The yin and yang for Australia In outcomes of China’s woes
China is in deep trouble, and many Australians know it’s because mega developer Evergrande owes local investors some $A400bn, in other words more than the national debt of many countries.
But what most Australians don’t know is the extent to which this can affect them favourably or otherwise, depending on what President Xi Jinping decides to do about it.
That he has this problem is hardly surprising as massive unfinished apartment blocks across China are being demolished because Evergrande has run out of working capital to finish them, because nobody seems willing to lend Evergrande any more money, and even if the apartments could be finished, virtually nobody could afford to buy them since each would cost about 43 times the disposable income of most local prospective buyers.
The wealth of China’s middle class, like Australia’s, is concentrated in property, and like many Australians, they are highly mortgaged. However, in the past few months, property values across much of China have fallen between 20% and 30%, sales have plummeted, and uncharacteristically, President Xi has hesitated to deal with a matter seriously threatening the nation’s economy.
In the past when he’s seen comparable threats, he’s acted swiftly to remove them, which is why the millions of Chinese mums and dads who have invested in Evergrande can’t understand his hesitation. Will he eventually rescue Evergrande or won’t he?
Because so many ordinary Chinese have a personal stake in Evergrande, community angst about the economy has never been higher and accordingly there is fear among domestic and international observers that to distract China’s masses from their mounting woes and incite national unity, Xi might attack Taiwan.
But consideration of what Australia could or should be doing in this situation requires understanding of how China got into so much trouble.
The genesis of Xi’s dilemma
When things began going wrong, quite apart from an array of concerns linked to COVID-19, hundreds of millions of Chinese were in a major state of disorientation as their President pressed ahead with his plan to switch China’s emphasis on manufacturing commodity products to high technology.
He’s been busy lately disbanding high pressure education for the nation’s youth, taking virtual control of large, high-tech companies’ data bases, and directing their owners to focus on helping the Communist Party in various ways.
He’s also been moving towards lowering environmentally destructive emissions – and starting a trade war with Australia.
Clearly neither Xi nor his advisers appreciated to what extent the stability of China’s economy depended upon highly geared property developers, nor did they realise banning imports of Australian coal would hurt the Chinese people more than Australians.
Power failures, blackouts, the desperate need to ramp up local coal production can’t be attributed entirely to a lack of Australian coal, but in this turmoil the relationship with Australia has become far more important to China’s immediate future than Xi initially imagined it ever could. He’s been considerably and unfavourably impressed by Australia’s proactive roles in seeking a determination on the origin of COVID-19, in establishing the Quad Alliance with the US, India and Japan, and in the recent AUKUS nuclear technology/submarine pact.
So where to from here?
Remember how President Xi has maintained that if Australia wants to improve its relationship with China, then it is Australia that is going to have to make the first move? Well, so much for that: China has now allowed ships, long anchored off the coast, to dock and unload much needed Australian coal.
US President Joe Biden, while considering the possibility of China attacking Taiwan if the Chinese economy significantly worsens, also weighs this possibility against Xi’s obvious realisation that his country’s economic wellbeing and his personal power, depend essentially on delivering prosperity to more than a billion Chinese, and this in turn depends very largely on Americans’ rising demand for Chinese products. But although they are awash with money, Americans are anti-China for a whole lot of reasons.
Nevertheless, because there is mutual benefit in Biden and Xi being nice to each other at their planned virtual meeting before the end of the year, they probably will be. Which suggests that Scott Morrison, who is now strongly positioned in the relationship with China, should quietly in Australia’s best interests make the most of this by adopting a soft-spoken attitude with Xi similar to Joe Biden’s.
How best to do this?
This ScoMo can do by tuning down his rhetoric about needing confirmation COVID-19 escaped into the world from a laboratory in Wuhan – even though it’s becoming increasingly apparent that it did. But Mr Morrison doesn’t need to rub China’s nose in this given the monumental trouble the country is already facing with its economy. He is likely to achieve more for Australia now by adopting a low posture with Xi rather than walking tall.
A paper published by Harvard economist Kenneth Rogoff and Beijing Tsinghua University’s Yuanchen Yang reports that real estate-related activities in China have in recent years accounted for 28.7% of GDP. They estimate that because Chinese households’ consumption are more sensitive to a decline in housing prices than those in either the US or Japan, a 20% fall in China’s real estate activity could lead to a 5% to 10% fall in GDP – and that’s without it worsening from a likely subsequent banking crisis and the loss of real estate’s value as collateral.
For a decade the Chinese have considered it normal for their economy to grow between 6% and 10% year on year, so that anything threatening to trigger a protracted decline in those figures will send shock waves across the nation. And Evergrande’s collapse does precisely that.
China’s economy and Xi’s dilemma
With retail sales growing just 2.5% this year compared with pre-COVID growth of 8%, belief by the Communist Party in China’s consumer-driven economy, was already shaky before Evergrande collapsed. The economy had grown just 0.2% for this year to the end of the September quarter, way short of growth between 1.2% and 1.5% during 2019, and investment bank Citi is obviously concerned about growth prospects since it is forecasting a period of stagflation driven by high energy prices and the highest producer prices in decades.
That begs the question: will Xi opt for another construction-driven stimulus like the one post-GFC -- in which case the world’s inflation levels will certainly be driven higher than they are now -- or will he elect, even if things worsen in the property sector, to simply let “the can be kicked further down the road” and see what happens.
In 2007 the iron ore price was $A48 a ton and 2.5 years later it was $A240, so if Beijing goes for stimulus now, commodity prices will again likely soar to give the Australian economy a massive boost.
