CHRIS NYLAND. Perhaps Not a Good Time to Poke the Dragon?

Jun 2, 2020

A number of commentators have expressed surprise that Canberra would provoke China at a time when the Australian economy may be desperate to increase exports!

With the onset of the Covid-19 crisis Australian politicians saw an opportunity to curry favour with their great and powerful mate to the North by urging an ‘independent’ study on the origin of the virus in a manner bound to induce a backlash from China. Morrison, no doubt, hoped by so doing he would receive a pat on the head from Trump and this was duly forthcoming.

Those who have the Morrison government’s ear claim that China needs us as much as we need them. Consequently Beijing has little capacity to impose significant costs on Australia. This perspective is founded on studies that have shown that when China has had to respond to previous economic downturns, it has invested vast sums in the building of physical infrastructure and turned to Australia for the raw materials needed to build new cities, railways, roads, etc. In brief, economic bad news for China has been good news for Australian exporters.

The latter relationship has given Australian officials an opportunity to win brownie points with the US. In brief, Australia has been able to provoke Beijing in whatever way Washington instructs when China is in difficulty confident in the knowledge that its leaders will express outrage but will nevertheless continue to buy our exports.

This time, however, the costs may prove greater than anticipated. The government would have been aware we were likely to experience a significant decline in agricultural and energy exports given the trade deal signed by the USA and China in January this year. This requires China to purchase an extra 200 billion dollars in US agricultural and energy products over two years. The government would have also been aware China’s extended ban on US barley was to be lifted in May. Given these developments a hit to barley growers and beef producers was going to occur irrespective of Australia’s actions. Indeed the government probably anticipates further blows to Australian farmers and energy producers will be forthcoming given China has been compelled to increase its purchases from the US. Moreover, it may hope to win further applause from Washington by claiming cuts to Australian exports are due to Chinese aggression rather than American protectionism.

What the Government may not have anticipated, however, is that given the increasing US hostility to China, the changing nature of China’s economy and the need for Beijing to secure the nation’s supply chains it may not repeat its past response to economic crises. Rowan Callick reports that while the Canberra political establishment has been in dispute with China’s Foreign Ministry the Australian corporate elite is looking forward to a massive Chinese infrastructure stimulus that will trigger a commodity boom, as occurred with the GFC in 2009. In short, China will require a lot of steel and thus iron ore, which comprised 47 per cent of Australia’s goods exports to China in the last financial year. This expectation has been echoed by the chief executive of the Minerals Council of Australia, Tania Constable, who has observed Australian minerals and metals “remain in demand in China and are helping to build cities and power factories as the country recovers from the Covid-19 pandemic”.

This time, however, China’s Premier Li Keqiang appears to have poured  cold water on Australian government and corporate assumptions. In presenting the annual “Work Report’, which outlines the government’s priorities for the coming year, on the 22nd May, Li advised the government was planning to inject substantial liquidity into the economy and would expand the deficit as it had when addressing earlier crises. But the allocation of the planned expenditures was not as anticipated. First, the Premier announced the injection of funds would be substantially less than what had been foreseen. Second, relatively little of the stimulus package is to be directed to infrastructure projects. Instead, most of the funds are to be utilised to protect the population from a possible second outbreak of the virus, increase the purchasing power of consumers, support small businesses and secure the well-being of the unemployed. Li made the policy emphasis explicit in a subsequent press conference where he observed:

“Big changes have taken place in China’s economic structure, where consumption is now the primary engine driving growth, and micro, small and medium-sized companies now provide over 90 percent of all jobs in China. So under the sizable-scale policies introduced this time, some 70 percent of the funds will be used to support the increase in people’s income through direct or relatively direct means in order to spur consumption and energise the market.”

Third, in what is likely to prove a concern to Australian farmers, Li advised that China’s government intends to institutionalise a plan for enhancing food security. This development in large part reflects the fact that as a consequence of the Covid-19 crisis a number of nations that are major food exporters to China placed bans on the export of agricultural products. Responding, Li observed:

“It is imperative, and it is well within our ability, to ensure the food supply for 1.4 billion Chinese people through our own efforts”.

Accordingly, the government will expand domestic iron ore and energy production and improve the management of grain reserves, expand the capacity of grain silos for summer harvests, diversify imports of major agricultural products, and guarantee the stable supply of grains, edible oil, meat, eggs, fruits, and vegetables. It will, moreover, direct a substantial proportion of the increased funds being made available to expand the rural social security system and by so doing keep workers ‘down on the farm’ instead of placing heavy reliance on imports. Morrison may need to give consideration to these developments and also remain aware that China’s government has floated the idea that it will establish a national iron ore fund to support the development of its domestic production which will use $US12.57 billion from tax levies on iron ore imports to expand new mines in China.

Chris Nyland is a Professor of International Business at Monash where he teaches and researches in the areas of Chinese Education Reform, Management History, and Geopolitics and Business Globalization

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