Xi Jinping knows who has the real power in trade dispute; it’s not him

Chinese officials invited into the office of President Xi Jinping in the Zhongnanhai (the Chinese equivalent of the White House) know not to mention that dreaded word, “Australia” and Xi’s plan to bring our nation to its knees so we would seek forgiveness for our sins.

In simple terms Xi’s “Australia plan” is not going well and China is being hit harder than Australia

It’s true that Australia’s largest wine maker, Treasury Estates, is being hit hard by the China tariff along with many other wine makers. A number of reports had Treasury marketing some its wine into the Taiwan market under the label “freedom wine”. Somewhat sadly I report that Treasury says very firmly that it is not doing that and will investigate whether wine brand counterfeiters in Taiwan are the culprits. I fully accept their statement.

In Beijing many of Xi’s friends enjoy a Penfolds and the wine from Chile is not quite the same. And ordinary Australians are enjoying cheaper wines.

China’s coal bans have hit Australian coal exporters but the Chinese steelmakers have also been impacted because the price of inferior non-Australian coal has jumped. Some of Xi’s rural bans are going well but, sadly for China, Australia’s gigantic wheat exporters have been smart and China is a relatively small part of their markets.

And then comes what for Xi is the saddest situation of all — iron ore. When Xi was planning his Australian attack as punishment for a series of criticisms of China from Australian ministers and public servants, the iron ore price was around $US80 a tonne. Now it is soaring above $US140 a tonne.

The China dispute is pumping almost $A600 million a month in extra revenue into the Australian coffers and it’s going a long way to funding the massive JobKeeper program and swamping any impacts China’s trade blows have created.

The reasons for the iron ore price rises are straightforward. To get China through the COVID-19 pandemic Xi stepped up public works on top of a large set of investments as part of the Belt and Road initiative.

That substantially increased the demand for steel and at the same time Brazil did not produce the amount of iron ore that that Xi had expected. To date overall, Australian has been conciliatory, looking to find a way to normalise relations, although the doctored imagine of Australian soldiers enraged the Australian Prime Minister, who is clearly not buckling to China’s pressure.

Morrison is able to tell countries in the region that they need to limit their dependence on China or they too may be punished and they will not have iron ore to nullify the blows.

Xi Jinping knows what he would do if he was Scott Morrison --- as Australian PM Xi would curb iron ore exports to China and send the price above $US200, crippling the Chinese steel industry. Morrison has never even hinted at taking such an action and it’s not on his agenda.

But both men know who has the ultimate power in this trade war.

Chinese President Xi Jinping walks past officials as he arrives for the second plenary session of the National People's Congress.

At the moment Australian iron ore producers led by BHP and Fortescue plus the Londoners at Rio Tinto are basking in the increased revenue and profits being generated.

The share market forecasts depend on how long this boom will keep going. All the indications are that it will last well into 2021. But shareholders in The Big Australian, BHP, needs to be aware that Xi is very angry at what happened in iron ore and in coming years will work extremely hard to reduce China’s dependence on Australia and get the iron ore price down. The measures taken by Xi will include boosting Brazil; increasing the amount of scrap used as a raw material; curbing infrastructure expenditure in exchange for more money for consumers; and boosting African and local Chinese iron ore output (not easy).

Iron ore has traditionally had booms which are followed by busts and there’s no reason to believe that this boom won’t be similar to previous ones. But what makes 2020 different is that iron ore is completely nullifying the overall impact of Xi’s trade war on Australia. Australia is moving around the region with more confidence knowing that on the trade front, at least for the moment it has China’s measure.

Meanwhile Japanese and South Korean steelmakers, while also being buffeted by the iron ore price are enjoying the advantages that come from lower priced Australian coal. And, because of Xi’s ban on Australian coal, China’s steel makers are being forced to bid up the price of the inferior product. So once again Chinese officials entering the Zhongnanhai are reminded not to mention Australia unless the great leader brings up the subject.

But Australians should not get too cocky because in recent years our defence protector, the United States, has fallen behind China in many areas of defence.