//
you're reading...
Australian Current Affairs

Australian Treasury too rosy about China


Australia China Map

Australia China Map

In October 2009, a former top Treasury official at the Australian embassy in Beijing slammed the Rudd government for a “dysfunctional China policy”. Stephen Joske went further, saying “there’s no one in Treasury who can tell up from down on China, beyond what they read in the newspapers” – a serious charge given the importance of China to our national income and taxation revenue.

Four years later, the resurrected Rudd government and senior Treasury officials are again being criticised for inaccurate forecasting. Much of the criticism now and since 2009 is directed towards the consistent failure of Treasury officials to present accurate forecasts of Chinese economic conditions and demand for commodities. Unfortunately, and despite the impartiality and competence of its senior officials, significant inaccuracies remain likely.

First some facts on the forecasting record. Take Treasury predictions about growth in commodity export volumes, which is mainly driven by demand from China for iron ore. Since 2003-04, Treasury has significantly overestimated commodity export volume growth in every year except for 2009-10, when Beijing began an unprecedented expansion in construction as a result of the global financial crisis. In 2010-11 and 2011-12, Treasury predictions of non-rural export volume growth overshot by more than 7 per cent and 8 per cent respectively; problematic errors of scale when one considers actual growth was only 1 per cent and 5 per cent in those years.

True, Treasury officials are on a hiding to nothing when it comes to forecasting anything to do with China. Part of the difficulty is the complexity of assessing the changing supply of commodities available to the Chinese market, which will affect both price and volume of Australian exports. But there is still no denying that Treasury has been systematically overestimating Chinese demand for mineral resources since about 2005. There are a number of reasons why this has occurred.

The main problem is that Treasury appears to have bought uncritically into the narrative spruiked by the large mining companies that rapid Chinese urbanisation will drive fixed investment (and therefore commodity demand) for decades to come. But if Chinese steel demand is driven by urbanisation, then something does not add up. From 1980 to 1995, genuine urbanisation increased more rapidly than it did from 1995 to 2012. In that first period, crude steel production in China increased by about 5 per cent each year. Yet, from 1998 to 2012, crude steel production shot up to growth rates of about 18 per cent a year and steel production doubled from 2008 to 2012.

The point is that Chinese steel demand bears little historical correlation with urbanisation, and the latter cannot primarily account for the huge increase in demand for Australian iron ore from this century onwards. When exports dramatically declined some months before the GFC in 2007, Beijing responded with the largest fixed investment stimulus in economic history by demanding that the state-controlled banking sector pump the economy with credit. Whereas fixed investment contributed 20 to 25 per cent of GDP growth in the 1990s, it was behind 55 per cent of growth in 2007 and 90 per cent in 2009.

Transfixed by the urbanisation narrative, Treasury treated this as the new normal when it was instead an unsustainable and desperate policy response by the regime. This bled into much of its modelling, which diplomatically takes the veracity of Chinese data at face value, and continues to incorrectly assume that Chinese lenders and investors respond rationally to price and market signals when these signals are either grossly distorted or are ignored in the country’s command political economy. Consultations with mining industry and financial executives publicly betting on China’s new normal – until only recently admitting that the best of the mining boom was probably over – merely reinforced the over-optimistic bias. Finally, eminent institutions staffed by highly credentialled officials, such as Treasury, tend to seek internal consensus and external confirmation from other august organisations such as the World Bank and the International Monetary Fund before offering a final assessment. The problem with such consensus-seeking is that it presupposes majority opinion to be the most accurate. In reality, the problem of herd intellectualism in all these organisations which have been behind on developments in China is immense.

It is not fatal to the career of a researcher or official – or the reputation of an organisation – to be wrong, provided that they share the error with the majority of experts and peers. But to be in error when you have stuck your neck out in a minority position is potentially fatal to one’s personal or institutional standing. Remember that it was fashionable, until recently, to buy into the story of a paradigm-busting China run by a peerless coterie of authoritarian technocrats who could do little wrong. With human psychology being such, Treasury’s forecasting errors on China are better understood as a product of uncritically recycling received wisdom about the enlightened capacity of capitalism with Chinese characteristics to meet its challenges than individual incompetence or political bias.

Replacing the top few officials in Treasury will not improve the accuracy in China forecasts but preparedness to challenge consensus-based economic approaches, particularly when flaws in the economic model means China is at a genuine crossroad, might well help.

John Lee is the Michael Hintze fellow and adjunct associate professor at the Centre for International Security Studies at the University of Sydney. He is also a non-resident senior scholar at the Hudson Institute in Washington, DC, and a director of the Kokoda Foundation.

Source: The Australian – Treasury too rosy on China
 

About Craig Hill

Teacher and Writer. Writing has been cited in New York Times, BBC, Fox News, Aljazeera, Philippines Star, South China Morning Post, National Interest, news.com.au, Wikipedia and others.

Discussion

No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

If you liked what you just read, click "Subscribe" to become a follower of the Craig Hill site. You will receive an email each time a new post is published.

Join 14,946 other followers

An archive of all my old posts

Follow me on Twitter

Most Recent Posts Post on My Blog About China: China News

Cadence Column: Asia, September 20, 2021

Cadence Column: Asia, September 20, 2021

China steps up expansion via Hong Kong elections. Seven editors are banned from Wikipedia on concerns of not acting in good faith and with relation to China. The US sails through the Taiwan Straight again, this time a destroyer. Taiwan wants more backup runways for fighter jets. Escalations only continue and no side shows any […]

China adds powerful new ship to maritime patrol fleet

China adds powerful new ship to maritime patrol fleet

China has added a new powerful ship to its fleet of maritime patrol vessels in the South China Sea, state media has reported. The 5,560-ton Hai Xun 03 was launched on Tuesday and will become the largest ocean patrol ship under the Hainan Maritime Safety Administration (MSA), the official China News Service reported, adding that […]

A lesson in political economy on investments in China

A lesson in political economy on investments in China

Paul Krugman, the eminent Nobel laureate in economics, recalls how companies are different from nations and their reasons. Business managers have different perspectives. It is economists – not managers – who place the question of foreign trade, the balance of payments and the exchange rate at the center of their reflections. Since 1989, China and […]

Are China’s climate promises just a load of hot air? (Yes!)

Are China’s climate promises just a load of hot air? (Yes!)

China is prepared to hold its cooperation on climate issues hostage to Western concessions elsewhere. Few cities in China represent the country’s addiction to coal more than Tianjin, where Alok Sharma travelled this week to talk about cooperation on climate issues. It sits on the coast of one of China’s most polluted regions, and its […]

The vanishing allure of doing business in China

The vanishing allure of doing business in China

It is nothing new for foreign firms to endure shakedowns by the Chinese Communist Party. As far back as revolutionary times, Chairman Mao’s victorious troops did not directly confiscate foreign-owned assets as their Bolshevik forerunners had done in Russia. Instead, they wore them down with higher taxes and fines so big that eventually companies gave […]

Wikipedia blames pro-China infiltration for bans

Wikipedia blames pro-China infiltration for bans

Wikipedia has suffered an “infiltration” that sought to advance the aims of China, the US non-profit organisation that owns the volunteer-edited encyclopaedia has said. The Wikimedia Foundation told BBC News the infiltration had threatened the “very foundations of Wikipedia”. The foundation banned seven editors linked to a mainland China group. Wikimedians of Mainland China accused […]

Diaries of former Mao aide spark custody battle over unofficial history of China

Diaries of former Mao aide spark custody battle over unofficial history of China

Today, “Li materials” are the subject of a legal battle between Stanford University and Mr. Li’s widow in Beijing. This is a battle for custody of an unofficial history of China. In millions of handwritten Chinese characters, Mr. Li documents his early days in the party, the revolution that brought him to power and his […]

World’s dirtiest cities list raises issue: Why don’t politicians call out China?

World’s dirtiest cities list raises issue: Why don’t politicians call out China?

Ponder this: A new tally of global cities’ emissions finds that the top 25 are responsible for 52% of the planet’s urban greenhouse gas emissions. Twenty-three of those are in China. New York City is the first American city to appear, at No. 26. Out of the top 75, just four other American cities are listed […]

Cadence Column: Asia, September 13, 2021

Cadence Column: Asia, September 13, 2021

The easiest solution to China’s escalating situation in the South Sea is to enforce China’s own formal statements at face value. China says they respect other countries and do not want to militarize the South Sea. Leave it at that. Any disrespect toward other countries is not at the behest of Xijinping. Any militarization of […]

Why is Iran so keen on joining the Shanghai Cooperation Organisation?

Why is Iran so keen on joining the Shanghai Cooperation Organisation?

What Happened: Iran became an observer in the Shanghai Cooperation Organization – originally comprised of China, Russia, and 4 Central Asian republics – back in 2005. In the 16 years since, Tehran has consistently pushed for an upgrade to full membership, particularly after the SCO underwent its first expansion, adding India and Pakistan, in 2017. […]

%d bloggers like this: