China’s economy in 2017

January 24, 2017

Australia’s economic wagon is firmly hitched to China. In fact, we’re arguably more dependent on China’s prosperity than on any other single nation – close to 30 per cent of our goods and services are exported to the Asian colossus.

But economist and commentator Saul Eslake says the influence China has on our economy is broader than just the revenue earned by our exporters.

“China also, in effect, sets the prices we get for exports to other countries, such as Japan and Korea, for commodities like coal and iron ore,” Eslake says. “So what happens in China matters a great deal to us and matters more to us than any advanced economy in the world.”

In January, the International Monetary Fund revised its 2017 growth forecast for China up by 0.3 of a percentage point to 6.5 per cent – slightly down from the 6.7 per cent rise Chinese President Xi Jinping predicted in 2016 and a fair way below the double-digit growth China enjoyed until 2010.

We can also expect to see a continuing diversification in China’s economic growth: recently dominated by construction and manufacturing, it is now being fuelled by household consumption and services.

“For Australia, this provides opportunities for increased sales of food and beverages and a range of personal and business services,” Eslake says.

The US wildcard

Eslake expects the Chinese authorities will continue to support growth in 2017. However, he says, they will encounter challenges in dealing with the United States.

Any suggestion that US President Donald Trump would not walk his election talk were squashed by his protectionist “America first” inaugural speech, in which he promised to follow two simple rules: buy American and hire American.

Underlining his stance on trade, one of his first acts was to withdraw the US from the Trans-Pacific Partnership, a free-trade deal that included Australia, New Zealand, Japan and eight other Pacific nations.

Having just returned from China, David Thomas, China expert at Think Global consulting, says the general view is that the first 100 days of Trump’s administration will be volatile, unsettling and even dangerous while the new president unveils his plans.

“China is ready for this,” he says. “It is expected that as Trump’s team moves from ideas and rhetoric to the implementation of actual policy measures, the new government will start to resemble a more typical Republican administration – more like Ronald Reagan’s presidency – and will be less threatening.”

However, Eslake warns that if Trump starts lifting tariffs on Chinese exports as promised, we could see a trade war between the world’s two biggest economies.

“And it’s hard to see how any good for Australia, or indeed anyone else, can come out of that. As President Xi told the World Economic Forum, there will be ‘no winners’ in a trade war.”

The US is China’s biggest trading partner, accounting for 18 per cent of its exports. A hike in US tariffs would bruise China’s exports and thus its economy. This, in turn, could dampen its infrastructure spending and appetite for Australian goods and services, and hurt our economy.

However, Trump’s plans to bring jobs back to the US will take some time: factories and machinery don’t spring into action overnight. Thus, any pain Australia may feel will come later in 2017.

The x factors
How else will developments in China affect the Australia economy this year? Here are four areas worth watching…

Commodities

Prices of iron ore and coal have risen over the past 10 months and Eslake says Australia’s trade surplus with China will rise if prices are maintained for most of this year.

However, as China’s demand for commodities slows, could “lifestyle” minerals such as lithium – used to make batteries – take up the slack? “Yes,” says David Thomas. “But only at the margin, because iron and coal represent such a huge percentage of Australia’s exports.”

Currency

Eslake says the likely rise in the US dollar suggests the Chinese renminbi should fall against it. “But if the Chinese allow that, they increase the risk that the Trump administration will take punitive action against them. So they are almost obliged to ‘manipulate’ their currency,” he says. “If all that happens is the US dollar continues to drift up against other currencies, then the relationship between the yuan and the Australian dollar probably won’t change much. Both will go down against the US dollar, but not change much against each other.

“If the Chinese feel that for political reasons, they can’t let the yuan depreciate against the USD but the Australian dollar falls, that will make [Australian goods and services, property and tourism] more attractive to the Chinese.”

Tourism

Tourism continues to be key. With close to 1.2 million Chinese tourists spending more than $9 billion in Australia annually, China is Australia’s fastest growing and most valuable tourism market.

Tourism Australia managing director John O’Sullivan is optimistic about 2017 following the recent removal of restrictions on air services between the two countries and the introduction in December of 10-year, multi-entry visas to Australia.

“Together, these measures should provide a significant boost to visitation, repeat visits and regional dispersal,” O’Sullivan says.

“The growing list of new Chinese services that have started or been announced in recent weeks and months suggests Australia remains as popular as ever among China’s rapidly growing middle classes,” he says.

“Many of these new flights are from China’s secondary cities such as Kunming, Hangzhou and Wuhan, effectively opening up parts of China which are largely untapped.”

Property

“You’d think that Chinese investors, as much as others, would be starting to get a little nervous about the level of property prices in Sydney and Melbourne,” Eslake says.    

Thomas, however, sees no slowdown in Chinese interest despite all the noise.

Both say this could change if China tightens up on its capital outflows, which it’s been doing by managing individual foreign currency transactions. “To buy property in Australia, the Chinese need to get permission to acquire foreign currency,” says Eslake.

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