China close to turning point
Rowan Callick, China correspondent | August 02, 2007
AUSTRALIA'S most influential economist, Ross Garnaut, forecasts in a report that China is at an historic economic and social turning point that will lead to an even bigger appetite for resources at higher prices.
"In 20 years time China is likely to consume more energy and metals than all of the industrialised economies today
," Garnaut says.
This analysis is in a paper about to be published by the Rio Tinto-Australian National University China Partnership and will be handily ready for distribution soon after Rio Tinto chairman Paul Skinner and chief executive Tom Albanese present the firm's results later today.
The report appears to provide strong justification for Rio's recent $44 billion purchase of Canadian aluminium giant Alcan.
The report, China's resources demand at the turning point, was drafted by Prof Garnaut with a colleague, Associate Professor Song Ligang.
Based on studies of neighbours Japan, South Korea, Singapore and Taiwan at similar stages of their development, Garnaut and Song say in their report, China is about to enter "a period of resource-intensive demand unique in world history".
It would not be surprising at all, they say, if China's economic output multiplies by eight times over the next two decades. It has grown almost six times over the last two decades.
They have identified in China today "the interplay of forces whereby labour becomes relatively more scarce and the economy shifts towards more capital-intensive production" -- effects labelled "the turning point" by Nobel Prize-winning economist Arthur Lewis.
Garnaut and Song say: "Economies which are more urban, more investment-reliant and more export-oriented tend to have a more accelerated increase in demand for metals and energy per capita as they grow.
"Sure enough, these are all aspects of China's economy that stand out," they say.
Most countries increase their demand for metals and energy per person markedly when per capita income reaches $US2000-$US5000 ($2300-$5800). In 2006, China's GDP hit $US2000 per capita for the first time.
The heightened demand, says Garnaut, will come from the increased consumption of resource-intensive products in China as more people become middle class and become able to afford new homes and more expensive goods, such as air-conditioners.
The demand will also come, he says, from the need for greater resource inputs to the more capital-intensive products being made and exported. If the latest Chinese Government moves to slash the number of new energy-intensive ventures prove effective, China will import more aluminium (perhaps processed in Australia) than the more upstream alumina -- a further justification for Rio's purchase of Alcan.
The transition to more capital-intensive exports is a strong indicator that "the turning point in China has been reached" already, Garnaut and Song say. The country's energy demand has been growing more rapidly than economic output since 2002.
They say: "China's influence will be greater in the future, mainly for petroleum, but also for natural resources in a wide range of alternative energy sources, notably uranium" -- which China is shortly expected to start importing from Australia.
Overall, "it is therefore likely that global prices for resources will remain on the high track for the foreseeable future -- at average levels that provide incentives for continued rapid growth in supply for a long time".
It is also likely, they conclude, that "China's imports of metals and energy will rise to levels well beyond those of any other country at any time".
The threats to this golden scenario include domestic unrest, a major upheaval in China's banking or corporate structures, and serious environmental damage leading to reduced capacity.