By John Richardson
THE blog was amazed over the weekend when it discovered that the country’s governing Labor Party has had to write down Aus$33.3bn in budget revenues in the space of just ten weeks, largely because it failed to forecast the extent of the slowdown in China.
Australia, as a major resources exporter is, of course, hugely dependent on China for its economic growth.
The writedown is one of the most extreme examples of all of how governments of all political shades, financial institutions, investment banks and, of course, chemicals and other companies have largely missed one of the most important shifts in the global economy for many years.
And so what went wrong?
Just a few months ago, the optimists easily outweighed the pessimists, or rather the realists, who had been warning for years that China’s deep structural problems threatened a severe economic slowdown.
Even as recently as May the conventional view, despite all the evidence to the contrary, was that China’s economic growth would accelerate rather than decelerate in 2013.
Many commentators repeated phrases such as “increased urbanisation” and “the rise of the middle classes” without any serious debate about what such concepts might really mean for China.
Questions that needed, and still need, to be asked include:
- Is further urbanisation sustainable, as China confronts chronic environmental problems which are a major threat to social stability? How will a rapidly ageing population affect the rate of urbanisation?
- What is the impact of the fact that being middle class in China is vastly different from being middle class in the West?As the chart above shows, despite a rapid increase in income levels, the majority of people in China still earn between US$2-10 a day.
- And, most importantly for Australia, what about the risk that the resources boom was a “once in a lifetime” event, driven by what is now, all too belatedly, widely recognised as a failed investment-growth model?
One wonders who has been advising Labor – and the opposition Coalition as well as it has also failed to highlight the risks – about the potential outcomes for China.
Could the advisers have included financial institutions, such as the International Monetary Fund, which are constrained by politics in what they can say about China? If they tell the truth they run the risk of being denied access to data by government agencies and of falling out favour with senior politicians. The end-result is that reports by the IMF etc are watered-down.
And for the investment banks, selling a one-dimensional China success story has served them well financially for many years.
As far as the ability to fully assess risks within big corporations, internal politics seem to be a major problem.
These quotes, from a middle manager at a chemicals company, are once again worth repeating. They should be printed out and pinned to every boardroom wall, to be read before any discussion takes place on China:
On a one-to-one basis and behind closed doors, people agree that China is not good. But, officially, the message stays the same – everything will be fine in the long-run.
Nobody wants to rock the boat because, if you do rock the boat, you have to come up with an alternative and that’s very difficult. If you are seen as being too pessimistic, people want to know what your back-up plan is, and that just takes too much time and effort and is too politically risky.
You cannot raise uncomfortable questions in big corporations because you will end up as the only person without a project, and then where will your career be? It’s all about keeping the financial analysts happy, about creating the right kind of buzz.
The Labor Party and the Coalition need to get serious about planning for a very uncertain future. They need to have a credible plan for Australia if China’s GDP growth falls to as little as 3-4% over the next decade – one quite possible scenario.
Perhaps a televised nationwide debate between Kevin Rudd, PM, and Tony Abbott, the leader of the Opposition, on this subject during Australia’s current general election campaign would be a step in the right direction.