Yuan move stalks our exports
By Michael Dwyer
The Federal Government's key commodity forecaster has raised the spectre of a move by China to devalue its currency, with potentially disastrous effects for Australian exports.
The dire warning from Australian Bureau of Agricultural and Resource Economics (ABARE) coincides with the release of new figures which show expenditure on mineral exploration is expected to drop sharply over the next six months.
The figures from the Australian Bureau of Statistics show expenditure on mineral exploration is expected to plunge from $775 million in the first six months of 1998 to just $299 million in the second half of the year.
But a far more significant problem for the Australian economy over the next few years, according to the ABARE report released yesterday, would be a decision by China to devalue the yuan.
The ABARE report claims that the Chinese economy is already likely to slow significantly next year as it adjusts to major reforms of its State-owned enterprises and the banking sector.
A move by China to devalue its currency - in response to weaker currencies among its Asian competitors - would make the situation significantly worse for Australia, according to ABARE.
"If China were to devalue substantially, it could have significant adverse effects on economic activity on other parts of Asia as China's exports became more competitive internationally," said ABARE executive director, Dr Brian Fisher.
He said Australian exports of wool, cotton and some minerals would be hit hard by a Chinese devaluation.
The ABARE commodity report noted economic commentators have predicted a significant devaluation of the yuan in late 1998 or early 1999.
China accounts for around 21 per cent of Australia's wool exports - around $800 million in 1997-98.
It also accounts for 15 per cent of Australia's cotton exports - valued at $176 million last financial year.
China is also a big market for Australian exports of iron ore and copper, taking around 23 per cent and 14 per cent of Australian shipments respectively in 1997-98.
The report raises significant concerns about the impact on the global economy of the recent financial instability in Latin America and the economic downturn in Russia.
It presents a far gloomier prognosis of the global economy than the views of the Federal Treasurer, Mr Peter Costello, who predicted last week that there would be a "turning" in Asia as early as next financial year.
Economic forecasters have upgraded their forecast for the Australian economy for 1998 but cut Australia's growth forecast for 1999.
The Consensus Economics survey of economists shows Australia's expected growth rate for 1998 has been increased by 0.5 percentage points to 3.7 per cent. This follows the unexpectedly strong growth in GDP in the June quarter. For 1999 Australia's forecast growth rate is now 2.5 per cent, down half a percentage point on the last survey.
The ABARE report is based on the assumption that world economic growth will decline from 4.1 per cent in 1997 to 2.1 per cent in 1998.
World growth is assumed to decline further to 1.8 per cent in 1999.
"Apart from Japan, signs have emerged that growth in the United States may be easing, and there are now concerns that growth in domestic demand could moderate in western Europe," the report said.
The ABARE report also forecast a fall in the value of Australian commodity exports of 0.8 per cent to $66.5 billion in 1998-99.
Export earnings from farm commodities are forecast by ABARE to be $22 billion in 1998-99, a decline of 4 per cent from the previous year.
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