Australia left exposed by its mining boom

After the boom does come the bust.  The question is how bad it will be, and when...  Not just yet, but sooner than you may wish

Australia left exposed by its mining boom

BY WAYNE ARNOLD | REUTERS BREAKINGVIEWS

Australia has become a barometer for China's economy. While China was booming, investors piled in, turning Australia's credit markets into a proxy for its biggest trade partner. But the mining boom created by Chinese demand has taken a toll on the larger, nonmining sector. Now markets are flashing red on China, and Australia's 20-year run of economic expansion is at risk.

Government bond yields everywhere tend to move according to economic expectations. In Australia, they tend to move with those of China. Exports are equivalent to about a fifth of Australian gross domestic product; exports to China account for about a fifth of that. Nevertheless, the combination of nearly 5 percent yields and a rising currency is like catnip to foreigners, who pile in to Australian bonds at any sign of rising Chinese growth.

As a result, foreigners hold roughly 76 percent of Australian government bonds, making them a lightning rod for trends in global trade and investment. And Australia's $205 billion government bond market is tiny — only 5.5 percent of G.D.P., compared with 65 percent in the United States. So it does not take much speculation to have a big effect.

The mining boom has forced policy makers to choose one policy for two economies. The Reserve Bank of Australia has been slowly raising rates since late 2009 to curb inflation even as other developed economies keep their rates near zero. As a result, while soaring prices of coal and iron ore have helped keep overall unemployment low and stoked inflation in mining regions, manufacturers and retailers are hurting. The risk is that if China slows, Australia will go from standing on one leg to standing on none.

Markets worry. Since May, the price of insuring Australian bonds has risen and the Australian dollar has stalled.

In theory, a cooler China would be a relief to Australia's forlorn nonmining sector if it means policy makers can cut rates. But reality is rarely so neat. Even if China averts a dreaded hard landing, Australia may not.

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