Commentators and financial markets may well get whipped into a frenzy by the release of new China data, particularly when it surprises on the downside. But these figures have almost no direct impact on aggregate demand beyond some unmeasurable impact on consumer and business confidence.
Far more instructive are the fundamental linkages between the two economies.
With respect to exports, if China were to experience a downturn, there is little evidence to suggest that its demand for Australia’s natural resources would plummet.
In the fourth quarter of 2007, China’s economy was growing at 13.6%. By the first quarter of 2009, this had slowed to just 6.6%. Yet the value of Australia’s merchandise exports to China over this period grew by 64%.
And this is not only a reflection of increasing export prices; volumes of key export commodities such as iron ore increased as well. Similarly, China’s demand for Australia’s services exports, such as education, has proven remarkably robust.
The Australian economy is also not without its shock absorbers in the face of a downturn in China, perhaps none more important than the exchange rate.
Between 2004 and 2012, when Chinese demand was fuelling a mining boom and the terms of trade were rising, the Australian dollar appreciated by more than 30% against the US dollar.
This appreciation had the effect of moderating the demand associated with the rising terms of trade. The income gains accruing to the mining sector were at least partially offset by income losses to other exporters, like those in manufacturing, tourism and education.
If the Chinese economy were to weaken, the exchange rate would depreciate, providing the non-mining sectors of the economy with a boost. Indeed, this process may have already begun. Since the end of 2012, the Australian dollar has depreciated by more than 10%.
Of course, exports are not the only channel through which Australia’s dependence on China might be evaluated. Another is investment. Yet here the numbers are stark: specifically, they show that the channel is almost entirely absent.
In 2012, net inward investment from China amounted to A$3.9 billion, around 4% of total net inward investment. Inbound net investment from the US, meanwhile, hit nearly A$44 billion, around 47% of the total.
At least at the macroeconomic level then, Australia’s export exposure to, and any associated dependence on, China is very much a good news story.
James Laurenceson is currently a Senior Lecturer in Economics at The University of Queensland.
This article was originally published at The Conversation. Read the original article.
