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Economic Dependency Causes Risks

We can see that many political events across the world are heavily influenced by economic links.  Ukraine seeks greater ties with Europe but is heavily reliant on Russian gas as an energy sources.  Russia seeks to flex it’s muscles internationally but is hampered by the fact that it’s economy is almost wholly reliant on selling raw materials like gas to European countries.  Stock markets and currencies tumble when political events cause instability in these relationships.

Australian Economics

Of course some of these links bring economic prosperity to a nation too, take the almost symbiotic link that Australia has with China.  The huge growth in China has required a huge amount of raw materials to satisfy it, as the smog clouds over Beijing testify too.  A lot of these materials come from the nearby resource rich Australia, which has even been dubbed ‘China’s mining pit’.

It’s hard to find an economy anywhere in the world that is so dependent on another, China buys 31% of Australian output.  This is usually incredibly beneficial except that it makes the Australian economy very reliant on how China fares economically.  So last week when a few weak statistics suggested that China’s growth was stalling – Australia got to share the pain.

Many investors already buy Australian stock as a means to leverage the Chinese market.  It’s much safer to invest in stocks and shares in Australian as opposed to the state controlled stock exchange in China.  Chinese restrictive practices have already started to impact it’s growth especially those on digital communication.  Many firms try to avoid setting up headquarters or offices in China due to the heavily filtered internet access.  Companies and individuals are forced to invest in a fast proxy simply to make their usual infrastructure work in that environment – for many it’s simply not worth  the effort choosing to settle nearby in places like Singapore which is not regulated as dramatically.

There is probably little that Australia can do in the short term about it’s reliance on Chinese success.  The worry that the Chinese economy is looking very fragile at the moment is a very real one however. It’s currency is overvalued, there are little sign of productivity gains or the vital structural reforms many hoped for.  Inflation is rising and there is a growing outflow of capital to investment markets abroad.  Australia has little options though to continue to trade heavily with China whilst seeking to develop other trading partners to try and reduce their exposure.

For more information on this subject see this video explanation of how to access Australian media sites.