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China's economic future -

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China's economic future

Broadcast: 15/03/2010

Reporter: Kerry O'Brien

Kerry O'Brien speaks with a leading expert on the Asian economies, Richard Martin of IMA Asia -
following Chinese Premier Wen Jaibao's warning that the global economy may slip into a double dip
recession, which could create problems even for China.


KERRY O'BRIEN, PRESENTER: Speaking of the dragon, when Chinese Premier Wen Jiabao warns that the
world could dip back into recession, how would that impact on China this time and in turn on
Australia? Did China demonstrate after the last global recession that it has finally uncoupled from
the US and European economies and can maintain strong growth regardless? To answer those crucial
questions for Australia I spoke in Sydney late today with a leading expert on the Asian economies,
Richard Martin of IMA Asia, who spends his time travelling and consulting through the region.

Richard Martin, how much is China still linked to the major Western economies?

RICHARD MARTIN, CHINA ECONOMICS ANALYST: I think during 2009 it delinked and it was very clear in
the second half of the year. Why did it delink? Just the scale of the fiscal and monetary stimulus
they let loose in that economy. And how do you know it delinked? You look at the growth they were
getting in the second half of last year. i think in the third quarter they cranked growth up to
eight per cent, and then they took it higher in the fourth quarter. What was happening in its main
export markets at that time. You take the United States, European Union: 62 per cent of global
demand in those markets, the big export markets for China - third quarter of last year, they were
contracting at three per cent, and China's growing at eight per cent or more. It delinked.

KERRY O'BRIEN: And what impact did that have on the rest of Asia and for that matter Australia?

RICHARD MARTIN: Well, for the rest of Asia, this was the best news ever. And it's a bit of a puzzle
to work it out. 'Cause you look at the export numbers for the rest of Asia. Exports for a place
like Thailand in November went up 25, 30 per cent. But their exports to China specifically jumped
over 100 per cent. And you see the same pattern going in Korea, Taiwan, Singapore, Hong Kong of
course and even Japan. I would say just about the only thing that got Japan out of recession last
year was demand from China. Now the biggest beneficiary. If you had to pick the one country in the
world that did best out of China's stimulus, it's Australia. It just pushed up demand for
construction and our materials went up. I think we did better than Hong Kong out of it.

KERRY O'BRIEN: What are China's biggest challenges right now?

RICHARD MARTIN: It's going too fast. It's going way too fast. I've just come back down from Hong
Kong, and talking to our clients up there, demand in January was stronger than we've seen in three
or four years. February is a bit complex 'cause of the lunar new year, but just the first few days
of March, demand shot up again. So, they're gonna have to cool that economy down. And this is an
odd situation where we're talking about in the advanced economies people are fearing a double dip
recession, yet in China it's running too fast and the focus now will be on slowing it down in the
second quarter of this year.

KERRY O'BRIEN: And in the way they slow that down, is there an economic model for what China is now
seeking to do and to what extent is this a leap into the unknown?

RICHARD MARTIN: It's a complete leap in the - there is no rule book on what you do in China.
Really, this is an economy that is a little bit of market economy, largely still a command economy,
and those are the tools they're using to keep that place under control this year, to stop it
gettin' too hot. So, there's no guide on this. And that is what scares the pants off the
stockmarket. They see Premier Wen Jiabao coming out and talking about how they might manage the
economy, how they might cool the real estate market, and everyone says, "Communists, can they slow
this market economy or semi-market economy down without tanking it?" There's a lot of fear there.
What do I think's gonna happen? I think they'll pull it off. They've worked really hard at this for
over a decade. They'll manage the economy down. It's not gonna be that pretty, but they'll manage
it down a bit. They'll get growth cooling off.

KERRY O'BRIEN: But when you say manage it down a bit, what would you expect growth to come down to
over the next 12 months, if it comes down?

RICHARD MARTIN: If it comes down. Of course there's always the golden - the goal is eight per cent
growth, and again that was restated this year. Eight per cent growth, three per cent inflation is
what they want. They're gonna get inflation significantly higher than that. It's gonna push up to
five per cent. There's a real inflation spike coming in China this year. Real growth will probably
be well over eight per cent, again 9.5 per cent. But unless they start cooling now, they could
easily put growth up to 10, 10.5 per cent, but blow inflation up to double digits.

Right now, something's happening we didn't expect to happen, which are our manufacturing clients
are running out of labour in the Pearl River Delta. This was a place that had 20 million unemployed
people last year. How do you run out of labour? Well the demand goes up so fast.

KERRY O'BRIEN: So how do you read Wen Jiabao's warning about the prospect of a double dip recession
in the global economy, and how seriously do you take his expressions of concern about how China
might be impacted?

RICHARD MARTIN: He's talking to two audiences when he speaks. The foreign press immediately read
this as a discussion with America about keeping the Renminbi pegged or not. But really the big
audience he's talking to is the China audience. I think the signal he's trying to get out to people
in China is we've had a great start to the year. We have a great finish to last year. But we've got
some problems on the plate here. We've got inflation moving up, we've got a bubble in our property
market. We had senior Chinese officials right at the start of the National People's Congress
putting their hand up to say, "Yes, there's a bubble in the property market." That should worry
everyone. So what do you expect to see in the second quarter here? They'll go slow on interest rate
increases, but they're really gonna tighten up their control of bank lending, their control over
investment in the real estate market and their control over investors in the real estate market -
households and state-owned enterprises.

KERRY O'BRIEN: So, if America falls back into recession, which in turn sends another shockwave
through the rest of the world, can China afford to just unleash another stimulus package, another
giant stimulus package of the size of the last one?

RICHARD MARTIN: They've got the money. That's it. At the end of the day, they have the money.

KERRY O'BRIEN: So to the extent that Australia now relies on China to cushion it against any
negative impacts from the Western economies, are you saying that we can be confident that a
resources boom here is guaranteed to continue regardless of what happens elsewhere in the world?

RICHARD MARTIN: The resources boom will. Now keep your eye on the public spending number. They've
cut their budget back from around 21 per cent growth last year to 11 per cent growth this year. And
that means they're not gonna be launching more infrastructure projects. That money's pretty much
gonna go through to what's on the table already. Now that might mean that the growth in export
shipments out of China won't be as fast as we saw last year. It'll still be strong, but not as
fast. But that's not the game now. The game is now moving to what China is pushing out of the
country and that's its own investment. We've seen that down here in Australia for four or five
years as they've pushed foreign direct investment into our resource sector, but the feeling that I
was getting last week up in Hong Kong is right across corporate China, whether its state-owned
enterprise, stock company or private company, corporate China is being told to go offshore with big
blocks of money, and this is gonna be a real game-changer for how commerce works, how global M&A
works over the next four or five years. And I suspect by the time we get into mid-2010, that is
gonna really focus our attention. It's - the last decade is about China's export rise. Exports
remain very strong this decade and go up a bit more. But what we start to deal with now is that
money moving out of China, not just into us and Africa and Laos and Cambodia; into the US to pick
up positions, into Japan to pick up positions and all of that. China dominates at the low cost end
of manufacturing and is moving up into middle manufacturing fast. What it wants to do now is get
the high technology and the distribution that you can get in the West. So, if you have a sick
manufacturing company in Germany, United States, Japan, it'll be a Chinese buyer who'll be looking
at it. And what they're after is technology, access and all of that. Is this any different to what
we saw Japan do 30 years ago? Not really, but the scale is gonna be bigger.

KERRY O'BRIEN: Richard Martin, thanks for talking with us.

RICHARD MARTIN: Thanks, Kerry.

KERRY O'BRIEN: The rapidly changing dynamics of the global economy.