‘Chindia’ keeps on keeping on

The effects of China and India go well beyond the resources arena, and their influence will be felt for quite a while yet. TIM HARCOURT

Australia’s recent economic success can almost be summed up in two words – China and India (sometimes referred to as one word – ‘Chindia’).

The economic expansion of these two emerging economic superpowers in Asia has fuelled demand for Australia’s vast resources sector and the services we build around our key commodities.

According to new research just released by the Reserve Bank of Australia (RBA), in 1999, China and India accounted for just under 6% of Australian exports, while in 2007, ‘Chindia’ accounted for 18% (with Japan on 16% and ‘other East Asia’ on 16.7%).

China is now our second most important export destination (up from seventh place in 1999) and India is now the new number seven (up from 13th spot eight years ago).

Over this period average annual growth rate of Australian exports was 24.8% for China and 24.7% for India. Part of the reason Chindia’s dash up the charts has, of course, been the high commodity prices – particularly in key sectors like coal and iron ore. In fact, according to the RBA, the growth in Australia’s export volumes (taking out price effects) has been relatively subdued in the 2000s, growing at an average annual growth rate of 2.4% compared to 8% for the 1990s.

Much of the growth in exports is price driven and supply-side or ‘capacity’ constraints – such as infrastructure ‘bottlenecks’ and labour shortages have been holding volumes down.

However, Australia is not Robinson Crusoe in this regard, as infrastructure and logistics difficulties and skilled labour shortages are considered to be a global phenomenon as the strength and duration of the world commodity boom has taken many pundits and participants by surprise.

So that’s the macro-economic ‘big picture’, what’s happening on a micro-economic level on the ground for Australian export businesses? How are exporters seeing the global picture?

According to the new DHL Export Barometer, Australian exporters are also looking to China and India for their future success. China and South Asia (mainly India) were in first and second place when exporters were asked where their export orders would come from over the next year. While China has been consistently ‘top of the pops’, India’s rise up the exporter sentiment ranks is a new phenomenon.

Other high place getters include our Trans-Tasman neighbour New Zealand, South East Asia, the Middle East (particularly the UAE) and North America. Despite the sub-prime crisis in the US, Australian exporters believe it to be a short-term affair and regard the North American market as a good medium term prospect given the US’s ability to bounce back. Also Australian exporter’s engagement in China, India, the rest of East Asian and the emerging economies has left Australia with minimal ‘northern exposure’ from the US credit crunch.

How about the exchange rate? Exporters are feeling the pinch from the rampaging Australian dollar with two thirds of all exporters worried about the appreciation compared to one half a year go. The high Aussie dollar – which has been hovering in the 90s for some time – has adversely affected manufacturing, agribusiness and tourism exporters who don’t have the benefit of the high resources prices.

However, while exporters are hurting, they are still hanging in there because of the overall growth in the global economy and the fact that almost 40% are also importers and are therefore getting some benefit on the cost side.

Is it just a case of ‘rocks and crops’ benefiting and the rest suffering? Are we seeing a ‘Gregory effect’ or ‘Dutch disease’ where a mining boom crowds out the rest of the economy via an appreciation of the exchange rate?

It’s not as simple as that as many manufacturers and services provide inputs to the mining boom and are therefore benefiting. In addition, it’s wrong to say that Australia’s booming trade relationship with Chindia is all about the resources boom.

In a companion piece by the RBA on education exports, the bank notes that Australia is experiencing a major boom in the export of education services to both China and India. According to the RBA, China and India’s combined share of Australia’s education exports are now a third (on 2006-07) compared to just under 9% a decade or so ago (on 1995-96).

In conclusion, Chindia is making a difference to Australia at the chalk face as well as at the coal face, and will do so for a long time yet.

Tim Harcourt is Chief Economist with the Australian Trade Commission and the author of The Airport Economist (see www.theairporteconomist.com). Thank you to Sara Carden, Mark Foy, Ric Deverell, Dan Andrews and Robert Arculus for their assistance with this article.

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