The visit of the Chinese Premier has coincided with a market
frenzy involving uranium stocks. Australia
has 40% of known global uranium reserves, and within a few short years exports
of uranium will be added to Australia’s
already booming trade with China.

According to the ABS, Australia’s exports to China grew at an average annual
rate of 21.5% from 2001 to 2005, while imports grew at 20.1%. While
nothing can grow at more than 20% annually forever, such growth is entirely
possible for Australia’s
trade with China
in the next decade. What will this mean for Australia?

In matters of international trade, the recent attempts to
override the market price for iron ore provides an example of complicating
factors that might be repeated. Setting prices for uranium will be a
challenge, but one can also expect market forces to prevail, after hard
negotiations along the way. Australia’s miners are used to hard
negotiations, so there will be no major change for them except expanded

With China’s
large, growing current account surpluses, Chinese investors will be searching
for Australian assets to buy. With our large current account deficits,
Australians will be happy to oblige. The tensions that surfaced when Japan
was first buying prime Australian real estate may resurface, but less
dramatically second time around.

Imports of cheap Chinese manufactured goods have provided
great benefits to Australian consumers. The resulting cheap prices have
helped keep inflation at bay, contributing greatly to powerful global
Ultra cheap Chinese labour cannot last forever, and some economists say
that the current powerful Chinese prosperity engine might begin to flag
within five years. If this is correct, maintaining low inflation and
strong growth
in Australia
will become more difficult, and we could see the return of a more
business cycle, including periodic recessions. This would be a rude
shock after
what will have been the best part of two decades of unprecedented
growth with
low inflation and strong growth of asset values.

There has been discussion in the United States focused on the rapid
growth in China’s
spending on “defence”. When US Secretary of
State Condoleezza Rice was here recently, there was some discussion of
“containment” and the general agreement is that is not the American
plan. Neither should it be ours. Strategically, Australia may be able
to play a
(small) role as an “honest broker” in keeping the two superpowers
constructively together. Getting caught in the middle of a superpower
punch-up would be catastrophic, so we have great interest in doing
whatever we
can to keep the giants working together harmoniously.

Coping with a rapidly growing nation of 1.3 billion very
competitive people will be one of Australia’s major challenges for
the twenty-first century. There are great opportunities and considerable
risks. The likely benefits greatly outweigh the risks, but we will need
to work hard (and smart) to get the best possible outcomes.

Read more at Henry Thornton here.