In addition to the ongoing sense of crisis around the eurozone and the outlook for the US economy, prospects for China have, at various times, caused financial markets a good deal of grief during 2012.

China’s economy has slowed; its demand for commodities, most notably from Australia’s point of view iron ore, has fallen significantly. The close link between China’s industrial activity and its demand for raw materials means that Australia is very much the canary down the coal mine, a harbinger for economic developments in China.

Indeed, a slowdown in overall economic growth, and a rebalancing in the drivers of growth away from investment exports towards consumer spending has been a stated aim of Chinese economic management for some time now.

Growing up economically

Such a slowdown and rebalancing has been a feature of how emerging economies tend to behave on their journey from being ‘emerging’ to ‘emerged.’

Evidence from other emerging-economy success stories – such as Japan in the 1960s and 70s, and Korea in the 70s and 80s – suggests that on their journey, economies tend to slow, and tend to start consuming more and investing a lower share of GDP, well before they fully develop.

There is a real risk that China has arrived at that point in its development journey. If it has, then the world has to get used to slower rates of Chinese economic growth.

In addition, the world in general and commodity producers such as Australia, in particular, have to get used to fact that investment as a share of GDP is likely to decline. At close to 50 per cent of GDP, investment in China is about as high as it ever gets anywhere and that level has never been sustainable anywhere.

As many commentators have noted, including eminent China watcher Professor Michael Pettis from Peking University, there is nothing terribly unusual or indeed wrong about any of this from China’s perspective. It’s all part of growing up in an economic sense.

Falling Australian dollar

However, any country whose exports are closely linked to Chinese investment and particularly the health of the Chinese steel industry is particularly vulnerable to this rebalancing. Iron-ore exports utterly dominate Australia’s exports to China and, when you throw in coking coal, our exports to China that are dependent on the health of its steel industry account for about two-thirds of the total.

Tourism and other service exports to China have been growing rapidly during the past decade or so, but are utterly dwarfed by iron ore and coking coal.

For Australia, this China-rebalancing scenario, if it continues to play out, does pose serious risks for our terms of trade, national income and the Australian dollar. Indeed, if Chinese demand for our key resource exports were to slow appreciably, we should all hope that the Australian dollar falls so as to cushion part of the blow for the economy.

Brian Parker is an investment strategist at MLC Investment Management.