Shanghai set-back

In his speech last night, Reserve Bank governor Glenn Stevens highlighted the China downturn. He could not have underlined a more important development affecting Australia. That's why early yesterday morning I filed the comment All eyes on China and alerted readers that Business Spectator's new China section would be essential reading (readers can also find it by simply clicking on the map at the bottom of the home page).

After I wrote that comment the Shanghai index fell one per cent led by property and financial shares, on worries that November economic data, to be released in coming days, would be poor. The fall is not large given the index has risen 20 per cent over a month from its low, but Fan Gang, an advisor to the central bank, says that Chinese exports may have fallen in November from a year earlier and growth in industrial production could have slowed to about 5 per cent.

A Manpower Inc survey shows that China's job market will weaken to a two-year low in the first quarter of 2009. The poll covers 3,727 firms in 10 major cities (China's job outlook dims in Q1 2009: Manpower, December 9).

The China stimulus package is probably more important to Australia than our own stimulus measures. If you want to understand what could go wrong in China if the stimulus package does not work as anticipated read China scholar warns of turmoil as growth slows (December 5).

But longer term China has another problem. A large number of safety scandals including contaminated infant formula have affected the buying patterns of western consumers and the US is clamping down on dairy imports from China (Brand China battered, December 9). After each scandal, Beijing had the same response: launch a crackdown, destroy tainted goods on television and jail a few officials. Unfortunately the scandals keep happening because of lax regulation enforcement, a fragmented food industry and widespread poverty in rural areas.

Fortunately the China stimulus is about fostering domestic demand and building infrastructure. Bad news is locked in for the next three to six months, but then we should start to see clear signs of improvement. The Shanghai index will be an important barometer.