Australia in Between Two Economic Behemoths: Should Investors Be Worried?

Dear Reader,

Has the coronavirus brought forward the day when Australia has to choose between Chinese money and American security? That’s the topic of today’s Rebellion. Australia finds itself smack dab in the middle of two economic behemoths, both of whom are a bit prickly at the moment. Should investors be worried?

The currency market says ‘no’. The Aussie dollar — a good barometer for the mood of the market — bought as much as 66 US cents last week. That’s a 20% rally from the intra-day lows on 18 March. Since then, both the Aussie dollar and the stock market — to the extent they can be trusted as reliable price signals — have been telling investors the worst is behind us.

But Wednesday’s price action came before the bad news from China and the US. From the US, Secretary of State Mike Pompeo said the US might have to ‘disconnect’ from its ‘Five Eyes’ security relationship with Australia. Why? Because Victorian Premier Daniel Andrews has signed a Memorandum of Understanding to join China’s ‘Belt and Road’ global infrastructure project.

I’ll come back to Andrews and China’s pursuit of global influence through debt in a moment. But let’s not forget two other big pieces of news in the last seven days. Hong Kong’s era of autonomy under the ‘one country, two systems’ doctrine is over. Chinese officials announced new security measures over the weekend that would make freedom of assembly and freedom of speech acts of sedition.

And before it cracked down on Hong Kong, China’s Communist Party had a go at Australia too. China announced an 80% tariff on Australian barley imports last week. About half of Australia’s $2.6 billion barley exports go to China. Fully two-thirds of Australia’s total farm production is exported. 30% of that goes to China, including around 20% of Australian meat exports.

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Australia is a kind of premium breadbasket for China

Meat, wine, dairy, wool, barley…Australia is a kind of premium breadbasket for China. The richer China gets, the better it eats. Australia is a big part of that. The barley ban appears to be a punishment for Australia’s call for a global inquiry into the origins of the coronavirus.

But taken together, do the moves against Hong Kong by the CCP and the move to punish Australia mean a new phase in China’s relationship with Australia and the rest of the world? Is China moving to become a dominant political power and not just an economic one? Let’s look at it from an economic point of view first.

In the scheme of things, $1.3 billion isn’t that much. It will certainly hurt Australian farmers. But Australia exported $117 billion worth of commodities and goods to China last year. Iron ore, coal, copper and aluminium make up the lion’s share of the dollar value (higher iron ore prices helped too). What’s the problem?

The problem is that nearly 40% of all Australia’s commodity exports went to China last year. It’s the biggest market for Aussie exports by far. That might give China enormous leverage over Australia’s economically AND, perhaps, politically.

The key is whether China now feels powerful enough to leverage its economic influence in political affairs. THAT would be a new phase of China’s engagement with the rest of the world. And it might be Australia more explicitly in China’s ‘sphere of influence’, something Dan Andrews seems quite content with, at least if it means billions of dollars of Chinese investment in Victorian infrastructure.

My how times have changed. The dominance of iron ore and coal and copper in Aussie exports for the last 20 years was driven by a series of five-year plans from China’s National Development and Reform Commission. That’s China’s central planner; the group that set annual GDP targets for the country.

When China entered the World Trade Organisation in 2000, its economic growth (as set by the NDRC) was driven by investment in fixed assets. ‘Fixed assets’ are things like roads, bridges, airports, train stations and real estate. Chinese fixed asset investment as a percentage of GDP was as high as 40% in the early part of the century.

It was that fixed asset investing boom that led to Australia’s commodity boom from 2002–2008. It was a three-phase boom. First there was a huge surge in demand which drove up commodity prices. Second, an investment boom in Australian resource projects to expand export volumes. Third and finally, a boom from expanded volumes itself.

Political strings from Beijing…

Things are different now. Internally, China has encouraged credit growth, real estate, and consumption to drive its GDP. It can ramp up domestic infrastructure spending to boost GDP, as it did in 2009. But in 2012, around the time the ‘commodities super cycle’ peaked, China shifted its focus to the Belt and Road Initiative. It’s an attempt at exporting its fixed asset boom to other countries as a way of generating economic and political influence around the world (especially Africa and the developing world).

By the way, at the meeting of the National Party Congress in Beijing last week — a meeting held once every five years — the Communist Party declined to give an annual GDP growth target. It was the first time in a quarter of a century the Party has declined to do so. And given that the Party, by hook or by crook, manages to meet every target it sets, it makes you wonder how bad things are in China right now.

It also makes you wonder if China is embarking on a new stage of its development as a global power. It’s less concerned with fictitious GDP targets and more concerned with raw political power. The previous 20 years were a methodical march to economic power: it became the world’s manufacturing hub; It consumed vast amounts of commodities to build out the productive capacity of its economy; it accumulated huge US dollar-denominated surpluses to become a global creditor; and it tied receipt of that credit to its Belt and Road project.

Up until now, Chinese money for Australian resources and Australian real estate has come without any strings. Chinese capital is welcome in Australia, from buying up commercial and residential property to investment in agriculture and resources. But what if, in the new era dawning, that’s not enough for Beijing?

Dan Andrews says that we all have to ‘concede’ that a stronger partnership between the Chinese Communist Party and Australia is in everyone’s interests. What kind of partnership does Daniel Andrews want with the Communist Party of China? Is it just the money for public infrastructure? And does he really think that won’t come with political strings from Beijing?

Until next time,

Dan Denning,
Editor, The Rum Rebellion

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