Two good articles here on Australia... here we have a Western style economy, capitalist in nature but with a far greater balance between corporate interests and citizen interests than the U.S. The government is not run at massive deficits year in and year out, and the country while relatively small in population (53rd in the world), has a good sized economy (14th in the world) and an abundance of natural resources. Think of a slightly smaller version of Canada (by population, land, and GDP) with a lot warmer weather. Unfortunately, it seems they are learning *some* things from the U.S. [May 12, 2009: Australia May Face Debt Crisis From Grants to Young Home Buyers]

/With their proximity to China, many are bullish on the long term prospects of Australia/ - but is there a cost? Let's explore.

Bloomberg: Luckiest Economy Shines in Down & Out World

  • Australians sure are a stubborn lot where their economy is concerned. With global growth crashing and markets reeling, Kevin Rudd in April did what any smart prime minister would: He warned that the nation's first recession in 17 years was inevitable. Australians are having none of that. The economy grew 0.4 percent last quarter, defying trends in other wealthy countries.
  • Yet two things are worth noting -- one bad, one good. One, while the Asia-Pacific region's fifth-biggest economy has avoided the technical definition of recession, the two engines of the recent boom -- exports and business investment -- are sputtering. Try telling the growing ranks of unemployed this isn't a recession.
  • .... worth noting that Australia's unexpected expansion, driven by government cash handouts and record interest-rate cuts, masks a darker picture. Rudd said that without the government's move to dole out more than A$12 billion ($9.9 billion) to lower-income earners, the economy would have contracted about 0.2 percent.
  • ... even as Australia's challenges increase, it will still be the envy of the developed world.
  • Measures of corporate investment contain more ominous signs. They showed outlays on machinery and equipment tumbled by the most since the economy was last in a recession in 1991. (nearly 20 years without recession? and without a central bank flooding the country with easy money every 3-4 years to make it so? remarkable) Rio Tinto Group has slashed its global spending by $5 billion to a total of $4 billion this year. BHP Billiton Ltd. shut its $2.2 billion Ravensthorpe nickel mine in Western Australia. (with the way commodity prices/ are elevating once more to the stratosphere many of these decisions may be reversed) Those amounts seem negligible as the U.S. throws trillions of dollars at its economy. (hey now... we call it prosperity here)
  • The nation's trade balance unexpectedly turned to a deficit in April as lower prices for coal and iron ore led to the biggest drop in exports since 1997.
  • Australia has been lucky so far. Its fortunes are changing before investors' eyes. And it's still an open question whether the country will experience the same type of crash in real- estate values that has taken place around the world.
  • That's the bad news. The good news is that even as Australia succumbs to the global recession, its economy will be the envy of peers in the developed world.
  • Opposition leader Malcolm Turnbull is deeply concerned about the budget surpluses of recent years swinging back toward deficit. It's hard to get bent out of shape. Net debt will peak at 13.8 percent of GDP in fiscal 2014, Treasurer Wayne Swan said last month. Most advanced economies will have a debt-to-GDP ratio of 80 percent then, Swan said.
  • Growth is positive, ample fiscal ammunition remains and the Reserve Bank of Australia has 300 basis points worth of interest rates to cut.
  • Australia's problems are good ones to have at the moment. (Reserve Bank Governor) Stevens is even counseling caution about cutting rates too far because that may encourage borrowers to take on debt they can't afford. (what??? *rubbing eyes* those words came from a central banker? Please someone send Alan Greenspan to Australia to talk some sense to this Stevens fella)
  • Those relative strengths explain why the Australian dollar is up more than 13 percent versus the U.S. currency this year.

/

  • Risks certainly do abound. One is Australia's growing reliance on demand from developing China. (more on this later) The longer that Asia's second-biggest economy has to live without a profligate U.S. consumer, the harder it will be to maintain stable growth.

But overall?

  • Even in its worst moments, though, Australia is among the least unsightly economies anywhere. It does have its share of problems as growth slides everywhere. They are still the kinds of challenges that most world leaders can only dream about.

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Now, onto the second story - as Australia increasingly ties its fortunes to China how is it shaking out inside the country? Via the NY Times

  • If outlanders tend to associate Australia with kangaroos, broad-brim leather hats and an opera house, many Australians are different. They think of iron ore and bauxite, copper and coal, nickel, gold and uranium, a trove of mineral riches that is their nation's birthright and the bedrock of its prosperity.
  • Which explains much of the breast-beating that has ensued since the Chinese announced plans this year to buy a big chunk of it. Since three state owned Chinese companies said they would buy stakes in Australia's storied mining industry totaling $22 billion - as much as China's entire investment here in the last three years - some of this nation's 21.3 million people have reacted with aggrieved nationalism.
  • The government of Prime Minister Kevin Rudd, which generally favors the sales, has been savaged as naïvely cozy with China, a view some in his own military appear to share. Opposition politicians have flogged the specter of an Australian future more or less as a giant open-pit mine in which the locals toil, but Beijing takes the profits.
  • It's the Communist People's Republic of China, 100 percent Communist-owned, buying up sections of the country and minerals in the ground which they will then sell to the Communist People's Republic of China, said Barnaby Joyce, who is a leader of the National Party in Parliament. And we're going to live off the commission on the way through. They'll try to make sure we get as little as possible.
  • But a few months after the first of the deals was announced, a sharp initial backlash has given way to a more subtle queasiness over whether Australia's place in the region, anomalous but secure for so long, is about to be altered by the new Chinese giant looming over its horizon.
  • Australia has always been the West's outpost in the East, the British penal colony with American spunk and European joie de vivre. But seemingly overnight, China has become Australia's biggest trading partner, one of its biggest tourism customers, the largest single buyer of its government debt, a major buyer of farmland and real estate. (with much of the money coming from Americans via Walmart) :)
  • China's hunger for steel gobbles up half of Australia's iron ore exports, and its textile factories buy more than half of Australia's wool. Over 120,000 Chinese students throng to Australian schools and universities.
  • And suddenly, Australians are stepping back, realizing that their new best friend is someone they really do not know very well, much less trust. The momentum has shifted from being broadly receptive to these deals to having a hard think at this, said Alan DuPont, who heads the Center for International Security Studies at the University of Sydney. This is not just about China and Australia. It's about how the world sees China playing its role in the future as a great power.
  • Western companies, if at one time equally ravenous for Australia's resources, are not direct appendages of their national governments. The dominant shareholder in major Chinese resources companies is the Chinese government. China has 115,000 state owned companies; the cream are more than 150 giants controlled by the central government. Those corporations - in mining, steel, finance, communications and other crucial areas - seek to make profits much as Western companies do. Government boards audit them, appoint their top executives and evaluate their performance, but in general, the companies insist, Communist Party leaders do not meddle in business strategy. (of course not) Even if that is true, China has long insisted on maintaining state control over companies in crucial industries, blurring the line between national and corporate interests.
  • There is also the question of whether China's stake in strategic industries - like its investment in United States Treasury bonds - could one day morph from a business deal to an instrument of diplomatic influence. (mmm... the world is finally catching on. Took them a while)
  • Paul Glasson, a Shanghai-based Australian who brokers deals between Chinese and Australian businesses, notes that China's domestic reserves can meet demand for fewer than half of 45 strategic minerals. By 2020, it will have sufficient supplies of only six. In a nation of 1.3 billion people, with the complex issues they face, with such resource deprivation, would it be wise for the government to abdicate that responsibility to S.O.E.'s? he asked, using the abbreviation for state owned enterprises. Claiming the head doesn't know what the body is doing just makes the situation difficult.
  • Mr. Glasson says state ownership actually brings advantages - among them, deep pockets and a focus beyond the next quarterly statement - that any merger partner might find attractive. But Beijing's denial of a role in its state owned companies, he said, is creating a credibility problem.
  • Allies of Prime Minister Rudd argue that increased Chinese investment pumps money into Australia's economy and opens new trade opportunities. But Mr. Rudd's opponents say he does Beijing's bidding. Among a drip of well-timed news leaks were claims that Chinese spies sought to hack into Mr. Rudd's laptop during last year's Olympic Games, and that his defense minister had failed to disclose gifts from a Chinese friend with ties to Beijing's military establishment.
  • Those allegations have been flying even as the Australian military has become more focused on China as a potential rival. A newly issued defense strategy proposes the biggest Australian military buildup since World War II, driven in part by a forecast of rising Chinese economic and military power, and a slow American fade in the Pacific.