Facing up to the realities of reliance on China

Global companies global companies have been moving to reduce their reliance on products sourced from Xi Jinping’s China. Picture: Getty Images

Prime Minister Albanese’s groundbreaking visit to China, expected at the end of the month, casts a spotlight on Australia’s complex relationship with its largest trading partner.

Australia’s fortunes are linked with China in many ways – as a buyer of our major resources and a source of a large amount of our imports.

Tax revenue from miners selling into China helps underwrite the federal budget position and that of key mining states such as Western Australia.

Foreigners – maybe more than Australians – see the fortunes of the Australian economy linked to that of China.

Speaking to the CFA Societies Australian Investment Conference in Sydney on Wednesday, the head of the Reserve Bank’s international department, Penny Smith, cited concerns about the slow growth of the Chinese economy as a factor in the weakness of the Australian dollar.

The dollar has fallen three per cent against its trade weighted index and almost 10 per cent against the US dollar since May last year, despite a significant hike in the official Reserve Bank cash rate- from around 0.1 per cent to the current 4.1 per cent.

The fall has come despite Australia now having a current account surplus, thanks to the strength of our exports to China.

Or, to put it another way, without the exports to China Australia’s currency would be a lot lower, or the Reserve Bank would have had to put up rates a lot more to hold up the currency.

A new report conducted by the Bankwest Curtin Economics Centre, released on Wednesday to coincide with the annual Canberra networking day of the Australia China Business Council, estimates that Australia’s trade with China has increased disposable income by a national average of $2500 per household in the 2021/22 financial year.

This varies from state to state; Western Australians benefit the most by an estimated $8500 per household.

Report author and director of the economics centre Professor Alan Duncan estimates that up to 569,000 jobs are supported by Australia’s economic ties with China which, he argues, reduces the unemployment rate by 0.25 per cent.

The report notes that Australia exports more than $190bn in merchandise goods to China each year – a third of our total merchandise trade exports.

Professor Duncan says that lower-priced goods from China have helped hold down inflation in Australia.

China imports 21 per cent of Australia’s agricultural exports, 33 per cent of our resource exports and a surprising 10 per cent of our manufactured products.

The Australian economy is also heavily reliant on imports from China – most of them manufactured.

China supplies almost a quarter of Australian imports, a trade which is worth some $111bn. A third of Australia’s manufactured imports come from China and 7 per cent of our agricultural imports.

As Australia shifts towards the use of electric cars, Chinese company BYD is becoming a significant supplier of electric vehicle – cars which come at a much lower price than Elon Musk’s Teslas.

Another sign of the importance of Chinese imports was the impact on building companies which suffered during the Covid-19 lockdowns when they could not get enough supplies from China.

As borders open up, the trade with China has the potential to increase.

Before the pandemic, Chinese students contributed more than $18bn to the service economy in Australia from a combination of university and education fees as well as personal and recreational services.

While this was hit by the Covid-19 border closures – during which service exports to China halved to $8.6bn in 2021-22 – Chinese students have returned to campuses across Australia, reviving education as one of Australia’s largest export businesses.

The next to return will be Chinese tourists who once supplied another $12bn a year in revenue to Australia.

Chinese group tours – the big source of income when it comes to Australian travel – have been given permission by Beijing to resume to Australia.

The new report breaks down the trade benefits by state. Western Australians benefit the most from Chinese purchases of Australian resources while for Victoria, the main driver of income benefits is education.

The report comes at a time when Australian politicians – and businesses – are acknowledging the need for diversification away from Australia’s trade dependence on China.

China’s imposition of a range of tariff and non-tariff barriers on Australian exports was a sharp reminder of the need for this.

On the import side, global companies have been moving to reduce their reliance on products sourced from China, partly as a result of political decoupling encouraged by US policies, and partly as a recognition of the perception of the risks of over dependence on supplies from China where manufacturing costs are increasing.

Reducing dependence on China as an export destination was a theme of the National Trade Survey launched this week.

Federal Trade Minister Don Farrell, who has been at the coal face of negotiations with China over its sanctions on Australian exports, said Australian companies were now stepping up their trade with other countries.

“For the first time the United States sits at the top of the most common markets for survey respondents, with a rapid increase in partnerships with the United Arab Emirates,” he said.

“The trade numbers clearly show that China remains our largest trading partner (and) this

government has been working hard to stabilise the trading relationship with China.

“So far, this approach has proven effective. Just ask Australian producers of coal, copper, hay, cotton, timber logs, and barley, as well as the Australian tourism industry.

“But there remain several unresolved trade issues that we need to work through, including for Australian wine, lobsters and some red meat exporters.”

Once a significant supplier of new foreign investments into Australia, the future of this is now uncertain due to stricter policies from the Foreign Investment Review Board, the rejections of investment proposals by Chinese companies and the federal government’s proposed policies on

Chinese investments in the critical minerals sector.

ACBC president David Olsson said that despite the importance of market diversification, the report showed “that it is critical for both Australia and China to continue to build a stronger, more respectful and meaningful relationship”.

“We believe that a nuanced approach towards China, Chinese foreign direct investment and Chinese technological co operation in various sectors and value chains can continue to play a crucial role in our economy’s sophistication and diversification,” he said.

The improving relationship with China on the political and economic front was not enough to save Treasury Wine Estates from a first strike against its remuneration report this week at its annual meeting.

The company, which is most famous for its Penfolds brand, has been hit hard from the loss of sales from Australia to China in the wake of tariffs imposed in November 2020 and formalised at levels of more than 200 per cent in March 2021.

Indications are that the tariffs on wine could be dropped in the next few months, which could vindicate chief executive Tim Ford’s long-term commitment to the Chinese market which has included the launch of a Chinese-made version of Penfolds.

China’s much more aggressively nationalistic government and its strict controls over its citizens will always make it a challenge for Australia.

But the sheer size of the market and the complementarity of the two economies continues to drive trade and business opportunities on both sides.

Two visits to China by Gough Whitlam – in 1971 and 1973 – paved the way for the opening up of political and economic ties with China.

Fifty years on from Whitlam’s historic visit as Prime Minister, the question is what impact Albanese’s visit later this month will have on long term relations and how this plays out

for future trade and business ties.