Australia Misses China Slowdown, Faces Aus$33bn Writedown

Australia, China, Company Strategy, Economics

ChinaMiddleClass

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.

PREVIOUS POST

Divergent China PMIs Tell Clear Story

02/08/2013

By John Richardson THE blog was amazed over the weekend when it discovered that ...

Learn more
NEXT POST

The Great Polyethylene Mystery Hunt Continues

06/08/2013

By John Richardson THE blog was amazed over the weekend when it discovered that ...

Learn more
More posts
China benzene spreads at ten-year low on misplaced trade deal hopes
19/05/2019

By John Richardson THE ABOVE chart shows that in April the average spread between CFR Japan naphtha ...

Read
Longer trade war: Impact in numbers on China polymers demand
15/05/2019

By John Richardson WE MUST now start to quantify the impact on the petrochemicals industry of no end...

Read
Plastics pollution crisis: Impact on polyethylene margins in 2022-2027
13/05/2019

By John Richardson ALMOST all countries late last week signed a UN deal to monitor the flow of hard-...

Read
China PE demand boom will not stop further margin declines
10/05/2019

By John Richardson CHINA’S polyethylene (PE) market is being temporarily weighed down by overstock...

Read
China holds all the petchems demand aces as it digs in for longer trade war
08/05/2019

By John Richardson THE STRENGTH of China’s position in the intensifying trade war is further under...

Read
President Trump’s Tweets increase risk of no trade deal until 2021
06/05/2019

By John Richardson THE PROSPECTS of a trade deal seem to have have faded into the distance as a resu...

Read
Pressure on US builds as PE exports to China tumble and EU considers tariffs
03/05/2019

By John Richardson DONALD TRUMP insisted in early March that he was willing to walk away from a bad ...

Read
China 2019 PE demand grows in double digits as PP struggles
01/05/2019

By John Richardson CHINA’S polyethylene (PE) and polypropylene (PP) markets continue to tell us so...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more