Full speed ahead

June 26, 2005
Even the Chinese diet will be transformed, with benefits for Australia.

Photo: AP

Cheap cars, but expensive petrol - China's galloping economy is turning the world upside down, writes Richard Webb.

China has transformed the world economy, sending commodity prices through the roof, shifting economic power away from the United States and delivering huge benefits to Australia. But as the dragon awakens, the numbers ahead are breathtaking, economists say, and this could mean petrol at more than $1.60 a litre within five years and cars at under $10,000. It could also mean the death knell for local manufacturing.

With a population of 1.28 billion, China has been sucking in raw materials like a giant sponge as its economy grows more than 9 per cent a year, quadruple the current rate in Australia. This isn't a one-off - the Chinese economy has been doing this for the past 25 years. But it has only recently got to a size where this 9 per cent growth has become world-changing.

China's economy is worth more than $2000 billion, the fourth-largest in the world, but it is projected to overtake the US to become the world's biggest economy by the 2040s. This is an economic reawakening of sorts as up until 200 years ago China had been the world's biggest economy, representing up to a third of global economic output.

All this is great news for local resource giants such as BHP Billiton, Rio Tinto and Woodside, and for Australia generally. These companies can supply what China needs - the raw materials its super-cheap labour can use to develop the economy and further cement China's position as the manufacturing base for the rest of the world. And its labour is certainly cheap. Chinese textile workers, for example, are putting in 10-hour days, working nine days straight with the 10th day off, for between $80 and $240 a month.

China is already a huge trading partner with Australia - last year China overtook the US to become Australia's second largest export market and it is on the verge of becoming our largest source of imports. Committee for Economic Development of Australia chief executive David Edwards said China's influence would grow much further in the next 50 years.

"Within a decade or two, China will become the most important economic partner in Australia's history," he said. "That will happen regardless of whether China's recent growth slows in the next few years, and, well after that, China will continue to become even more important to Australia."

But this booming Chinese demand for raw materials has already unhinged world supply and demand balances, which is why crude oil is at record levels and the price of essential product and infrastructure commodities such as copper and nickel are at many-decade highs.

The scary bit though, is that, in terms of China's raw-material consumption, economists say we haven't seen anything yet. China's economic growth has been essentially export-driven so far, but Mr Edwards said that in the next few years it would gradually shift towards being more domestic-driven, which is when the 1.3 billion people multiplier will start to kick in.

At the moment, China is using its state-of-the-art factories and cheap labour to produce goods that no other country can compete with on price. That's great for local consumers, as the price of goods such as air conditioners and plasma television screens has plunged. But there is much more of this to come. AMP Capital Investors chief economist Shane Oliver said China is only a year or so away from producing a car for $US7000 ($A9000).

"It's like a repeat of what happened with Japan, South Korea and Taiwan, but it will be on a much larger scale," he said. "We talk about how cheap Hyundais are, but China will better that."

It is because of these sorts of capabilities that Dr Oliver believes the local manufacturing industry is facing its biggest threat.

"China is much bigger than anything we have seen before, so the threat to manufacturing is likely to be even bigger. But we can almost see it coming, so we should be moving as an economy to adjust for it. It's bad for manufacturing, but it is good for our mining, agriculture and services sectors, and together these represent far more of the Australian economy."

The structural changes and figures involved in China's economic development are astonishing. China is in the midst of the largest urbanisation program ever undertaken, attempting to take 200 million people off the land and into cities in the next 15 years. To do so, it must build cities equivalent in size to Melbourne, Sydney, Brisbane, Adelaide and Perth every year for the next 15 years, with the accompanying infrastructure to service them, such as roads, transportation, power and water.

The Chinese are starting to experience a lift in their standard of living, and are beginning to acquire more resource-intensive goods. They are moving from bicycles to scooters and eventually will be buying cars. As their standard of living rises, they will buy more televisions, more fridges, and consume more protein-rich foods. At the moment, people in Taiwan and South Korea consume up to 10 times as much meat, fish, sugar, beer and dairy products as people in China - this gap will narrow.

The Chinese economy now consumes 1.9 barrels of oil a person each year. In Australia, consumption is running at 15 barrels a person each year and in the US it is 25.2 barrels (the US uses a lot more oil for heating than in Australia, and Americans drive more petrol-guzzling four-wheel drives).

If China consumed as much oil per person as in Australia, global oil demand would jump by more than 50 per cent, and at the moment, with the world's oil producers already pumping at close to full capacity, it is far from clear where this oil will come from.

The same goes for many other commodities: Chinese consumption per person is set to take off with enormous effect on the rest of the world.

Already China produces five times as much cement as the US. Its steel capacity has doubled since the start of the decade and is now larger than the US and Japan combined. It is already the world's largest copper, aluminium, iron ore and platinum user and the largest consumer of paper and pulp (it produces 82 million newspapers a day). China has the most mobile phones, and with 330 million smokers, it is the world's largest tobacco consumer. Even though per head the Chinese don't drink much beer, its population size means that it is now the world's largest beer consumer.
