THE DISTILLERY: Chinese whispers

Jotters speculate on what China's shift towards domestic consumption means for Australia's non-resource sectors.

China’s boom helped Australia roar out of the global financial crisis. Now, the transition of China, and indeed Asia more broadly, towards more domestic consumption is showing what Australia is made of without a mining sector that booms automatically. This shift forms the basis of this morning’s edition of The Distillery.

Firstly, Fairfax’s John Garnaut writes about how he was told almost three years ago by eminent Chinese economist Yu Yongding that China could continue going gangbusters for five years…then it would have its "Wile E Coyote” moment.

Props for the terrific imagery, but Garnaut then goes on to point out that China has since eased from those boom times, considerably.

"The period of construction madness, in which steel production rose six-fold between the start of the millennium and the peak in March this year, is over. It has been replaced by what Mysteel's Xu Xiangchun says will be three to five years of ‘record low profits’ and annual production growth of 2 or 3 per cent ‘in the most optimistic scenario’. Investors, analysts and even official economists are wondering if the Chinese leaders have been paralysed by their own internal ructions, or the bureaucracy is feeding them misleading rosy information, or they have run out of policy ammunition, or all three. All year they have been waiting for the decisive government stimulus package that has always materialised by this point in the cycle, but it hasn't come.”

Coincidentally, Business Spectator’s Josh Kenworthy quotes Garnaut’s father Ross in his piece that discusses a broad refocussing by Asian countries on domestic consumption rather than construction.

"Nothing about China's new direction is encouraging for Australia’s resources sector, but there are plenty of opportunities in the non-resources sector if we can mirror China’s rebalancing and lose our fear of direct investment from our biggest trading partner. While Australia’s mining sector will continue to be inextricably tied to China – not just in terms of demand, but increasingly in terms of capital flows, it will be increasingly important that Australia now focus on realising opportunities in high-end services and manufactured goods, which should become more competitive when the stubbornly high dollar begins to finally recede with commodities prices. That will mean Australia must leverage its strong base in R&D, something highlighted this week when Cochlear announced it has received a $100 million contract from the Chinese government and is in the process of negotiating a further $600 million worth of work. China's healthcare spend is set to triple to $1 trillion by 2020.”

Broadening the discussion to Asia’s growth prospects, The Australian’s David Uren has an early copy of the International Monetary Fund’s update to economic outlooks and the biggest downward revisions are hitting our region.

"It is this change that led the Reserve Bank to conclude that Australia needs a clearly stimulatory setting for monetary policy. As the global outlook sours, our living standards are no longer being underwritten by our trading partners. The IMF's headline forecast for world growth is likely to be cut from 3.5 per cent to 3 per cent this year, while its tip for 2013 will be lowered from 3.9 per cent to about 3.5 per cent. The fund is constrained in its forecasts – it cannot deviate too far from those made by its member finance ministries. Most private sector forecasters believe global growth will be below 3 per cent this year and not much more than that in 2013. The Asian Development Bank's economic update, released last week, forecasts that the major industrial economies will only achieve growth of 1.1 per cent this year and 1.5 per cent next year.”

So, it was Asia’s slowdown that prompted the Reserve Bank to cut rates. As Business Spectator’s Shane White points out in The Last Gasp, you wouldn’t know that if you listened to the reaction of Treasurer Wayne Swan, who pinned the decision on Labor’s economic policies.

"In the hours following the rates decision, Swan slipped into his regular post-cut groove, making it clear to Australia’s big banks that the federal government would accept nothing less than an equal move. It’s a stance that has terrified banks in the past, forcing them to ignore the Treasurer and do whatever they've wanted. Swan’s claims were supported by the official RBA statement, which said Australian banks were having no difficulty meeting funding costs, an excuse they have used to dodge the rate rise bullets in the past, while the ACCI said it believed the funding costs debate was dead and buried. ANZ Bank, Commonwealth Bank and the Bank of Queensland then each held back some of the cut, citing funding pressures, in what is not the first time the Australian banking industry has turned to dark arts like necromancy for a dollar.”

Sticking with interest rates for the moment, Fairfax’s Carolyn Cummins writes that many of Australia’s retailers are resigned to the fact that discounting will continue for the foreseeable future and that the latest interest rate cut from the Reserve Bank won’t carry shoppers through Christmas.

The Australian Financial Review’s Chanticleer columnist Tony Boyd says Woolworths could not have picked a better time to launch a high-yielding $1.4 billion property fund, given the rate cut.

In other domestic economic matters, Fairfax’s Ross Gittins worries that Australia is losing its fiscal discipline just as the rest of the western world gives us an unprecedented reminder of why that’s a bad idea.

In international affairs, The Australian Financial Review’s economics editor Alan Mitchell writes that the first two elements of the European debt crisis are less threatening. The region’s banks no longer look like they’ll collapse imminently and government defaults seem less likely.

However, the gap between the competitiveness of northern nations and southern nations persists. If left unchecked, it could leave Europe with decades of subpar growth.

The Australian Financial Review’s Karen Maley points out that the US unemployment rate might have dropped beneath 8 per cent, but the figure really doesn’t illustrate the state of the American jobs market.

Additionally, the most pressing problem facing the US is the fiscal cliff. If that legislative nightmare goes unaddressed, the jobless rate is going sky-high.

The Australian’s Robin Bromby writes that the world’s global phosphate market has a significant stake in the tensions between Turkey and Syria, as the latter has the world’s eleventh largest phosphate reserves in the world.

Business Spectator’s Jackson Hewett writes that corporate business models will come under increasing pressure as return on assets levels continue to sink towards zero.

Meanwhile back home, Fairfax’s Michael West takes the government and the carmakers to task for their stance against making documents that were recently sent to The Australian Financial Review public. With $3 billion in taxpayer money going to the big three domestic producers, that’s a fair call.

The Australian’s Richard Gluyas writes that there’s a "flight to quality” in the resources sector, which is illustrated by ANZ’s follow-up report on the sector.

Fairfax’s Elizabeth Knight reports on the efforts that Fortescue founder Andrew Forrest is willing to give to help the corporate regulator avoid the kind of egg currently being wiped from its face for going after the iron ore tycoon. You can call Forrest many things, but ordinary is not one of them.

And finally Fairfax’s Malcolm Maiden discovers that BHP Billiton chief executive Marius Kloppers would much prefer to be living in Fitzroy, Collingwood or Carlton, as he resides in the Melbourne suburbs.

That’s not the main thrust of his piece. Maiden examines the speculation about Kloppers’s tenure at BHP, given that most CEOs don’t last much more than four years and he’s celebrating the completion of his fifth.

The real thing you need to know about Kloppers is there’s a good chance that he won’t be succeeded until one of his potential successors has about 6 months to a year at board level. No one’s even been elevated yet, so cool your heels.

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