At lunch yesterday I sat with a group of Australian manufacturers, deeply worried about the Australian dollar going above $US1. One is already closing his factory with the currency where it is now; there was an air of foreboding among the others.
Last night it was dinner with a miner. He was also worried about the currency, but he has the offsetting relief of rising commodity prices and a guaranteed long-term future supplying a rampant China with raw materials.
All of them are in the grip of China’s exchange rate policy. As long as the yuan is pegged to the US dollar, currencies like Australia’s must carry the weight of adjustment.
China is exporting its over-capacity to the rest of the world; crushing manufacturers like those I spoke with over lunch yesterday and stealing profits from the mining companies that supply the booming nation.
America has the biggest problem. Unemployment is somewhere between 10.2 and 17.5 per cent, depending which measure you use, yet it has a trading partner that refuses to unshackle the two currencies – exporting its unemployment to the US while lending the government the money to pay unemployment benefits.
At the same time, as Arthur Kroeber of Dragonomics told Isabelle Oderberg this week, China is wasting colossal amounts of money because capital is now as plentiful and cheap as labour.
He said: “They’ve thrown a whole lot of money into infrastructure projects and … the financial return on these infrastructure projects is not going to be high. The social return tends to be very high over a long time, so if you’ve got a lot of roads, railways, power generation or telecoms networks, these enable a lot of economic growth over time, so they’re good things to do, but the financial return on them is low and the problem is that if you do so much of them, you create a lot of demand for steel and cement and these basic industries, so you have over investment in those sectors which is very easy to do because the cost of capital is low.”
Ambrose Evans-Pritchard in the London Telegraph wrote this week: “China is rolling as much steel as the next eight producers combined. It is churning more cement than the rest of the world. Fixed investment is up 53pc this year.”
There was a certain wistfulness about all this yesterday among the Australian manufacturers. A few had recently been to China and seen the massive spending on infrastructure going on there: wide highways, bridges with little traffic, half empty buildings – even an entire empty city in Mongolia.
Said one: “The Chinese are building infrastructure that will be productive in time, not straight away. We’ve got an infrastructure deficit in Australia, but in China the over-investment they’re doing now will stand them in good stead”.
Another marvelled at the efficiency with which things get built. He saw a factory that would take three years in Australia go up in six months, partly because of the lack of planning controls. But: “the Japanese suppliers of the technology wouldn’t let it open until they had thoroughly tested the equipment, and it all worked beautifully.”
So Australia’s manufacturers have got China-envy, mixed with China-fear. They all insisted that Australian manufacturing has a future, but that future is niche and high-tech; they don’t want tariffs, but a US70c dollar would be nice.
Meanwhile the miner I had dinner with will ensure that doesn’t happen. He is part of a new resources boom based on Chinese demand for commodities and once again the Australian economy is tilting – what Treasury Secretary Ken Henry called a “two-speed economy”, forced on us by high terms of trade and high currency.
Most of the manufacturers at lunch were supplying the automotive industry. They were excited about the hundreds of millions of Chinese buying cars, but depressed that the exchange rate would keep them out of that market.
My dinner companion was more excited about their ballooning housing construction. He told me that the key single determinant for a nation’s demand for all commodities is the size of housing space per person. Once you know that and can see its trajectory, you will know the demand for steel, copper, nickel, lead, concrete and so on will be.
China’s dwelling space per person is rising rapidly and is close to western norms because they are building so many high rise apartment blocks; India’s is stuck at around six or seven square metres per head because there is far less urbanisation and apartment construction going on there.
China’s refusal to countenance a floating exchange rate and to use the wealth-created exporting with a pegged currency to engage in centrally-controlled nation-building is both good and bad for Australia.
The rapid increase in infrastructure stock and dwelling space per person in China supports Australia’s national income through the terms of trade and mining profits, but the rising currency is hollowing out manufacturing industry.
Will China’s investment bubble collapse and rebalance the world of its own accord? That’s the big question. If so, it would be like another GFC for sharemarkets and commodities.
Meanwhile, America is trying to deal with the aftermath of the collapse of its own investment bubble (housing) with one hand tied behind its back.
That’s because China is pressing on with its policy of exporting deflation and unemployment – holding down the currency and spending vast sums to support its export economy while just talking about the need to boost domestic consumption.
This week’s visit to China by President Barack Obama merely served to highlight the inequality and tension between these two poles of the world economy. The rest of us are spinning around their axis, hoping it turns out okay.
This article first appeared on Business Spectator.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
