An article by Rowan Callick, Asia-Pacific Editor, The Australian
The recent run of sour economic events has underlined how much emerging markets, and especially China — not your common or garden emerging market by any criterion — matter to the developed world, including Australia.
But the mostly undifferentiated way in which emerging markets continue to be lumped together as a category masks the limitations to the damage we in Australia are likely to cop. This is demonstrated by data produced by Australia’s official risk assessor, the Export Finance and Insurance Corporation, in its latest reports.
First, confirmation some trends prompting market gloom will continue: “The surge in Chinese domestic investment is at an end,” Export Finance Australia says. “Authorities have repeatedly stated the need for more consumption-led growth, as additional investment in physical infrastructure is adding to the current glut.”
And Australian reorientation towards this new force for growth in China will be good for us in the longer term. Fortunately, we have signed a free-trade agreement that opens the door to taking advantage of that increased consumption. Unfortunately, it appears there’s still a wrecking ball running wild that seeks to demolish the deal over a single, contentious claim about labour regulations.
China’s real investment per person per year is heading towards the sweet spot that is the hallmark of a developed economy — between $US5500 ($7840) and $US7500. Beijing is keen to keep investment within this range, rather than let it keep soaring as Japan’s economy did in the late 1980s, resulting in years of stagnation in Japan that are still not convincingly over.
The Aussie dollar has kept falling — due both to declining prices for our key commodity exports, driven by China’s circumscribed demand, and to the expectation US interest rates must rise sooner or later from their present level of about 0.25 per cent.
The Reserve Bank says Australia’s services exports will benefit further as our dollar keeps falling against the greenback. But the markets don’t buy that as any big deal. They’re mostly in “clobbering time” mood.
In this light, it’s instructive to take a look at Export Finance Australia’s new Export Monitor, which rates emerging markets according to crisis risk on four indicators: external vulnerability — assessing the buffers to cover funding needs and whether it is a net lender or borrower from abroad; leverage — how much debt it has; economic stability — judged by growth and inflation outlooks and reliance on commodity exports; and — the hardest to measure — policy effectiveness.
Using these indicators, Ukraine comes off worst, followed by Russia — now in recession — Turkey, Argentina, Brazil, South Africa, Indonesia, Mongolia, Vietnam and Sri Lanka. India comes next, which doesn’t make the BRICs line-up look too bright, with the exception of China, of course.
Already, almost $US1 trillion has flown out of the 19 largest emerging markets in the past 13 months.
But Australia is only vulnerable to Indonesia to any significant extent in the top — or worst-performing — 10. Even then, it’s our 11th biggest trading partner and mutual investment is negligible.
As Export Finance Australia says: “Australia’s direct trade linkages with vulnerable emerging markets, with the exception of Indonesia, are minuscule. Most of the Asian region’s other emerging markets appear well positioned to handle a potential sell-off.”
These markets have transformed themselves since, substantially due to the Asian financial crisis of 1997-98.
They have “done the hard yards,” says Export Finance Australia’s senior economist, Cassandra Winzenried — liberalising exchange rates, building up foreign exchange reserves, running current account surpluses. She says US rates will certainly rise, for the first time in nearly a decade, and as a result emerging economies “need to have their houses in order”.
Louis Gave, an analyst with China-based Gavekal Dragonomics, expects China will continue to inject liquidity into its banks, maintain the basic stability of the yuan and, along with the rest of Asia, will register a dramatic improvement in its current account balance.
“Hopefully,” he says, “decent banking sector profitability and positive trade balances will prove enough to convince the markets that Asia can service its debts, and that the region is not enduring a solvency crisis.”
Export Finance Australia agrees the chance of a full-blown crisis, especially in Asia, are slim.
With the exception of Turkey the emerging markets carrying the greatest risk have high dependence on commodity exports. The commodity story, says Winzenried, is not just one of China’s rebalancing moderating demand, but also one of a supply glut.
The China-led Asian Infrastructure Investment Bank provides an element of relief for these hard-pressed emerging markets, with about $US100bn likely to start becoming available next year.
And Australian investment abroad increased strongly last year, Export Finance Australia’s latest World Risk report points out, with “rapid inflows into Asia reducing the heavy skew in Australia’s overseas investment profile towards OECD countries”.
At the same time, our finance and insurance industry has overtaken mining as Australia’s largest direct investment by industry
Significantly, the report says “because exporters face heightened operating challenges in China relative to Australia’s traditional offshore markets, securing preferential market access is critical”.
At every stage this week, then, pressure has been building for Labor to consider changing its stance of opposition to the China FTA, or of insisting it be reopened for renegotiation, which amounts to the same thing.
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