Australia has too many eggs in its Chinese basket
"Hence the word egghead?" asks Louise, our literary-minded resident intellectual.
Well, it might not have been the smartest egg in the world, but we all came to see quite clearly the powerful effects of a change in atmospheric pressure.
Last week, we promised to explore the effects of a change in global economic pressure as China's growth is squeezed a bit.
According to Charlie, our redoubtable economic forecaster, now that China represents 40 per cent or more of our exports, we might have a few too many eggs in one bottle/basket.
Remember the professor's Cadbury ads about a glass and a half of full-cream milk in every block? Well, that certainly has been the case for Sino-Australian trade over the past decade - we got the cream. But Charlie, who picked the 2008 downturn early and another peak in 2010, says a slowdown in growth is inevitable for the middle kingdom.
China has grown strongly for the past 20 years, with only one or two soft patches, most recently during the global financial crisis. But steep uptrends are never forever.
The Chinese economy is in the process of transition to a more balanced and sustainable growth model, with lower growth in investment and exports and higher levels of consumption. Ultimately, that means slower growth on average. China will still be vulnerable to events in the US, European and Asian economies, especially as investment growth wanes.
Charlie reckons there is a hard landing of the Chinese economy just around the corner. A hard landing would be GDP growth of less than 5 per cent as opposed to its near 8 per cent now. Still not too bad given that we are on about 3 per cent.
"Why is it so?" Well, China faces many challenges and each one of them can soften the economy: appalling pollution requiring major and costly industrial reform; an ageing population resulting from the one-child policy; contagious disease outbreaks such as bird flu; financial systems that are not transparent; accumulation of non-performing loans; and overinvestment in infrastructure creating asset "bubble" risks.
There is no doubt there will be a blip in the Chinese economy, and we have to make sure that we don't have all our eggs in that basket. If we do, we could get what is called the Dutch Disease - a term coined by The Economist in 1977 to describe the decline of the manufacturing sector in the Netherlands after the discovery of natural gas in 1959. They lived too well in the good times and didn't build enough of the infrastructure needed for what followed.
We are in the middle of such a cycle.
So what do we do? Well, according to Charlie, it is a good idea to cash up and diversify. Debt is cheap but soon it won't be. Plan for a downturn, as Ross Garnaut has been arguing this week. He even claims there could be a recession. Possibly so, but we won't get caught if we move quickly in these four areas:
■Better education, including the expansion of universities not the contraction of them.
■Better health - more hospitals where people need them.
■Better food - high-quality food production, particularly in Australia's north.
■Tourism - free up visas, making holidaying easy.
Do this and we will boom for years.
Frequently Asked Questions about this Article…
The article notes China now accounts for around 40% or more of Australia’s exports, which means a large share of economic exposure is tied to China’s growth. That concentration raises risk for investors because a slowdown in China could hit Australian exporters, commodity prices and broader economic activity.
A 'hard landing' refers to a sharp slowdown in GDP growth — the article describes it as China falling to under 5% growth from near 8%. For Australian investors, a hard landing could reduce demand for exports, lower commodity prices and weigh on earnings of companies tied to Chinese demand.
The article lists several pressures on China’s economy: a planned shift from investment and exports toward consumption, severe pollution requiring costly reforms, an ageing population from the one‑child policy, outbreaks of contagious disease, opaque financial systems, rising non‑performing loans and overinvestment that creates asset bubble risks.
Dutch Disease describes how an economy can become over‑dependent on a booming sector (like natural resources or a single export market), causing other industries to shrink and leaving the country vulnerable when conditions change. The article warns Australia could face similar risks if it doesn’t diversify away from heavy reliance on China.
The article recommends practical steps: 'cash up and diversify' — meaning hold some cash buffers, reduce concentration in China‑exposed positions and spread investments across sectors and regions. It also notes debt is currently cheap but may not remain so, so planning for a downturn and de‑risking portfolios makes sense.
The article highlights four areas Australia could develop to reduce dependence on China: better education (expanding universities), better health (more hospitals where needed), higher‑quality food production (especially in the north) and tourism (making visas easier). These sectors could see growth from policy shifts and new demand sources.
No — the article doesn’t call for blanket selling. It urges caution: don’t have all your eggs in one basket. Rather than immediately dumping China exposure, everyday investors are advised to assess concentration risk, diversify holdings, hold some cash and prepare for a possible downturn.
Diversifying across countries, sectors and asset classes reduces the chance that a China‑specific slowdown will heavily damage your overall portfolio. The article stresses that China is vulnerable to shocks from the US, Europe and Asia, so spreading exposure helps manage that systemic risk.
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