China relationship looms over Australian assets
The writer is a former banker and author of ‘Fortune’s Fool: Australia’s Choices’
Competing economic and geopolitical forces mean Australia’s relationship with China requires walking along a barbed-wire fence with a foot on either side, to borrow a phrase from former Queensland politician Joh Bjelke-Petersen.
As Australia heads to national elections on Saturday, it is a delicate situation that investors in assets there will have to watch closely. Trade between the countries has not just been hit by China’s slowdown as it pursues a zero-Covid policy and attempts to rein in the debt laden property sector. It also is at risk from Beijing’s attempts to rebalance China’s economy away from commodity intensive infrastructure projects and diversification of raw materials suppliers.
The position is complicated by strident Australian criticism of Chinese territorial claims in East Asia, alleged human rights abuses, and authoritarian rule. Australia has rejected foreign investment proposals and banned Chinese participation in Australian ventures, some on undisclosed national security grounds.
New legislation allows intervention in various activities for foreign policy reasons. The Aukus treaty has strengthened defence ties with the Anglosphere. Viewing these steps as unfriendly and interfering in its internal affairs, China has imposed restrictions on some Australian imports. The carefully calibrated measures allow continuation of iron-ore exports, reflecting China’s needs and lack of alternative supply.
More than 35 per cent of Australian exports of goods and services (including iron ore, coal and LNG, agriculture, forestry and fisheries products) go to China directly. That is greater than the combined total to Japan, South Korea, India, the US and UK.
With other exports based on Chinese end demand, the true proportion is higher. Australian imports from China comprise approximately 20 per cent of the total (manufactured goods, telecommunications and information technology equipment, and homewares). China is normally Australia’s largest source of higher education international students (over 160,000 or 38 per cent). China is also its second-largest inbound tourist market (around 1.4mn arrivals) and the largest by expenditure.
Australian exports are largely raw materials for which there are alternatives. To reduce dependence on Australian supplies, China has supported the troubled Guinean Simandou project, the world’s largest untapped iron ore deposit with an estimated 2.4bn tons of high quality reserves. In services, other nations can offer sybaritic beach holidays, fresh seafood and luxury brand shops as well as high quality schools and universities.
China’s support for Russia in the Ukraine conflict adds complexity. It may allow Beijing to reduce its current reliance on Australian coal, energy and other essential commodities, which will be available at advantageous prices due to the limited market for Russian products. A decision by the US or west to place China under sanctions for collaboration with Russia or over Taiwan would severely disrupt Australia’s ability to sell to its major trading partner.
Australia’s high living standards and incomes are sustained by this trading relationship. In 2021, the rise in iron ore export revenues offset losses from international students, inbound tourists and immigration — limiting damage from the pandemic.
The financial effects of further deterioration in the Sino-Australian trading relationship would be serious. Reduced exports would affect national income and the trade balance flowing through the economy. Public finances are vulnerable. A $10 per tonne rise in iron prices would increase Western Australia’s royalties by around A$800mn a year and Australian tax receipts by around A$3.7bn.
One casualty might be the Australian dollar. With around half Australian government bonds and significant amounts of state, corporate and bank debt held by non-residents, investors would suffer losses. A weaker dollar would also result in increased import prices and higher interest rates for Australian households and businesses if that results in higher inflation.
Another vulnerability would be Australian resource companies exposed to China, which are more than 80 per cent foreign owned.
Given the two nations’ complementary economies, it would be wise for Australia to attempt a modus vivendi with China to mend the commercial relationship. Beyond trade, co-operation is essential for dealing with regional and global issues such as climate change. For British statesman Lord Palmerston, countries had no eternal allies or perpetual enemies, just permanent interests. For the moment, Australia’s economic wellbeing remains dependent on China.