China’s impact on Evergrande, iron ore, and Australia’s future
The Chinese and Australian economies are inextricably linked and the latest fallout from Beijing could prove to have a profound impact on us.
American author Mark Twain once said, “It’s not what you don’t know that’s causing you trouble. This is what you are sure it is not.
As Chinese mega real estate developer Evergrande continues to implode, these words are deeply painful for an Australia that has bet farm, mine and vineyard on a strong Chinese economy. For years, the Chinese economy was expected to continue its decades-long streak of outpacing global growth, thus supporting our own economy.
Thanks to international students, resource exports and the sale of homes to Chinese citizens, Australia has become, year after year, more and more dependent on Chinese capital and remains in Beijing’s good graces.
But as the fallout from the unrest in China’s real estate sector becomes increasingly evident, it is clear that Australians may have to pay a penance for the nation’s failure to sufficiently diversify the economy.
But how did we get there, how did Beijing get out of a bailout that the Chinese Communist Party is now allowing one of the world’s biggest companies to default on.
The world has changed
In the wake of the global financial crisis, the Chinese government has used a huge construction stimulus program to support the economy. While the program was successful in its broader goals, it came to be seen by many in the halls of power as going too far.
Yet despite these concerns, the construction-driven growth model continued and became even more relied upon. Chinese leaders such as former President Hu Jintao have repeatedly reiterated the importance of rebalancing the economy away from construction and in favor of a more consumer-oriented model, but this has failed. been the case.
As the Covid-19 pandemic continues to impact China, Beijing’s priorities have apparently changed dramatically.
With about one in six urban Chinese youth (aged 16-24) unemployed and millions of small business owners struggling, the thought of spending a huge amount of money to bail out foreign investors and the wealthy national bond holders would probably be a good idea. ball.
That’s not to say that some form of rescue won’t come, it will almost certainly happen at some point.
With 1.4 million homes expected to be completed by Evergrande for home buyers and more than 3.8 million people directly or indirectly employed by the giant, it is unlikely to be allowed to collapse.
Instead, a restructuring that protects property buyers, retail investors, and suppliers is likely, allowing President Xi Jinping to show the Chinese people that the CCP has their interests at heart.
The power of the Chinese Communist Party
As the uneven nature of China’s economic recovery becomes increasingly evident, the central government has apparently been looking for ways to prove to its people that it is its number one priority.
Where once a mere slice of the spoils of China’s rapidly growing economy was sufficient, as growth is increasingly concentrated in select industries and locations, it has become a much more difficult prospect for Beijing.
Before the pandemic, this was already a smoldering issue, as President Xi tried to make his mark in China’s history books alongside Mao.
In the wake of the pandemic, this is now being done with much more urgency and fervor. Whether it’s limiting the time young Chinese can spend on TikTok per day or reigning over the power of Chinese tech giants, Beijing is trying to argue that it is a powerful force for improving Chinese society.
As an individual who was deeply affected by Mao’s “Cultural Revolution” in his teenage years, President Xi is keenly aware of the importance of maintaining broader social stability.
While the markets and some wealthy Chinese may want to pursue the never-ending bailouts, Xi appears to be taking another route. An itinerary in which people are at the center of concerns and if the holders of assets are burnt, this can be all the better for its credibility than for its desire for “common prosperity”.
The potential impact on Australia
According to an analysis by Goldman Sachs on the impact of Evergrande’s woes on the real estate sector, Chinese GDP is expected to fall from 1.4% to 4.1%.
Not fantastic news for an Australian economy that catches a cold when China sneezes (no pun intended on Covid). But perhaps more worryingly, new Chinese housing starts are expected to drop 15-30% in 2022.
While the current crop of projects is expected to keep iron ore demand relatively stable for some time, longer term the impact on the Australian economy becomes clearer.
If these scenarios materialize, Chinese iron ore consumption could drop 6 to 12 percent as the current crop of projects is completed. While these numbers seem relatively innocuous on paper, in reality, they could tip the balance of supply and demand quite significantly.
Since iron ore prices peaked at nearly US $ 240 (AU $ 331) per tonne in May, cuts in Chinese steel production have already lowered prices by almost 60%, to range. briefly below 100 US dollars (138 Australian dollars) per tonne.
While the federal budget conservatively based its estimates on iron ore prices at just US $ 55 (AU $ 76) per tonne, it did not predict any other significant impact from virus lockdowns and restrictions. .
Before parts of Australia returned to foreclosure, it looked like the huge bonanza in the price of iron ore could help the Treasury fill some of the budget holes.
But with more than 11 million Australians stranded and the price of iron ore below half of what it was in June, the likelihood that the Morrison government or its successor will have to make tough budget choices after the election has dramatically increased. increase.
For years, Australians rode the Chinese real estate boom gravy train, with many believing it would continue for decades to come. But to paraphrase Mark Twain’s famous quote, it’s not what we didn’t know that got us in trouble, it was we thought we knew for sure, but it just wasn’t the case. .
Tarric Brooker is a freelance journalist and social commentator | @AvidCommenter