During the mining boom there was never any doubt that China was raising Australian living standards.

That consensus started to change in 2011 when the mining boom started to come off the boil and China’s economy began transitioning to growth led by consumption rather than resources-hungry investment. Some commentators began to suggest that China might turn into a drag.

But the latest set of national accounts released by the Australian Bureau of Statistics (ABS) last week shows that these fears have not eventuated and that China continues to drive greater Australian economic prosperity.

Most of the goods and services produced by the Australian economy are actually consumed domestically. Over the past year domestic consumption has accounted for 73 percent of GDP, compared with 22 percent for exports.

But in terms of GDP growth, foreign demand has taken on far greater significance. In the first quarter of 2016 the Australian economy grew by an impressive 1.1 percent. Yet take away exports and it would have been just 0.1 percent. It doesn’t get much closer to recession territory than that.

The ABS noted that the increase in foreign demand showed up in particular as a jump in our mining and services output. So who exactly is buying this output?

In the first quarter of 2015, China took a massive 38.8 percent share of our mining exports. But in the first quarter of this year it took even more, 41.1 percent.

Australia’s liquefied natural gas (LNG) exports to China are up 85 percent year on year. Even iron ore exports, coming off an established base, increased a further 6.5 percent.

A common mistake is to think that our trade with China begins and ends with iron ore. This may have been true five years ago but no longer.

In 2011 iron ore accounted for 57 percent of Australia’s exports to China but by last year this had fallen to 43 percent. Or put differently, take away iron ore and the value of Australia’s other goods and services exports to China are worth $10 billion more than our total exports to Japan, our second largest overseas customer, and $30 billion more than to the US in third place.

Chinese demand for our services is booming. Already the biggest foreign buyer of services in 2014, the value of services exports to China leapt another 19.8 percent last year to reach $9.8 billion. Services exports to other countries also rose, but at less than half the pace, 8.4 percent.

Nothing has changed this year. In fact, the gap between China and the rest appears to have only widened.

Through April, Chinese tourist arrivals were up 23.3 percent, compared with 7.0 percent from other countries. Newly commencing students from China at Australia’s educational institutions were up 20.9 percent, compared with 8.8 percent from elsewhere.

New areas of Chinese demand are constantly emerging. In 2011, exports of financial services to China were only worth $49 million. By 2015 this had swelled to $370 million.

And don’t forget that recent research by the Reserve Bank of Australia (RBA) found that even during the mining boom, services exports were worth more than mining exports to the Australian economy because they embody a higher percentage of value-added.

Some might protest that while the volume of exports to China is still growing rapidly, the total value is falling. This has been true since 2013 as the world price of bulk commodities such as iron ore and coal have declined markedly.

But after the RBA’s bulk commodity price index increased three and a half times between 2001 and 2011, it was inevitable that some of the gains would eventually be given back as the global supply of commodities increased.

And the resilience of Australia’s non-mining exports to China has meant that the falls in total value have been limited. While the price of bulk commodities declined by 25 percent in 2015, the value of Australia’s exports to China only declined by 7.0 percent. In contrast, the value of exports to Japan slumped by more than double that, 15.7 percent.

In any case, there is a good reason why first-year macroeconomics textbooks emphasise changes in the volume of output rather than prices. Changes in output are a more important determinant of employment.

Using Australian data since 1979, Figure 1 depicts what economists call Okun’s Law. It shows that a one percentage point increase in the growth rate of output (real GDP) is associated with a 0.4 percentage point fall in the rate of unemployment.

Figure 1.

Source – ABS, author’s calculations

In recent years it has become popular to emphasise changes in real net national disposable income (RNNDI) rather than real GDP. RNNDI includes changes in export prices, whereas real GDP strips them away, along with other price changes. An increase in export prices and RNNDI will make Australians feel richer because for a given volume of output they will be able to afford more imports. Yet Figure 2 shows that a one percentage point increase in the growth rate of RNNDI is associated with just a 0.2 percentage point fall in the rate of unemployment.

Figure 2.

Source – ABS, author’s calculations

The fundamental driver of Chinese demand for Australian goods such as premium food and beverages, as well as our services across the board, is the emergence of the country’s middle class. The OECD estimates that the Asia-Pacific region’s middle class will grow by an extraordinary 2.7 billion between 2009 and 2030. This will be led by China and India. Australia’s mining boom may have peaked but the second round of our China boom is just getting started.

Article by Professor James Laurenceson, Deputy Director, Australia-China Relations Institute, University of Technology Sydney.