Addendum: Spoke Too Soon on China/Australia

In my previous post, I pointed out the dependence of the Australian economy on exports to China. There, I said that as long as the Chinese government's stimulus program didn't change Australia would likely fare fairly well during the rest of this recession.

It seems as if I spoke far too soon.

I was just surfing through Reuters when I stumbled upon this news article:

BEIJING (Reuters) - The Chinese government is attempting to pass the baton of growth from state-funded infrastructure investment to the private housing sector, a risky but necessary move to sustain the economic recovery.

Construction cranes sprouting in big cities, busy furniture shops and soaring property sales all show that the transition is going smoothly so far, though officials are wary that house prices may rise too high, too quickly.

The rest of the article is about the Chinese government's fears about the housing market heating up too fast. No further comment is offered on how state-funded infrastructure investment is being reduced, if in fact it is. I don't know the intricacies of the Chinese economy enough to be able to comment on how this will effect Chinese raw materials imports from Australia. Nonetheless, this seems to complicate the situation and what I stated in my previous post.

Australian Economic Forecast

The Australian economy doesn't get much attention in the American press. Today, however, I found an interesting article from Forbes on the future of the Australian economy.

The good news is that the Australian economy is nowhere near as over-leveraged as the American and British economies are.

Australian activity has remained surprisingly strong during the global crisis. Monetary and fiscal policy were aggressively switched to stimulus at an early stage. Australian banks were never exposed to the same degree of risky lending as their counterparts in the United States and the United Kingdom. The strong fiscal position enjoyed by the government enabled it to extend guarantees to various parts of the financial system at relatively low cost.

The bad news?

Over the past two years China's share of Australia's merchandise exports has risen from 15-20%.

and

The sharp fall in Chinese exports has not resulted in lower demand for Australian resources, as China's fiscal stimulus has focused on infrastructure, for which Australia is a supplier of raw materials. Although export prices are down from 2008 peaks, total Australian merchandise export volumes have risen in the nine months to June.

So Australia is heavily dependent on the Chinese market for raw goods. Lately, the media has been printing all kinds of troubling news concerning the Chinese economy ... everything from the macro effects of slumping American consumption to the decline in the real estate markets of Shanghai and Beijing. However, China is importing raw goods that are to be used in infrastructure construction. As long as the Chinese government keeps up its fiscal stimulus program and keeps it oriented towards infrastructure construction, the Australian economy should be, more or less, fine.

So, for now, I think the Australian economy will face some pain, but, not quite on the level that the U.S. and U.K. are facing. Of course, if the entire global financial system melts down, this all goes out the window. That's a big "if" of course.