One of the most discussed issues facing the current global economic outlook is the status of China’s economic transition to a new growth model and a more market-based economy, along with the consequences of this shift for the world economy in general and China’s trading partners in particular1. The latest IMF forecast, for example, highlights the ‘sizeable global spillovers’ from China’s new growth path that have already occurred through the trade channel, both directly (via the impact on China’s demand for imports) and indirectly (via the impact on commodity prices, for example). Likewise, the Fund’s central case scenario for the medium-term global outlook is predicated on a successful rebalancing of the Chinese economy, while one of the key downside risks identified to that same forecast is the danger of a sharper than forecast Chinese slowdown.
Closer to home, a recent RBA conference also took a detailed look at China’s rebalancing and the consequences for trading partners such as Australia.
And a few weeks back, I gave a presentation to colleagues visitor Australia from several other trade promotion organisations which looked at how that same process was influencing Australia’s trade and investment relationship (pdf).
The starting point for my story was that, given our close economic ties with China, developments in Australia’s bilateral trade and investment flows provide an interesting perspective on the rebalancing story. For example, the share of Australian exports going to China relative to the total is one of the highest in the world2:
It’s also the highest among all OECD members:
And, as Edmund Tang pointed out in a recent post, the investment relationship is also substantial. According to data collected by the American Enterprise Institute (AEI) and the Heritage Foundation, between 2005 and 2015 Australia was the second most popular destination for Chinese outward investment behind only the United States3.
As is well known by now, the investment- and export-intensive phase of Chinese growth was also a very resource intensive process. In terms of the bilateral trade figures, this was reflected in a dramatic increase in the value of Australian iron ore exports to China:
And in terms of Australia’s overall trade profile, this same trend produced a pronounced shift in the direction of our exports:
And a parallel shift in their composition:
One implication of these changes was a greater degree of concentration in Australian exports, as shown in the measures of market and product export concentration in the chart below4. That said, however, at well below 20 per cent, the absolute levels of concentration were still well below those of many countries typically identified as having high levels of export concentration. (By way of comparison, the market concentration indices of Mexico and Canada, both of which are heavily reliant on the neighbouring US economy, both stand at around 60 per cent, while the product concentration index for an oil exporter like Saudi Arabia is again 60 per cent or higher.)
At the same time as Australia’s export relationship with China expanded, the investment relationship deepened too. The stock of Chinese inward investment in Australia has grown markedly over recent years, although in absolute terms its share remains quite modest at just 2.3 per cent of the total stock of foreign investment in Australia in 2014, and 4.4 per cent of the stock of foreign direct investment (FDI)5.
For the first few years of this surge, the bulk of Chinese money went into the resource sector6:
So, how has the much-discussed rebalancing of the Chinese economy influenced the shape of these bilateral flows?
Of course, by far the most obvious change with respect to Australia’s overall trade profile has occurred in terms of the price and hence value (down sharply) and volume (up sharply) of exports of iron ore:
But while this has meant that the value of total exports to China has also fallen quite substantially (the value of goods and services exports to China fell by 16 per cent in 2014-15), the value of exports of services has continued to grow:
From this perspective, the rebalancing story is appearing in the export numbers, with a rise in the total value of exports of Australian consumption goods and services to China alongside a fall in the value of resource exports:
While we have been able to increase the value of service exports, however, this has not been sufficient to offset the fall in the value of exports of iron ore and other resources, given the relative magnitudes involved.
This kind of pattern is in line with the findings of one of the papers (pdf) presented at the RBA conference noted earlier. The authors, Guonan Ma, Ivan Roberts and Gerard Kelly, presented data showing that a shift in Chinese expenditure patterns away from investment and towards consumption (one of the declared objectives of the rebalancing process) would hit the overall value of Australian exports given the greater import intensity of investment relative to consumption, and with the consequent fall in exports of iron ore and coking coal being too large to be fully offset by increases in exports of food and beverages, services and other products to the consumer side of the Chinese economy.
Finally, turning back to the investment side of the relationship, here too there has been a significant change in the composition of flows:
Over the past two years, Chinese investors in Australia have diversified into a range of sectors including agriculture, finance, tourism, health care and (especially) real estate.
2 It’s also important to note that since Australia’s exports as a share of GDP are lower than that of some other key trading partners of China, it follows that our export dependency measured as a share of output rather than as a share of total exports is lower than implied by the latter ranking. More on this discussion(pdf).
3 The American Enterprise Institute and The Heritage Foundation’s China Global Investment Tracker captures large (US$100m and above) Chinese investments excluding bond purchases.
4 The Herfindahl-Hirschman (HH) Market Concentration Index measures the dispersion of trade values across an exporter’s partners. A county with exports concentrated in a small number of markets will have an index value closer to one or 100 per cent. Similarly, the HH Product Concentration Index measures the dispersion of trade values across an exporter’s products. A county with exports concentrated in a small number of products will again have an index value closer to one or 100 per cent).
5 Note however that the official ABS estimates of the stock of Chinese investment likely underestimate the ‘true’ totals (and are much lower than, for example, the estimates produced by KPMG and the University of Sydney) since they do not allocate to China investment flows by Chinese companies that have been routed through third countries.
6 Official ABS data does not allow us to allocate investment by both country and sector, so the data cited here rely on the AEI-Heritage database.