Treasury chief Martin Parkinson has raised the spectre of China's boom turning to bust - with devastating consequences for Australia - if Beijing persists with manipulating its exchange rate and spreading inflation throughout the world.
Picture: Kym Smith/The Daily Telegraph
Treasury chief Martin Parkinson
Dr Parkinson said moves by the Chinese to clamp down on domestic inflation could slash demand for Australia's minerals.
"China's approach to monetary policy is a source of global inflationary pressure, but more directly for us raises the risk of action (by the Chinese authorities) to restrain inflationary pressures in ways that impact on our export sectors," the Treasury secretary said.
Delivering his first speech since he replaced Ken Henry at the head of Treasury last December, Dr Parkinson told business economists in Sydney that the government's budget faced serious risks from the global economy, and it would have been unwise to add to them by imposing tougher spending cuts, which could derail the economy's growth.
"There are clear global risks," Dr Parkinson said.
"My own sense is that doing significantly more to tighten fiscal policy in the short-run would inject another risk: that of slowing the economy excessively."
He said this would result in a slower return to budget surplus.
Dr Parkinson dismissed the idea that the government's budget made interest rate increases more likely. "The Reserve Bank's statement on monetary policy and the budget have broadly similar perspectives on the outlook for the economy," he said. "There is no big gap between the bank and the government on this."
The Reserve Bank yesterday released minutes of its May board meeting two weeks ago, saying higher interest rates would be needed to keep inflation in check. Market analysts speculated that could come as soon as its next meeting in two weeks.
However, the minutes drew attention to the effort the government was making to reduce pressure on interest rates, noting "the prospect of significant fiscal consolidation over the next couple of years".
Dr Parkinson said there was nothing Australia could or should do to lessen its dependence on China, and he added that he remained confident its long-term outlook would be positive for Australia. "The amount we export to China is only slightly larger than our exports to Japan, and I haven't heard anyone say there is a terrible risk tying our economy to Japan," he said.
Treasury's central case is that China will continue rapid growth, with Australia's terms of trade (export prices compared to import prices) forecast to fall only 0.25 per cent over the next year.
Dr Parkinson said the Chinese economy was now so big that if it slowed, it would deliver a blow to the global economy.
By keeping its exchange rate closely linked to the US dollar, Dr Parkinson said China was importing US monetary policy, which was designed for an economy with double-digit unemployment, almost no inflation and weak demand. By contrast, emerging countries such as China have strong GDP growth, little spare capacity and rising incomes.
"Unfortunately, the path being pursued is dislocative for the rest of the world, including Australia," he said.
"Volatility in China's future growth path cannot be ruled out."
Under Dr Henry, Treasury refrained from joining US attacks on the Chinese exchange rate. However, concern has shifted in recent months from the size of the US trade deficit to the global inflationary threat.
Treasury believes China's build-up of foreign exchange reserves, which total $US3 trillion ($2.83 trillion) and have risen by $US200 billion in the past three months, show it is manipulating its exchange rate. The Chinese renminbi has fallen almost as far against the Australian dollar in the past year as the US dollar.
Dr Parkinson said the high level of the Australian dollar was one of a series of forces acting to restrain the Australian economy, including interest rate rises and the government's rapid return to budget surplus.
He said that if the government had withdrawn its stimulus spending more rapidly, as some had argued it should, the result would have been growth in this financial year lower than the expected 2.25 per cent and the deficit might have been bigger.
He defended the level of the government's stimulus spending during the global financial crisis, saying it had saved jobs.
"I do not believe we can be precise about the extent of stimulus required in the midst of a crisis," he said. "And if the response is inadequate, we consign more Australians to sustained unemployment and lower living standards."
He said there had never been such a rapid reduction in the deficit as that in the budget. "Many have said all the government needs to do is cut middle-class welfare," he said.
"In the budget, the government attempted to make some structural improvement to the underpinning, and we've all seen the response to that," he added referring to Coalition criticism that the government had embarked on "class war".
He said further spending cuts might not have been practical.
©theaustralian.com.au
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