilising. Many emerging markets try to stabilise their currencies when depreciation starts looking disorderly.
Australia is not in this camp. The $A can depreciate sharply at times, with few negative side-effects. This makes the $A an obvious trade for smart money during periods of China turbulence but it doesn’t mean the Australian economy is in the same boat as the currency.
For example, in 1998, Australian was expected to suffer a significant slowdown, if not a recession, after the crisis in Asia in 1997 and in Russia in 1998. In reality the $A and commodity prices fell sharply but export volumes hardly missed a beat. The Reserve Bank of Australia’s modest (in those days) 250 basis point easing cycle also helped cushion the fallout.
The second factor is the type of exports Australia sends to China.
Commodities make up 80 per cent of Australia’s exports to China. In contrast, Japan and Germany primarily export manufactured goods. Vehicles, machinery, electronic equipment and optical and medical apparatus make up 60 per cent of Japanese and 74 per cent of German exports to China.
Resource exports are more fungible than manufactures. A buyer is likely to be relatively unfussed about whether the iron ore it needs comes from Australia or Brazil. Of course, prices will likely need to drop to encourage this reallocation, but the $A can help cushion that impact.
In contrast machinery, electronic equipment and other technical apparatus are niche products with very specific characteristics. Shifting product at the margin is likely to be much more difficult.
Thirdly, services trade has become a more important element of global trade, particularly since the financial crisis.
Chinese tourists spent $A10.9 billion in Australia in the past year, far exceeding US visitors who spent $A3.8 billion. But Chinese spending represents only 0.6 per cent of GDP.
A sharp drop in the number of Chinese visitors wouldn’t greatly damage the Australian economy. Additionally a fall in the $A would encourage Australians to holiday at home.
According to the China Outbound Tourism Research Institute the top-eight destinations for Chinese tourists are all in Asia, with the US and Italy rounding out the top ten. Any fall in outbound tourism would hurt other destinations more than Australia.
Education is a different story but not a different conclusion. Australia ranks second for overseas Chinese students. The ABS suggests international education exports to China contributed $A10 billion (0.6 per cent of GDP) to the Australian economy.
A sharp drop in Chinese students studying in Australia would be a shock to the education sector but the aggregate GDP exposure is only around one-tenth of that for the trade in goods.
Australia is exposed to China but not singularly exposed.
China accounts for 35 per cent of global GDP growth. Any material slowing of economic growth in China would negatively impact all countries.
Recent developments including falling Chinese bond yields, reserve requirement cuts, renminbi depreciation and more-active fiscal policy suggest we are likely to see the economic data in China improve over the next few quarters.
While unquestionably China faces structural issues the slowdown should at least abate for a while. If China has a serious problem it’s unlikely there are any countries that will be unaffected.
Richard Yetsenga is Chief Economist at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
26 Oct 2018
01 Oct 2018