A wild ride ahead on our enemy and benefactor

The ‘China miracle’ may be self-destructing, but we can stick with it or go back to something akin to an ‘Argentinian ­future’.

A BHP freight train carries Australian iron ore to port for what could be a sea trip to China. Picture: Bloomberg

Point and counterpoint. Thursday was all about identifying, publicly announcing and formally countering China as not just our biggest geopolitical strategic threat but indeed a literally existential threat.

Yet this is the same China that is not just the core foundation of our prosperity, but is so, so overwhelmingly and in so many ways pervasively across the economy and indeed deep into our daily lives. At least, that was, pre-Covid; and, we hope, post-Covid, whatever that proves to be.

It’s not just about iron ore. It’s tourists, it’s students, it’s the major component of our population-construction Ponzi, it’s most deliciously the rich, indeed very rich, communists in our ­casinos.

And then there’s all that “stuff” on the other side that we get so cheaply and abundantly, as does every developed economy, in ways utterly unimaginable even just 20-25 years ago.

What would Apple CEO Tim Cook do without his cheap iPhone – that’s cheap to him, expensive to you? What would Amazon’s Jeff Bezos do without all that cheap product churned through his centres by his armies of Metropolis-style drones, (really) earning their $US17 an hour pay cheques?

Now yes, all of those Chinese benefactors outside iron ore are currently on Covid-hold, along with other more “minor” exports which China, unrelated to Covid – apart from perhaps, a certain ­irritation over a certain lab – is happy to do without for the ­moment.

They’ve been replaced by the biggest national credit card binge in our history and an accommodating – very accommodating – Reserve Bank. But can that really be a permanent substitution? I think not.

In crude macro policy terms, we can go back to, indeed stay with, China or go back to something akin to an “Argentinian ­future”.

So it was at least “interesting” that in the same week we put China in the geopolitical stocks, so to speak, the iron-ore price plunged to just over $US100 a tonne, less than half its recent peak and about two-thirds the ­average price over the 2020-21 ­financial year.

Apart from delivering spectacular profits to BHP, Rio Tinto, Fortescue and lush dividends to their shareholders, and less publicly the same to Gina Rinehart, while also fortifying some three million West Australians and one of them in particular behind their easterner-proof virtual reality Nullarbor fence, those high prices delivered two big macroeconomic outcomes.

It gave us a jaw-dropping $68bn current account surplus – together with 2019-20’s somewhat smaller surplus, the first surpluses in just shy of half a century, at least halting and indeed temporarily reversing our seemingly inexorably escalating foreign debt.

It meant that iron ore all on its own contributed about 7 per cent of our entire $2 trillion nominal (cash) economy in 2020-21; and oodles of tax revenues to Canberra and Perth. Now of course not all our iron ore goes to China, “only” about 80-85 per cent; but Chinese demand – and it’s willingness to pay the price if not the piper – sets the price that everyone pays.

I doubt that even abstracting from the “other” tensions, that willingness can be assumed to be open-ended. China is desperate – just as indeed our original benefactor and sponsor of the Pilbara, Japan Inc, was in the 1960s and 1970s – to promote excess supply and so a buyer’s market.

Imagine such a world where the iron-ore price went back to averaging, say, $US50 long term, far less the $US20-$25 that the Pilbara miners used to think was their reasonable lot.

Now you might say that the two are not incompatible: China as our deadly, and near-permanent, geopolitical enemy; and China as our bountiful, and also, hopefully, near permanent, benefactor.

Whether that potential – expectation, faith, hope – is based on the realism of Kissinger-style Realpolitik or the more proletarian advice of Jack Lang via his acolyte Paul Keating to “always back the horse called Self-Interest because at least you’ll know it’s trying”.

To my mind though, two incompatibilities that are so fundamentally incompatible cannot long survive together; at best, you can hope for a “gentle” separation.

All this also plays into – and to borrow that famous quote from 1945, “not necessarily to our advantage” – the more fundamental conundrum about just exactly what is going on in China and how is that going to play out across the spectrum into the global space?

Crudely, is the “China miracle” in the process of self-­destructing, or at least gapping down to a much lower and more volatile level?

Or is it adjusting, however messily in the context of a centrally driven command economy (headed by Chairman Mao Version 2.0) and the most voracious “tooth and claw” capitalism we’ve seen since the 19th century, to the consumer and services-driven ­reality of modern developed economies?

I wouldn’t pretend to even try to answer any of that; but it’s going to be a helluva ride along the extended way and it’s the horse we are riding like it or not.

I’m more confident at suggesting that in economic terms, we and arguably we alone in the entire world were floating through 2020-21 in a bubble suspended from reality thanks to China and the iron ore price, even though the tourists, the students and the billionaires weren’t coming.

Just as after the GFC, China alone kept its music playing and we were once again the main and almost only beneficiary. Once again, the main thing the central banks did was to further enrich the already rich.

Now the bubble is bursting; now we all (the entire world) face the bill; and the bill’s not just in money but also in terms of the actual real economy: that’s to say, what do we actually do to produce “things”, to create “real” jobs post-Covid?

Back to the Ponzi? Or maybe we can keep kicking the can down the road as, again, we seemed to so “successfully” do after the GFC? Heck, just throw another trillion on the debt barbie.

China might prove “difficult”, but at least we’ll always have Wall Street and the Fed.