Sino-the-times

The airport economist first visited China as a trade union official some years ago. The Australia trade union delegation, of which I was a member, was taken to a factory. While on the tour, I asked our hosts: “Do you have workers’ compensation in China?” After much deliberation, the translator replied: “No. If the workers break anything, they don’t have to compensate us… straight away.”

I’m not sure what was ‘lost in translation’, but it is not surprising given that at the time China had almost an endless reserve army of labour as unskilled migrants from rural areas flocked to the big cities and the new industrial zones. The factory job was and is a much better alternative to rural poverty.

Arthur Kroeber, who produces the well-respected newsletter on the Chinese economy, Dragonomics, explains China’s labour market this way:

“As it has modernised its economy, China has experienced a virtual ‘tsunami’ of labour supply. Much of it has consisted of young Chinese women between 18 and 22, with not much bargaining power. As a result, China, for a long time could run its economy at 12% growth, with little pressure on wage and price inflation or the exchange rate.”

But according to Kroeber, the demographic trends that have helped China’s economic progress to date will change on or just after 2020 when the ageing of the population and the gender balance will produce significant head winds.

“In the future, we’ll see a tighter labour market in China, so the authorities will either have to accept a higher exchange rate of higher rate of inflation. This will occur, as China shifts from its reliance on export-led development and investment to consumption by increasing its efficiency of investment. Inflation tolerance ought to be higher than it is now. Beijing must let inflation take some of the burden,” he explains.

While Kroeber believes this will be a delicate balance, he does not believe that Beijing will take the foot off the pedal as far as the stimulus is concerned. “China wants to grow at 8% this year, and around 8.5% next year, and Beijing will stimulate the economy until those rates are achieved. The stimulus package is not a one-off,” he says.

So what does this mean for Australia? Certainly, the ‘bamboo shoots’ of the Chinese stimulus package has already had a big impact on amazing Australia’s export performance with demand for coal, iron ore and LNG being added to already strong Chinese demand for infrastructure, architectural and constructions services to build the growing second and third tier cities of the interior.

China is now our number one trading partner, accounting for $83 billion or 14.7% of our total trade in goods and services, in 2008-09 (in fact, the ‘Big 4′ – China, Japan, Korea and India – now account for nearly $140 billion or just under half of our total exports).

But it’s not just a trade story it is increasingly about investment as well. According to Austrade North East Asia regional director, Laurie Smith, Austrade has seen around 1,500 companies annually increasing its about investment proposals, joint ventures and how to access global supply chains as it is about straight export and import transactions.

But according to the Dragonomics thesis, they’ll be other opportunities as well. Given Kroeber’s views about China’s need to improve the efficiency of capital, the export of financial services is an obvious area for growth. And with a tighter labour market, they’ll be a strong market for education and training in the export of labour market services to help improve productivity as the labour supply tsunami comes to an end.

Are there any risks to the outlook? In some ways, we’ve had it – the global financial crisis – which caused a major external shock to China, which had been enjoying an annual average 27% export growth rate since joining the World Trade Organisation. In fact, according to Dragonomics research, the only other time export growth had been zero or negative in its modern history was in 1989.

Are there risks for Australia? As ever we have to be wary of capacity constraints or ‘bottlenecks’ on the supply side as Chinese demand for our exports takes off again. In some ways, Chinese demand is the roadrunner we don’t want to be caught flat-footed like Wile E. Coyote in the famous Warner Brothers cartoon.

Fortunately, according to the Reserve Bank of Australia (RBA), mining investment has been holding up and Australia overall has a good investment story in our resources export sector which bodes well on the supply side. In fact, there’s been a strong link between Australia’s investments in major resource projects – like the next LNG train coming on line in the North West Shelf – which helps explain our strong performance in export volumes. In fact, Australia was the only developed country not to record a drop in its export volumes over the year at a time when world trade volumes have declined by 20%. No wonder international economists are praising us on CNBC Asia as ‘Down Wonder’.

But back to Beijing. It’s clear that the Chinese labour market is a very different one that on my first trip to that factory in the special industrial zone. I hope next time I go labour conditions will have further improved and some of visitors’ questions won’t be lost in translation in future. Yes, the times are a-changing, in the Chinese labour market, the Chinese economy and this will have a significant influence on China’s economic relations with Australia, the Asia Pacific region and the rest of the world in years to come.

Tim Harcourt is Chief Economist with the Australian Trade Commission and the author of The Airport Economist.