Australia has too many eggs in its Chinese basket

'Why is it so?" asked eccentric TV physicist Professor Julius Sumner Miller. His catch-cry - and his brilliantly simple experiments - inspired generations of TV viewers to be curious about how the fundamentals of our natural world work. Who can forget him dropping a burning piece of paper into a milk bottle, placing a shelled boiled egg over the opening and watching it squeeze itself all the way into the bottle?

'Why is it so?" asked eccentric TV physicist Professor Julius Sumner Miller. His catch-cry - and his brilliantly simple experiments - inspired generations of TV viewers to be curious about how the fundamentals of our natural world work. Who can forget him dropping a burning piece of paper into a milk bottle, placing a shelled boiled egg over the opening and watching it squeeze itself all the way into the bottle?

"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.

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