The Rudd strategy Part II: just how good is China's economy?

Australia's reliance on China's economy

Despite a lack of clear evidence that the global economic crisis will not worsen, the Rudd Government is confident that China's ongoing demand will continue to drive our resources sector, contributing to state and federal coffers and offset any downturn.

Is Rudd relying on China's US$1.9 trillion foreign currency reserve substantially insulating it from the global crisis?

China in the global economy

China is a huge assembly plant, importing components, energy and raw materials to produce goods for export, reliant on high volumes and low margins. While it earns trillions in foreign exchange, re-exportable content is in the high billions.

China distorts the "level playing field" in world trade with a range of subsidies including those paid to state-owned petroleum refineries forced to sell petrol, diesel and refined petroleum products well below cost. In 2008, Sinopec received billions of dollars to protect its bottom line. Subsidies paid to PetroChem were not disclosed. Private refiners received no subsidies and shut down operations to avoid losses.

Many state-owned enterprises operate at a loss just to earn foreign exchange and provide employment, losses concealed by off balance sheet accounting.

2009 growth estimates

Pre crisis, China accounted for about 5 per cent of total world GDP. The USA accounted for 28 per cent.

China also accounts for roughly 12 per cent of global manufacturing. Domestic demand however, accounts for just 43 per cent of China's GDP. America and Europe consume more than 40 per cent of China's exports.

China's 2008 third quarter GDP growth slipped to 9 per cent on the back of successive monthly declines, the lowest since 2003. China's export growth rate is estimated to plummet from 21 per cent in 2008 to a low of 10 per cent in 2009.

Factory closures

Guandong is the major centre for export manufacturers which employ about 10 million.

In the first seven months of 2008, safety standards non-compliance closed over 50 per cent of China's toy exporting factories.

New credits restrictions are severely impacting on the supply chain. Exporter's who once received payment ex-factory, are now giving 90 days credit and warehousing surplus stock.

Closures range from global brands to component manufacturers: 18,000 of the 70,000 Hong Kong owned factories will close following deliveries for Christmas and Chinese New Year orders. Some will close earlier.