China slowdown chills Australia's surplus hopes

Sydney:  Australia's mining exports to China saw it all but shrug off the financial crisis, but talk of the Asian giant slowing shook the market this week, casting a pall over Canberra's surplus hopes.

Dubbed the "Wonder from Down Under" for its enviable performance in the global crisis, Australia has been riding the crest of a China-driven commodities boom that has flooded its economy with cash.

It was the only advanced economy to dodge recession during the downturn, quickly rebounding from a brief contraction on bullish demand from Asia to record growth and unemployment said to be the envy of the world.

But BHP Billiton's warning this week that Chinese iron ore demand had plateaued and would soon hit "single digits if it's not already there" sent the commodities-driven Australian dollar and stock market sliding.

‘Moderating growth'

Australian forecasts the following day confirmed "moderating growth" in the Asian giant this year and further easing in commodity prices.

The cost of iron ore, Australia's key export to China for steelmaking, was tipped to drop eight per cent from the 2011 average, according to the Bureau of Resources and Energy Economics (Bree).

China, the world's largest consumer of raw materials, has targeted growth of 7.5 per cent for 2012, well off last year's 9.2 per cent and 10.4 per cent in 2010.

On top of that, Beijing saw a trade deficit of $31.48 billion (Dh115.63 billion) in February, while a closely watched HSBC preliminary index of Chinese manufacturing activity hit a four-month low in March as export growth slumped.

Bree said "a dip in [China's] growth rate in 2012 is expected to moderate demand for some bulk commodities".

Exchange rate

This would have "several" implications for Australia, said economist and IMF consultant Tony Makin, who said commodity prices had hit their peak.

"I guess the most important thing is that the [Australian-US dollar] exchange rate will lose some of its strength, which is a good thing for other sectors in the economy," Griffith University's Makin said.

"A lot of tax revenue has been lost from the non-resource sector, so that means company profits are down. Anything apart from mining is pretty well languishing at the moment and that's impacting on revenues."

Makin also said he doubts the government could bring the budget back to surplus by 2012-13, warning further measures to meet the target could hurt foreign investment.

Australia passed a new tax on mining profits this week, having already approved an emissions tax that comes into effect on July 1 and a one-off levy on taxpayers to help rebuilding efforts after last year's floods.

Sovereign risk

"There's a growing perception of some sovereign risk as a consequence of these new taxes popping up unexpectedly," said Makin.

He said any risk to Australia's economy from its dependence on China was "exaggerated and simplistic" given its strong relationships with other Asian nations including Japan, Korea and India.

Bloxham felt there was a danger in relying so heavily on a single economy but said it was a risk common to most countries as China becomes more economically crucial.

Were there to be a major Chinese downturn Bloxham said Australia was among those best placed to respond, with relatively low government debt and official interest rates at 4.25 per cent providing plenty of breathing space.

"Yes we've become more dependent on China but that's almost the most fortunate thing that's happened to us," he said.

Sectors struggle

Though mining accounts for 20 per cent of Australia's economy, its inflationary impact on the local dollar has seen trade-exposed sectors such as tourism, manufacturing and education struggle.

Australian growth came in at 0.4 per cent in the October-December quarter — half as much as forecast — as commodity prices eased, leading to a slump in export values against imports for the first time since September 2009.

Treasurer Wayne Swan has warned the slowdown would inevitably hit the government's bottom line while HSBC chief Australia economist Paul Bloxham said Canberra faced a mammoth job in delivering a planned surplus next year.