China's Rise Curbs US Influence in Australia

Michael Pascoe, writing for Australia’s The Age, argues the US has nowhere near the potent influence on China many assume, despite that idea’s widespread belief. He tackles in particular the unassailable concept of the US consumer, suggesting this group not only fails to support practically all of China’s expansion, as is so often implied by the media, but is in fact only responsible for a measly-sounding 0.3 percent of China’s often double-digit GDP growth.

From The Age:

“Spare me the usual myopic line born of American xenophobia and ignorance about China being dependent on exports to the USA […] net exports’ contribution to China’s growth over the past decade has averaged just 1.5 per cent. And the United States’ share of China’s exports is 20 per cent so the much ballyhooed American consumer is only good for 0.3 per cent of China’s GDP growth – growth that runs along in double digits or close to it even in the Great Recession.

“That’s only part of it. The stuff China exports to the US is mainly low value-added – clothing, toys, electronic gadgets. About half of China’s exports now go to the developing world and that half has higher value-added content – power stations, mining machinery and the like.” (Emphasis added.)

To add additional heft to his views, Pascoe often turns to previous comments from strategist Michael Power of Investec Asset Management…

“An example of [Michael Power’s] examples: if you’ve been half tuned-in to the state of the world, you’d know that more cars are sold in China now than the US. That’s already history. The insight that’s worth thinking about is that car ownership penetration in China is only 3 per cent, 80 per cent of buyers are purchasing their first-ever car and 90 per cent pay cash. Not only is it a massive market, it’s ungeared and untapped.” (Emphasis added.)

By “ungeared,” Power means unleveraged, and is referring to the fact that the Chinese still do not have widely-available credit. Therefore, the typical shopper has precious few financing options available, aside from tapping personal savings, when looking to buy higher-priced durable goods, like cars. When China’s typical wage earner gains access to debt as a form of purchasing power there’s likely to be marked rise in the strength of its domestic consumer base.

Pascoe goes on to again briefly cite Power in describing what these changes have come to mean for Australia:

“‘…A decade or so ago, we spent a lot of time puzzling over why quarterly movements in Australian GDP were so highly correlated with quarterly movements in US GDP. We don’t puzzle over this anymore – not because we solved the puzzle, but because the correlation has fallen. At the same time, the correlation between quarterly movements in Australian and Chinese GDP has steadily increased. Clearly what happens in the Australian economy is now more dependent upon what happens in China than has been the case at any time in our past.’

“Emerging Asia is our economy now and will continue to be […] But on top of the changing relative importance of the US to us is the declining absolute importance of the US. (This is me postulating now, echoing some of Power, not the more circumspect RBA.) Wall Street still calls the sentiment tune, but with the threat of more quantitative easing (ie printing money), the US is undermining its claim to the baseline of global capitalism – the “risk free” US government bond. It’s not risk free when its value is being eroded. The idea of the greenback being the safe haven currency is simply bemusing, it’s so last century.” (Emphasis added.)

The cat’s out of the bag… the US is failing not only as the engine of the entire world economy, but is even sputtering out relative to an English-speaking brethren that previously took its main cues from American financial markets. Specifically, Australia is picking up on the not-so-subtle hints from the Fed that it has little interest in a strong dollar or, for that matter, the feds any interest in a manageable national debt. The notion gaining steam is the American century is becoming an old story… one that’s already been written.

You can visit The Age to read more details in its coverage of how you ain’t seen nuthin’ yet from Chindia.


Rocky Vega,
The Daily Reckoning