Australia shouldn’t expect another free ride from China

While all eyes have been on China’s new security laws for Hong Kong, something has gone by relatively unnoticed. Chinese Premier Li Keqiang has decided to set no GDP (growth) targets for the first time since 1994.

The targets are usually something of mantra for China’s ruling Communist Party (CCP) — a neat summary of the country’s ever-increasing prosperity. They have also underpinned Australia’s economy.

COVID-19, of course, caused the CCP to dramatically lock down China. This shut down an already slowing economy, further buffeted by the trade war with the US. As the virus spread across the globe, the already precarious global economy has also been smashed.

With this in mind, there is no GDP target that could look remotely respectable. Instead, the narrative from Chinese Premier Li Keqiang — who delivers the central economic work report to the National People’s Congress — is that China will pull focus on its domestic economy.

Li admitted that a mind-blowing 600 million people still live on less than US$140 per month. Meanwhile, average monthly earnings across China are US$4100. There is a vast chasm of inequality in the country. (It’s worth remembering that the grievances of Hongkongers are rooted not just in freedom, but in fading economic opportunity and inequality.)

With China’s global export markets looking awfully shaky, there was really nowhere else to go. But the imperative to boost the domestic economy has been sharpened by growing joblessness (its official unemployment figures are widely seen to be next to meaningless) and the aforementioned wealth gap.

This has meant, quite explicitly from Li, a renewed emphasis on self-sufficiency. It’s part of the broader “decoupling” narrative that has further implications for Australian trade beyond any tit-for-tat spats over Canberra’s inept diplomacy and Beijing’s chest beating.

What’s critical to remember is that, for all the gushing praise (and subsequent derision for the budget deficit it left) heaped upon the Rudd government for its sharply executed economic stimulus in late 2008, the role of China was critical.

Indeed, it was the massive stimulus by Beijing — at the time price-tagged at $4 trillion, but costed by economists as many multiple times that number — that provided the ballast. This came, primarily, in the shape of a historically unprecedented infrastructure binge on rail, airports and a local government-backed housing boom that gobbled up just the kind of raw materials Australia digs up.

Once the sugar rush of Rudd’s cash splurge was over, it was this — and an ensuing Chinese tourism and student boom — that underpinned Australia’s economy. China ensured that Australia did not slip into recession like the rest of the OECD nations did.

But debt levels in China have soared on the back of the government cash splash and this time Beijing has far less room to move. There’s little left to do in the way of nation building with a sagging property market.

Respected China analyst Professor June Teufel Dreyer has written on Li’s latest moves for the Foreign Policy Research Institute:

Perhaps learning from the experience of a decade before, when a large stimulus package had encouraged local governments to front-load investments in infrastructure projects that were often less than wise and raised their debts to alarming levels, Li’s plans appear more modest.

The proceeds of local government special purpose bonds and treasury bonds are to be transferred to local governments to stimulate consumption and raise employment rates. National rail capital funds are to be raised; electricity rebates and tax breaks for small businesses will continue until the end of 2020; and the country’s largest state banks have been told to increase lending to small firms by 40% from 2019.

None of this sounds like catnip for Australia’s miners, despite the serendipitous surge in iron ore prices that is due to problems with China’s other main supplier Brazil (and has had the deleterious effect for other exporters of lifting the Australian dollar).

None of this means that China is not still going to be Australia’s biggest export market, just that Beijing’s stimulus efforts will be directed toward domestic imperatives such as improved healthcare — in a suddenly health-obsessed world — social security, and the nitty-gritty of keeping its manufacturing sector afloat.

Australia appears to have escaped the worst of COVID-19 but, unlike the 2008 crisis, there won’t be a free ride up and out of this slump on the dragon’s back.