WAKE UP AUSTRALIA: The fear over China's growth

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Australia sailed through the global financial crisis better than any other developed country because our banks had a good asset book and our main trading partner, China, undertook the largest stimulus operation of any major economy and so supported its growth rate.

In turn, that boosted commodity prices and the demand for our mineral exports ballooned. But as we look forward to 2010 and 2011 there are clear cracks in the China story – and there is a danger that we will move into a period of lower China growth which will play havoc with our exports and our currency.

During 2009 we saw a very different China and that change caught us on the wrong foot. In former times China seemed to accept lectures from the west – but when our Prime Minister Kevin Rudd spoke to the students at Beijing University in Mandarin about human rights he greatly upset Chinese leaders. This and other events lead to a breakdown in the relationship at the top, and while it didn't affect our commercial relations, China prevented a number of delegates coming to Australian conferences (see WAKE UP AUSTRALIA: Fix the China relationship, January 29).

In US-China relations, China began to fully appreciate the significance of the fact that China's support of the American currency and economy gave China great latent power over the Americans. And once again it was not interested in being lectured to by the Americans. But when China's President Hu Jintao last year left the G8 meeting early because of the crisis in Xinjiang it was a sign that he faced internal political problems. Those problems made China anxious to avoid a downturn and this contributed to the enormous boost to Chinese infrastructure spending. Last year the European based Pivot Capital Group – which correctly forecast the American sub-prime crisis a year before it happened and the Eastern European currency problems about six months before they happened – made a third major forecast: China would go into steep decline in 2010 or 2011. The men behind Pivot, Pars Mellstrom and Carl George, claimed that most of the productive Chinese infrastructure spending had already been undertaken and it was now spending money on marginal projects. Banks were lending to investors building apartments that were too expensive for ordinary people to buy (see China's house of cards, January 8 and Has China peaked too soon? January 11).

Mellstrom and George believe no country can maintain infrastructure spending at more than half of GDP for an extended period, so China will have to reverse this and begin the slow process of lifting consumer spending. A sign that this analysis might be right was this month's decision by the Chinese to substantially reduce bank lending. In turn, this will curb apartment boom and other asset speculations. No one is predicting that China will go into recession, but Australia has come to depend on high growth rates that Mellstrom and George say are not sustainable. When Mellstrom and George made their original prediction they were virtually alone. But more recently, senior Australian journalists from China have been saying similar things so the level of concern is rising. But the domestic political and social implications of a slowdown in China mean that may be delayed for an extended period.

There are other areas of concern. China is undertaking substantial carbon emissions mitigation but its growth imperative makes it very difficult for China to meet some of the high levels of carbon emission cuts.

But the Chinese are choking themselves with pollution – and my guess is that in the longer term they will switch a lot of their dirty industries to Africa to improve their air quality and to meet the global carbon standards. Don't be surprised that if in 2010 the American jobs imperative that President Obama underlined in his State of the Union address will be translated into more US clamps on imports from China and Asia. If that happens it will lift global tensions and Australia will be caught in an uncomfortable sandwich between the country that provides the bulk of our defence security and our major trading partner. But always remember that these are short to medium term problems. Longer term, China is going to be a growth powerhouse and we will be a major beneficiary.