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Detuning our China violin and dealing with the dragon

Posted By on February 26, 2019 @ 15:20

Our coal exports to China sneezed last week, but the market and media reactions to the sniffle were as if the gravy train that is our $15 billion coal trade with China had come down with bird flu.

There are two reasons for this. One is about us—the Australian media, the analyst community, and officials and political leaders—and one is about Beijing. We can change the first, but the second would require a profound shift in the nature of Xi Jinping’s Chinese Communist Party and its approach to governing its people and engaging in the world.

Not much from last week is actually about the economics or politics of coal in China or about the trade in coal between Australia and China.

On coal, Australia’s Department of Industry, Innovation and Science has seen risks to our coal exports to China for some time. Its June 2018 [1] resources and energy quarterly noted that:

Policy changes have continued to drive China’s coal markets, and remain the key risk underpinning the outlook for thermal coal imports. Recent policies include the sporadic banning of imports of coal to certain ports, and a suite of measures to cool domestic thermal coal markets, which could drive a gradual shift away from imports.

All that pretty much forecasts what we’ve just seen at Dalian port—if not the hysteria here at home.

So, we can expect more import reductions and more ‘new environment and safety checks on foreign cargoes [2]’ (as Beijing’s Foreign Ministry spokesman described last week’s moves) as these changes take effect over coming years.

The market reaction to this forecast news, though, was a 1% fall in the value of the Australian dollar. And fears that Chinese authorities might have banned [3] shipments of Australian coal through five ports that make up 1.8% of our coal trade caused media hysteria, rushed ambassadorial inquiries, and calming statements from the prime minister [4], the treasure [5]r, the trade minister [6] and the governor of the Reserve Bank [5].

What this shows is that Beijing really can play the Australian media and our political environment like a violin, going up and down the scales at will.

And we’ve helped tune it up quite high. We have sold ourselves the view that Beijing can ‘punish’ Australia economically at a whim, and will do so at times of its choosing.

We tell ourselves this is our fault, because Xi and the leaders around him in the CCP have been angered by Australian government decisions like the exclusion of Huawei and ZTE from the 5G network, the foreign interference legislation passed last year, and the rejection of Chinese bids to control Australia’s east coast gas distribution.

We tell ourselves that this is about how our government ‘manages the relationship’. It’s not. Media reports that pick up this myth don’t help our public understand the underlying issues.

Beijing is ‘angry’ because the Australian government has responded to Chinese state policies and actions. But those actions and uses of Chinese power—not our reactions to them—are the drivers of these events.

It’s a case of the Four Nots. If Beijing was not insistent on using its companies in compulsory partnership with its intelligence agencies for ‘state security’; if Beijing was not a source of major cyber intrusions for economic and state purposes; if Beijing did not have well-funded institutions of state whose role is covert and overt foreign interference; and if Beijing did not make explicit plans to use high technology and economics for strategic power in the world, then none of these Australian decisions—or decisions like them in a rising number of other countries—would have been made.

Australia and other countries are reacting to the nature of the CCP’s exercise of power in the world. Certainly in the case of the string of recent Australian government decisions mentioned above, they are acting in our national interest. We’ll need to make more decisions like these.

So let’s get out of the trap of blaming ourselves for trouble in the relationship with Beijing and sheet the responsibility back to where it lies—in Beijing.

Which brings me to the other profound but simple issue behind last week’s events. It’s that the political risk of doing business in China keeps rising, and this risk now is affecting market perceptions of major industries like coal.

Businesses and individuals face increasingly unpredictable—and at times punitive—actions by the Chinese state that can undercut business profitability and viability and also lead to the arrest and detention of individual foreign nationals or employees inside China.

Canada has experienced this, South Korea has experienced this, and so have New Zealand, Japan, Norway and Australia. Tourism, airlines, students, retail businesses, wine companies and consultants have all been levers in Beijing’s hands.

The reason the foreign exchange market reaction and early analysis assumed a link between the coal import trouble and Beijing’s anger at recent Australian government decisions was because that is how Beijing operates. The Chinese state does indeed intervene in ways others don’t and for reasons wholly unrelated to the specific industry or activity they affect. That’s the nature of Xi’s authoritarian regime—and it’s not likely to change while the CCP’s overall goal remains staying in power.

So far, Beijing’s mercantilist instincts and dependency on resource and service imports have restrained Beijing from economic self-harm when it comes to the $183 billion two-way trade with Australia.

But the increasing sovereign risk generated by Beijing will over time cause shifts in myriad global relationships and supply chains involving China. This may not be how China works, but it is still how global economics and risk work. Money loves a return, but knows risk when it sees it.

The world’s China Dream is over and the reality of Xi’s China is emerging.

This requires a deep reset of the assumptions that have guided policy and engagement with China on the part of Australia’s political and business leaders and those of other nations. Even the sober assessment of Australia’s Reserve Bank governor seems to be acknowledging this.

Amid the heat and fever of last week, Philip Lowe said Australia should look to diversify its trade relationships [5] to emerging countries like India and Indonesia, adding that coal bound for China could be redirected to other foreign buyers. He’s right. That’ll be one of the best ways of living with the Chinese Dragon.



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URL to article: https://www.aspistrategist.org.au/detuning-our-china-violin-and-dealing-with-the-dragon/

URLs in this post:

[1] June 2018: https://publications.industry.gov.au/publications/resourcesandenergyquarterlyjune2018/documents/Resources-and-Energy-Quarterly-June-2018-Thermal-Coal.pdf

[2] safety checks on foreign cargoes: https://www.reuters.com/article/us-china-australia-coal-ministry/chinas-foreign-ministry-says-coal-imports-from-australia-continues-as-normal-idUSKCN1QB0R8

[3] might have banned: https://www.reuters.com/article/us-china-australia-coal-exclusive/exclusive-chinas-dalian-port-bans-australian-coal-imports-sets-2019-quota-source-idUSKCN1QA0F1

[4] prime minister: https://www.themercury.com.au/news/breaking-news/china-port-bans-australian-coal-imports/news-story/cc3ee01cad4b4f035ed937363ada79b2

[5] treasure: https://www.afr.com/news/josh-frydenberg-urges-calm-amid-fears-over-china-ban-on-australian-coal-20190222-h1bkxv

[6] trade minister: https://www.sbs.com.au/news/australia-china-deny-ban-on-coal-imports-amid-tensions

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