What Gorgon Means for Australia

China’s near insatiable hunger for natural resources appears to be dwarfing political concerns for the moment. Witness the final stages of approving the “Gorgon” project – the deal in which Australia will supply liquefied natural gas (LNG) to China valued at $50 billion – amid the downgrading of a diplomatic visit because Australia granted a visa to Uighur leader Rebiya Qadeer. Perhaps more telling is that China and Australia have become more intertwined thanks to China’s resource appetite. Beyond the twists and turns of such greater interconnectedness lies an interesting notion that the Australian dollar may emerge as a good proxy for China’s economy, thanks to the high volume of economic interaction between the two states. Traditional measures of China’s economic activity such as GDP have been looked at with some skepticism by market observers. For example, electricity production has not matched relative levels of GDP growth. And while some researchers have used electricity production to achieve a more accurate gauge of China’s economy, such statistics are dependent on the quality of domestic data collection – another source of skepticism. The Australian dollar may prove a better proxy precisely because it offers a more transparent measure of the Chinese economy’s strength in real time as well as being less susceptible to manipulation. But the unintended consequences are many: if Australia’s currency becomes the new proxy for China, the normal factors that drive its value may become masked by speculation. This could seriously affect the Australian central bank’s ability to maintain a stable currency. – YaleGlobal