Hard choices as China's boom fades

Hard choices as China's boom fades
July 13, 2010

Australia's export prices remain about as good as they have been in a century, but the peak is now behind us. What we have seen in the past few years is as good as it will get.

Last week alone iron ore spot prices fell 9.4 per cent and Brazil-China freight prices fell 20 per cent. China's trade figures showed iron ore imports fell 14 per cent last month, measured year-on-year, after rising an average 8.4 per cent each month until May.

Given that China bought 70 per cent of the world's iron ore exports last year, and Australia's iron ore exports this year will be worth about $US50 billion, it is not hard to see that the huge Chinese tail wind for Australia's national income is no longer blowing like it was.

The underlying reason for Australia's once-in-a century resources boom was that China's heavy industry sector has been growing much faster than its overall economy. The boom was inflated by distortions in the economy linked to China's hybrid market-authoritarian form of government.

Now a series of command-economy edicts has flipped this pattern around. Steel production has been falling in absolute terms for two months and the rate of decline accelerated through June. That was despite a surge in exports as mills pocketed export rebates before they are scrapped today.

Over the coming decade the trend in Chinese resource consumption - and therefore Australian national income - will be determined partly by consumer and investor preferences. But the aggregate of those private choices will be trammelled by policy and political choices that the Chinese leadership will either face or evade.

Many of those challenges will be outlined tomorrow at the Australian National University's China Update conference. Zhongxiang Zhang will look at China's efforts to reduce fossil fuel consumption, and its equally serious challenges. Last year China installed more wind power turbines than any other nation. And yet, in the first quarter of this year, 60 per cent of wind power generation capacity was wasted because it was not hooked up to the grid.

Huang Yiping will look at the price distortions that fed China's heavy industry boom, including cheap industrial land, cheap energy and cheap capital.

Huw McKay and Ligang Song will calculate how China's per capita steel consumption could peak earlier and at a higher rate than previously assumed - at double the present rate of consumption in little over a decade.

However, for my money these policy debates will be swamped in coming years by the core question of whether and how a one-party state can make itself accountable.

Over-construction will continue so long as officials receive great financial incentives and few political and legal disincentives against bribery and stealing land. State-dominated heavy industry will continue to over-produce so long as the services sector is stunted by politically powerful state monopolies.

That is why Yongsheng Zhang, at the State Council's Development Research Centre, will tomorrow tackle the question of whether local officials can ever be held accountable to their people when they are appointed from above.

And Yang Yao, the director of Peking University's China Centre for Economic Research, goes even more directly to the heart of things. He writes that the key to China's reform-era success is that the party did not allow policy to be hijacked by special interest groups at the expense of other sectors of the population. But that is now changing, as cadres meld seamlessly into the world of crony capitalism.

''While the private business community is realising the importance of cultivating the government for larger profits, it is the government itself, its cronies and government controlled [state owned enterprises] that are quickly forming strong and exclusive interest groups,'' he writes.

''All this suggests that some form of explicit political transition will be necessary to counterbalance the formation of strong and exclusive interest groups. The Chinese Communist Party must soon realise that there is no alternative to fuller democratisation if it wishes to maintain both high economic growth and enhance social stability.''