China won’t save the global economy this time
20 May 2020|

Bad assumptions make for bad policies and poor investment decisions. One big one we need to test is the notion that China’s post-pandemic economy is going to rescue the world.

That assumption is flavouring much of the Australian debate on our economic future—and on how we should deal with trade threats from Beijing.

An example is talking about $600 million in ‘lost’ exports to China because of the 80% tariff Beijing has imposed on Australian barley. That $600 million figure is an illusion. It’s based on the amount of barley exported in 2019, which was driven mainly by sales of high-end barley used in brewing beer.

And here’s the problem with that: Chinese consumer demand, especially among the middle class, has plummeted as a result of the pandemic, so prices and sales volumes of many commodities are falling. This is true of Chilean grapes, Egyptian oranges and Peruvian avocados, and it will probably also be true over coming weeks and months of ‘luxury’ commodities bought by China’s middle class—wine is an example that comes to mind.

So, the economics of the pandemic tells us that market projections and sales data from before Covid-19 for a wide range of products—including barley—are not guides to the future. On top of this, businesses must now take into account the realised risk of coercive action by the Chinese government, with barley as Exhibit A.

Back in the heady economic times of mid-2019, McKinsey Global Institute forecast a buoyant consumer market in China ‘on the back of rising incomes’, mainly of the middle class. That’s not the situation now, so resetting our assumptions is critical.

The global financial crisis started in the US and was centred on the international finance system. The Chinese economy was affected by it, but China was not the source of the crisis. And China’s economy and state-driven finance system were in a position to pump-prime their own development and so suck in imports. After a brief, sharp downturn in 2008, China’s economy grew by 8.7% in 2009 and 10.4% in 2010.

Fed by large volumes of our competitively priced iron ore, gas, coal, food and services, China’s economy, along with Australia’s, emerged in comparatively good health.

This time it’s different. China is the place where the pandemic began and, for all the triumphalism from Beijing, the Chinese economy is in no way back in business. The stimulus tools available during the GFC—cheap money from a shadow finance sector and large-scale infrastructure spending—don’t make sense this time because the finance sector is now its own source of risk, and infrastructure oversupply won’t deliver a healthy economy.

More significantly, Chinese consumer confidence is broken. Just like in other countries, government policy is big in China, but consumers’ perceptions of their economic future are bigger. Chinese consumers know that China’s two sources of growth—domestic consumption and global exports—are both undercut by the pandemic.

Along with that, the pressures to alleviate poverty and avoid social unrest are growing. Managing them will drag on growth. The Economist reports that only about a quarter of China’s 800-million-strong workforce is eligible for unemployment insurance, and the number of people left unemployed by the pandemic is perhaps as much as 80 million—nearly 20% of urban workers. Much of the suffering is concentrated in China’s 300 million ‘migrant workers’—Chinese citizens living and working in locations different to their place of registration. Under Beijing’s rules, they are not entitled to government benefits.

Social unrest is an abiding and primary concern for the Chinese Communist Party because it fears the political change it could drive. It’s the reason Beijing spends more on internal security forces than on the Chinese military. It’s also why Beijing continues to repress protests in Hong Kong: political freedom there is dangerous for the CCP on the mainland. These anxieties will be heightened by the suffering of migrant workers.

So, Beijing has to manage unemployment, along with reluctant consumers and an economy dislocated by the pandemic and continuing control measures.

It’s not surprising, then, to find Chairman Xi Jinping doing ‘self-inspection’ tours urging industry and commerce to get the economy up and running. Given the troubled economy, he’s been talking up poverty alleviation and talking down his previous goal of achieving an affluent society. He has also been pushing to reduce ‘dependence on traditional industries like coal and steel’.

China is not the global growth engine it was projected to be in many businesses’ plans.

That raises an urgent question about the extent to which businesses in any sector—not just tourism, tertiary education, beef, barley, wine, and even iron ore and coal—should risk their futures by banking on secure, growing markets in China. The very real business risk from coercive Chinese government behaviour is an additional element that makes this something every company director and shareholder is right to question and test.

The optimal balance for Australian trading sectors will take time to establish. Like with the China market, developing a greater share in other global markets will take time and commitment.

But it’s smart not to fall into the dangerous and lazy trap of thinking that the economic path out of Covid-19 is the same as it was for the GFC and leads through Beijing.

None of this means ‘shutting the gate in respect of China’, as some of the more outlandish characterisations of the debate have claimed. There’s still a foundation of mutual benefit in the economic relationship. And Beijing’s concern around the political implications of its domestic economic weakness may moderate its willingness to inflict further self-harm through further coercion of Australian and other businesses.

We need to be clear-headed when making fundamental economic decisions and bring to those decisions an understanding of the actual economic pressures China faces, as well as of the Chinese government’s role and nature. The good news is this seems to be the path that Prime Minister Scott Morrison is on, with the support of the federal Labor Party. The Australian public understands this, although some business leaders and state politicians have some catching up to do.

Beyond China, it’s also smart to consider what new value our customers and partners will place on trade with Australian businesses because of the safety and reliability we’ve shown during the pandemic. For example, there’s an important opportunity for Australian farmers provided by rising global food insecurity. Partnerships between government and industry can help grow these other markets as we all recover.

Along with assessments of China, the potential to grow new and existing markets is another assumption to test as we work towards building a place for Australia in the world after Covid-19.