Commentary on Political Economy

Sunday 6 June 2021


How China's attempt to hurt Australia's economy may have backfired

A graphic image of a puzzle with the Chinese and Australian flag imprinted, some missing pieces
A trade war which has broken out between China and Australia may have hurt Beijing more than Canberra.( ABC News: GFX by Jarrod Fankhauser )

What's that old saying? Never start a war unless you know you can win.

Which brings us nicely to the topic of China and its rapidly deteriorating relationship with Australia.

Much to the chagrin of the Beijing bureaucracy, Australian trade is booming, driving a rapid turnaround from the COVID-inspired crunch that crippled the global economy last year.

And a vast amount of that good fortune is down to China.

The numbers that landed the other day showed a bulging trade surplus, up to $8 billion in April alone, off the back of surging iron ore and coal prices.

The previous month's surplus was revised up to $5.8 billion.

After more than a year of increasing hostilities which now has degenerated to open trade warfare, a quick tally would indicate that while we have sustained some casualties, much of the cost of the trade war is being borne by the Middle Kingdom.

Australia is sailing through relatively unscathed.

From a longer-term strategic viewpoint, the fury that has been directed our way from China could end up a blessing in disguise.

Many of the hardest impacted industries have been forced to seek out other markets, which ultimately will alleviate our unhealthy reliance on just one main customer, and an increasingly erratic one at that.

Friendly farewells, Filipino style

Diplomats, by definition, usually aren't particularly forthright.

So, it came as something of a shock last month when Philippines foreign minister Teddy Locsin Jr took to Twitter with a tirade against Beijing over its disputed maritime claims.

"China, my friend, how politely can I put it? Let me see … O … GET THE F*** OUT. What are you doing to our friendship? You. Not us. We're trying. You. You're like an ugly oaf, forcing your attentions on a handsome guy."

He went on at length with a follow-up tweet about China's territorial ambitions.

A few days afterward, he apologised, apparently after he was informed that only the President can use curse words.

The incident highlighted the tensions boiling over in the region.

China borders South China Sea
China's claims cut through the majority of its neighbours' claims.( ABC News: Illustration/Jarrod Fankhauser )

The ruling elite in Beijing are rattling sabres over Taiwan, ramping up control of Hong Kong and are engaged in border hostilities with India.

Last week, 16 Chinese military aircraft flew into Malaysian airspace, prompting the Royal Malaysian Air Force to scramble Hawk fighter jets to intercept them and force them back. 

While our business leaders fret over the potential loss of income from an angry Middle Kingdom and continue to urge for a "normalisation" of the relationship, China's stoush with Australia is entirely in keeping with its stance to the bulk of its immediate neighbours.

Beijing is ramping up pressure on multiple fronts across the region, most acutely in its ambitions over territorial waters disputed with overlapping claims from Brunei, Malaysia, the Philippines, Vietnam and Taiwan.

So, it's not just us.

Shooting the lights out 

Donald Trump learned the hard way that no-one wins a trade war. Not that he ever admitted it.

While the former US president's tariffs certainly inflicted pain and hardship on China, the plan backfired spectacularly.

A study by Oxford Economics found that America lost 245,000 jobs during the stoush while a Brookings Institute study estimated it shaved $US1.7 trillion from US stock prices, and between 0.3 per cent and 0.7 per cent off GDP.

Chinese authorities now are presiding over a similar episode.

Not only has its economy suffered, but the extreme measures also imposed upon Australia have left Beijing strategically bereft of ammunition.

In January and February, the bans on Australian coal plunged large parts of China into darkness.

Blackouts in Shanghai and across southern China were put down to routine maintenance issues.

But thermal coal shortages across China have sent prices soaring particularly as the recovering Chinese economy ramped up its demand for energy.

During the past week, blackouts have been reported across southern China and power rationing has been imposed.

Last week, thermal coal prices sat at three-year highs at around $US120 a tonne, way above last year's $US48 a tonne. It was a major factor in our burgeoning trade surplus.

We might not be landing much coal in China. But as China scrambles to source energy elsewhere, Australian product is filling the gaps.

That's what happens with trade. It's a merry-go-round.

As for iron ore, prices again have surged above the $US200-a-tonne mark despite an attempt a fortnight ago to muscle prices down, threatening prosecution for anyone caught rigging the market.

We may be basking in it now. But that won't last forever.

China for a decade has been keeping its economy afloat with massive stimulus programs involving construction of new cities and infrastructure.

For much of the past five years, it has been trying to wean itself off the state-inspired building craze.

When it does, demand will moderate. And by that time, it may well have sourced new supplies in west Africa which will limit the gold rolling in from red dirt exports.

Longer term, prices will fall and the industry's importance will diminish.

In the meantime, however, we hold an extraordinarily powerful trump card.

China's economic health and its conventional military ambitions depend upon a reliable supply of iron for steel, a fact that would not have gone unnoticed in Beijing.

An old story about new markets

China may have banned Australian barley — but not wheat.

Last December, as barley farmers were reeling from the loss of market, wheat farmers cashed in, sending almost 800,000 tonnes to China.

Meanwhile, barley exports to Thailand and Vietnam are expected to double this year.

How much of that then finds its way to China is anyone's guess as enterprising entrepreneurs find ways to circumvent the bans.

Take the lobster trade for example. Hong Kong, which previously bought only meagre amounts of our crustaceans, suddenly is gorging on Australian lobster like never before.

It is highly likely that well-heeled members of Beijing's ruling class merely have found a way to get their favourite delicacy back on the menu via what's known as the "grey trade", where a Hong Kong middleman buys from Australia and then exports to China. 

A lobster pot with a large crustacean in it.
Chinese consumers are still hungry for Australian lobsters.( Four Corners: Harriet Tatham )

Even one of our hardest hit industries, wine, appears to be navigating its way out of the mess.

Treasury Wine Estates, the world's biggest listed premium wine producer, was knocked for six by Beijing's imposition of crippling tariffs last year that essentially closed the market for half the national wine exports. The company's share price tanked throughout 2020.

Three weeks ago, however, Treasury announced a much-improved earnings forecast, sending its stock price soaring, as it targeted new markets in Asia and sent more product to Europe and the US.

Earnings are expected to rise 33 per cent in the June half year, compared with last year's sad performance. That helped lift the company's share price 17 per cent in May alone.

Australian businesses are adapting, just as they did when the UK joined the European Union in 1973. The difference now is that we have a far more nimble economy with a floating currency that absorbs major shocks like global financial meltdowns, pandemic-inspired recessions and even trade wars.

Meanwhile, back at the Politburo, things are looking grim.

No power, no lobster and no Grange. Whose idea was this, anyway?

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