Australia’s New Treasury Chief Explains The Emerging Threat To His Booming Economy

Martin Parkinson

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China is making a serious blunder with its monetary policy that could put Australia’s economy in danger, according to Australia’s treasury chief Dr. Martin Parkinson.Parkinson, speaking today, outlined the failure of China’s exchange rate policy.

From the speech:

In the case where exchange rates are being artificially repressed by some formal or informal link to the US dollar, these countries are importing monetary policy designed for an economy with subdued core inflation, a close to double digit unemployment rate, and where private demand is not yet self-sustaining. Yet emerging market economies are characterised by declining spare capacity, strong GDP growth and rising incomes.

That exchange rate policy failure is leading to an inflation problem in China. Parkinson points out that further aggressive policy tightening in China could lead to a slowdown in Australia.

China’s approach to monetary policy is a source of global inflationary pressure but, more directly for us, raises the risk of action to restrain inflationary pressures in ways that impact on our export sectors. More generally, the macroeconomic challenges are becoming more, not less, complex for China with clear implications for Australia and the rest of the world. In short, volatility in China’s future growth path cannot be ruled out.

Australia also faces the risk of rapid currency appreciation, if China allows the yuan to appreciate rather than instituting more rate hikes. Any slowdown in the Chinese economy could also have the knock on effect of contributing to a price decline in the Australian housing sector.

So if you’re betting on Australia right now, the only thing you really need to watch is China.

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