Wry & Dry

If China sneezes: who catches the cold?

W&D senses that the worst economic fear of the brains trust in Canberra* is not Donald Trump.  But a China recession.

Hmm.  The lads and lasses at Bloomberg have crunched the numbers for W&D.  It may not be as bad as readers might think.  A China recession, that is.  

A Trump presidency would be.  And cause W&D to sell-up the suburban dream and buy a patch of land in the country and grow vegetables.

The China EffectJust kidding.

As you can see from the above chart, it's all about exports.  Australia derives some 4.5% of our GDP from exports to China.

Whilst not as large as South Korea, Vietnam, Taiwan or Singapore, it's a big slice.  A severe China recession would certainly mess with the economies of those countries. 

As for Australia, the below chart clearly shows the rise in influence of China as a key export trading partner. 

 Chinas economic threat 2

And that is just merchandise exports.  Ponder exports of education and tourism.

So, the short story is that Australia is heavily reliant on the Chinese economy.

Err, well, not as much as readers might think.  It's about Global Value Chains (GVCs).

Work with W&D on this.

The idea here is that export data reports the destination country for exports solely on the basis of the country to which the exported goods (or services) are directly sold.  And so misses an important part of the story.

That’s because it’s often the case that those same exports (e.g. iron ore and coal) will be then processed by the importing country (e.g. into cars) before being exported again to another market, either as a further input into a GVC or for final consumption (e.g. US car market) in that third market.

In these cases, although it is ultimately demand in the final market that determines demand for the original export, traditional export numbers will not reflect this (e.g. the final import of the car to the US is really partially an export from Australia - and other countries).

This consideration of the final destination of merchandise is called Trade in Value-Added (TiVA).

TiVA is difficult to determine.  And there is always a measurement time lag.  But OECD-WTO data suggest that the value of at least 25% of Australia's merchandise trade to China is re-exported.

So maybe Australia's exposure to a China-shock may not be as large as first seems. 

But it is still large.

*An oxymoron.