Economics and the China Resources Boom

The Australia–China economic relationship has grown exponentially since the turn of the century. Bilateral trade has increased from around A$15billion in 2000 to over A$150 billion today. China is by far Australia’s largest trading partner.

China remains more important to Australia than Australia is to China. In 2014, trade with China was over twenty-seven percent of Australia’s total merchandise trade. Nearly thirty-four percent of Australian merchandise exports were China-bound (A$90 billion), led by iron ore (A$50.6 billion), coal (A$8.3 billion) and gold (A$7 billion). China accounts for thirteen percent of Australia’s services exports ($A7.5 billion) — dominated by education [topic page link] (A$4.1 billion) and tourism [topic page link] (A$1.9 billion).

For China, Australia is its fourteenth-largest export market and accounts for around two percent of total exports (A$54.1 billion), with major sectors including telecommunications equipment, clothing and computers. But China exports relatively few services to Australia (A$2.1 billion), with these services being mainly travel and transportation.

For China, resources remain the driver of the trade relationship. Australia supplies almost sixty percent of China’s iron ore imports and is China’s sixth-largest import source, with a 4.6 percent import share. Australia consistently records a large balance of trade surplus with China.

Much of this imbalance stems from the China-driven resource price boom that Australia began to enjoy in 2002. Sustained rapid urbanisation and high domestic investment in China generated ten percent annual economic growth rates. This growth led to colossal demand for the primary resources needed in urban dwelling and infrastructure construction, especially the iron ore and coal used to make steel. This extraordinary surge — Chinese iron ore imports increased from seventy million tonnes in 2000 to 685 million in 2011 — pushed the capacity constraints of unprepared suppliers in Australia (and elsewhere) and drove the iron ore price from US$13/tonne in 2002 to record highs of US$190/tonne in 2011. Australia was the leading beneficiary as it possesses the world’s largest iron ore deposits (as well as abundant energy and mineral reserves) and is geographically proximate to China relative to other major suppliers. Inflated prices translated into enormous profits for Australian mining companies. Iron ore exports to China grew an average of twenty-three percent per year from 1999 to 2011 and mining doubled its GDP share. This triggered an investment boom as Australian miners rushed to extract more to sell to China. Mining investment over this twelve-year period exceeded A$270 billion.

For Australia, the China resources boom brought tremendous benefits. It delivered historically high terms of trade and remarkable growth performance: from 2000 to 2012, Australia’s GDP increased forty-four percent and gross national income jumped sixty-three percent; from 2004-2013, Australia reaped A$1.29 trillion in extra exports compared to the previous decade; in 2013, trade with China contributed A$16,985 to the average Australian household; and unemployment hit four percent in March 2008 compared to 7.1 percent in November 2001. The China boom is widely credited as helping Australia avoid recession during the Global Financial Crisis.

However, the boom had its downsides. It created a ‘two-speed economy’ whereby record resource exports and constantly growing demand for capital and labour in the mining states of Western Australia and Queensland produced a strong Australian dollar that damaged the international competitiveness of Australian manufactures and services (industries that are concentrated in other states). Chinese investment [topic link page] interest in Australian resources ignited public controversy, particularly Chinalco’s failed US$19.5 billion investment in Rio Tinto in 2009 [topic page link]. And iron-ore price negotiations became politically sensitive, sparking the Stern Hu affair [topic link page].

There is now consensus in Australia that the China-driven commodity price boom is over. After peaking in 2011, the iron ore price began a sustained slide from US$135/tonne in December 2013 to US$47/tonne in April 2015, before rising to around US$60/tonne in May 2015. This has been caused by the ‘new normal’ of structurally slower Chinese growth, associated cooling in the Chinese property market and a resultant weakening of Chinese demand for steel, combined with relentless supply increases by large intra-marginal iron ore producers trying to price smaller higher-cost competitors out of the market. In 2014, iron ore exports increased by 23.5 percent, but falling prices meant that the export value of iron ore actually decreased. The price collapse was not anticipated by the iron ore industry, and hundreds of billions of dollars in investment have been delayed or cancelled. This has had a negative effect on the Australian economy over the past two years: Australia’s terms of trade have deteriorated sharply; economic growth has slowed to well below potential; the unemployment rate has climbed over six percent; and the federal deficit has inflated to A$35.1 billion as falling iron ore revenues reduce government revenues.

There is also much anxiety in Australia that successive governments ‘squandered’ the China boom by spending its A$300 billion tax proceeds on populist subsidies and tax-cuts rather than on investments in sustainable long-term growth and infrastructure. This line of thought has it that the Australian economy became too dependent on resource exports to China and should have instead diversified towards knowledge-based services, high-value added manufactures and premium agriculture to take advantage of the growing purchasing power and changing preferences of Chinese consumers. This process would then keep the Australian economy growing as the Australian dollar weakens and as the resources and investment booms subside. The hope that service exports can be Australia’s ‘next China boom’ was encouraged by comparatively generous market-access concessions granted to Australian service-providers by the China-Australia Free Trade Agreement [topic link page] (CHAFTA) agreed in November 2014. In 2014, the services sector overtook iron ore as Australia’s largest export earner, aided significantly by the falling Australian dollar and rapidly growing demand from emerging middle-classes in Asia.

China will remain essential to Australia’s future economic prosperity. Some industry analysts go so far as to argue that the China boom is not over but is actually in transition. According to this perspective, the first phase was a commodity price boom that ended in 2011, the next phase an investment boom that peaked in 2013 but will remain steady, and the final phase an exports boom that will come as increased production from new projects comes online. The latter could generate substantial income for Australia into the long term, as urbanisation and development in China (and in ‘sleeping giants’ such as India and Indonesia) still has many decades to run. However, while Australian exports to China continue to be very high, they fell by almost five percent annually in 2014.

Unsurprisingly, the Australian business community — especially those with interests in China and the resources industry — have become vocal advocates of strengthening Australia–China political engagement, welcoming greater Chinese foreign investment [topic link page] and increasing Australia’s ‘China literacy’ [topic link page] in order to improve bilateral business ties. Business was a major supporter of the 2012 Australia in the Asian Century White Paper [topic link page], the upgrading of Australia’s relationship with China to that of a ‘strategic partnership’ in 2013 [topic link page: Gillard government] and the conclusion of CHAFTA. But commentary remains divided: in 2012, tycoons James Packer and Kerry Stokes drew particular criticism for arguing Australia should be more ‘grateful’ towards China, with this being seen as ‘kowtowing’ to China in the cause of personal profit and ignorant of the broader strategic relationship.

Links

Arts, Culture and Creative Industries

Australia and the American ‘Pivot to Asia’

Australia and the Asian Infrastructure Investment Bank

Australia and Xi Jinping’s Corruption Crackdown