Economic shockwave hits China
THE rampant Chinese economy that Kevin Rudd and Wayne Swan are confident will help insulate Australia from the worst of the global financial meltdown is starting to falter, with Chinese leaders warning of a "most difficult" year ahead.
As US President George W. Bush used his last State of the Union address to urge bipartisan support for measures to stop the world's biggest economy slipping into recession, China blamed an uncertain outlook on the financial turmoil emanating from the stressed US housing market.
Premier Wen Jiabao warned that 2008 would be "a most difficult year".
"There are uncertainties in international circumstances and the economic environment, and there are new difficulties and contradictions in the domestic economy," he said in remarks released from last week's State Council meeting preparing for the nation's annual parliamentary session in March.
The comment contrasts with the confidence expressed by Australian politicians, some economists and business leaders since last week's global stock market meltdown that the sound Chinese economy would help Australia ride out the financial storm.
China's economy has been growing at double-digit rates, creating huge demand for Australian resources such as iron ore and coal. These have swelled company profits and, as a result, tax receipts for the Government.
Last night, the Treasurer said he remained confident about the country's outlook in the face of the financial market turmoil, which yesterday lopped another 2 per cent off Australian shares, taking losses since the start of the year to 9.8 per cent.
"All the advice that I am receiving is that we are well placed to withstand international turbulence although we are not immune from it," Mr Swan said through a spokesman.
Last week, the health of Asia was central to the Rudd Government's pitch to investors caught in the stock market maelstrom.
Mr Swan, while conceding there were uncertainties, said the fact that Australia was close to Asia, particularly to China and India, helped insulate Australia from the events sparked by the US uncertainty.
"We are certainly well-placed, but families, I think, can be confident that the prospects for ongoing growth in Asia and the region are still strong," he said last week.
Concerns about an economic slowdown in China caused by the problems in the US are now starting to overtake anxiety about the economy overheating. Economists believe any slowdown will become more pronounced after the Olympics in Beijing in the middle of the year.
Severe winter storms - which have swept unusually far south this year, bringing snow even to Shanghai and Nanjing - are exacerbating shortages and fuelling inflation, with blackouts in half the country.
The weather is contributing to economic concerns in China, where shares on Monday suffered their fourth biggest fall in 10 years, down 7.2per cent in Shanghai, before steadying yesterday.
Inflation has exceeded 6 per cent for the past five months, and China is anxious about the impact of the downturn in the US, which buys more than 20 per cent of its exports.
The yuan is also appreciating rapidly against the US dollar, making China's exports more expensive.
In Washington, in his annual address to the Congress, Mr Bush offered a speech that was much less an ambitious sweep on how the US could change the world to more on how it could save itself from slipping into economic malaise.
Mr Bush stressed the need to right the US's listing economy, where a sharp decline in US household wealth has come just as he can boast about good news in Iraq.
"In the short run, we can all see that growth is slowing," Mr Bush said. "America has added jobs for a record 52 straight months, but jobs are now growing at a slower pace. Wages are up, but so are prices for food and gas. Exports are rising, but the housing market has declined."
Mr Bush and Republicans had struck a deal with Democrats who control Congress on a $US150 billion ($170 billion) economic stimulus package.
Yiping Huang, the head of Asia-Pacific analysis at Citigroup, said that Asian economies would slow as a result of weakening growth in the US and Europe because so many businesses were now globally integrated.
He said the impact of deterioration in such important economic zones could not be quarantined.
ANZ Bank, in its latest assessment of the economic outlook, says the key barrier to another stellar year for economic growth and asset prices in Asia is the slowdown already in progress in China.
Real growth is expected to come down from a peak of 11.9 per cent early last year to a still robust 9.5per cent by the end of this year.
The cause was likely to be a fall in the pace of investment in real estate and manufacturing. ANZ warned that extra regulations designed to stem inflationary effects may be "overkill" if there was a slowdown in demand from customers in the US and Europe.
HSBC chief economist John Edwards remains optimistic, noting that China's problems were mainly those of controlling growth and inflation as well as dealing with energy shortages.
While they may have an effect, Australian financial authorities and companies such as mining giants BHP Billiton and Rio Tinto would have allowed for those difficulties. Coal prices were high and a shortage of coal would mean demand for Australian exports would be strong, he said.
"The issue they are addressing is not particularly a downturn in the US but domestic inflation and they have taken a series of measures to deal with it.
"And in this respect, they are rather more like us than the US."
Access Economics also remains confident that China's strength should carry Australia's economic growth, underwriting a notable lift in coal and iron ore prices.
But the consultancy group has warned in its latest assessment this month that the risk of China "turning from a benefactor to basket case is rising".
"If and when China finally stumbles - perhaps in 2009 rather than 2008, with the Beijing Olympics safely out of the way - Australia could see what has been a long-delayed downturn," it says.
"And it has been so long since we've had one that the next downturn will hurt."