Sun sets on resource boom as China economy shrinks
Global steel production is down 24%.
CHINA'S once irrepressible economy has hit a wall, posing major risks to the Australian economy and to the federal budget.
Annual economic growth in China almost halved from 13 per cent in 2007 to 6.8 per cent in the year to December, the National Bureau of Statistics reported yesterday.
The growth figure is below the arbitrary 8 per cent threshold that Chinese leaders say creates risks of social instability.
Adding to concerns, Citigroup has calculated China's economy shrank 0.1 per cent in the December quarter from the September quarter — its first contraction in at least 16 years.
And some of China's top investment bankers say it may never again power the Australian economy like it did over the past five years because it will be forced to dump its reliance on construction.
The news from China has sent fresh shockwaves through the Rudd Government, with Finance Minister Lindsay Tanner describing it as bad news for Australia's growth and jobs.
"The Chinese boom that turbo-charged Australia's economy over five to seven years is receding rapidly," Mr Tanner said.
He said the Chinese numbers would probably mean the hole in budgetary revenue would be even bigger than anticipated, although he believed the budget "remains in surplus but it's getting pretty tight."
The figures underlined "the enormous challenges facing the Government" — but also reinforced its determination to do everything to support Australian growth and jobs, Mr Tanner said.
The Chinese figures coincided with more gloomy news from Australia, with a Westpac-Melbourne Institute survey revealing "recession level" fears on unemployment, and retail giant Wesfarmers following the lead of David Jones and cutting staff hours.
And profit expectations for BHP Billiton, the world's biggest miner, have been slashed sharply in response to the increasingly bleak world outlook.
In China, Frank Xu, head of mergers and acquisitions at China International Capital Corporation (CICC), said 2008 was likely to mark the all-time peak of China's appetite for Australia's key resources, particularly iron ore.
He said the resources boom, which inflated Australian commodities export prices by 150 per cent over five years, was driven by China's unsustainable growth in exports and building of factories and infrastructure.
"If you look at each one of those drivers they're going to decline," he told The Age in a rare interview.
"The part that was not sustainable was the investment that goes into producing capacity for more steel companies, more cement plants, more equipment manufacturing, more power generators, because if you don't have demand for the output then these plants are going to be wasted," he said.
Mr Xu, who advises most of China's giant resource and heavy industry companies, said it was "physically inconceivable" that China would return to the resource consumption rates of the past.
"We simply don't have enough land, we don't have enough clean air to support such growth, at some point it has to slow down and even decline in absolute terms," he said.
The Australian economy has in recent years been propelled largely by coal and iron ore, both of which depend on the steel mills of north-east Asia. Figures from the World Steel Association show global production collapsed 24 per cent in December from a year earlier.
China led the industrial downturn, throwing tens of millions of people out of work and generating huge social and political stresses.
But Australia's other top two export markets, Japan and South Korea, are now in even worse shape, with figures yesterday showing South Korean GDP contracted 5.4 per cent in the December quarter and Japanese exports plunged by an all-time record 35 per cent in December from a year earlier.
China looks likely to be the first country to stabilise its heavy industry sector, with the Government pledging trillions of yuan of new construction projects and leaning on banks to flood the economy with new loans.
Global steel production would have fallen 35 per cent in 2008 if not for a rebound in China.
Many analysts say the Chinese Government-led construction effort will stimulate a short term recovery but exacerbate structural economic and social imbalances.
"The moment we stabilise the growth scenario we need to accelerate reform, as in state owned enterprises, local competition, government intervention in resource allocation, liberalisation of trade, prices and private investment," said Wei Ding, head of investment banking at CICC.
CICC's dour research findings about commodities demand are in stark contrast to the long-term optimism of major mining companies and international investment banks.
But the CICC findings are similar to those stated in a new report by China's Ministry of Land and Resources. Leaders of the China Iron & Steel Association are privately even more pessimistic.
Before the release of the latest figures, Prime Minister Kevin Rudd said yesterday that China's growth projection for 2009 had fallen by $US200 billion, which meant a "massive $5 billion fall immediately in Australian exports", and so a $5 billion resulting impact on jobs.
Mr Rudd said the Government would "not sit on its hands while Australians lose their jobs, superannuation and house values. We will act to get the blood pumping around the economy again".
Asked whether the figures out of China hastened the need for another stimulus package, Mr Tanner said the Government would continue to weigh up the situation as it commenced its budget preparation.
He refused to be drawn on speculation about the possibility of tax relief being given before the legislated July 1 tax cuts. "The options that are in the mix at any time will involve either increased spending or reduced taxation," he said.
