As tensions heat up between President-elect Trump and the equally sensitive Chinese over trade policies that could lead to an all trade war, amid other problems arising from the “One-China” policy, the RBA is suggesting bring it on!
In an interview to the WSJ, RBA board member Professor Ian Harper suggests any trade war would have two effects – a “hammered” Aussie dollar and a huge fiscal stimulus response from Chinese authorities, thus saving the RBA, I mean Australia. From The Australian:
“I’d like to see the (Australian-dollar) rate weaker than where we’ve seen it over the last 2-3 years, that’s for sure”
….a weaker Aussie dollar would help the local economy, while policy makers in Beijing would also likely take action to prop up Chinese growth. “You would expect some countervailing action to stimulate Chinese economic activity”.
There’s a slight problem with both those assertions. First what has the RBA done to foster and keep a lower AUD? Ever?
Secondly, the IMF only just recently came out with a dire warning for Australia if China continues to use the fiscal bomb and a “deluge” of too-cheap credit to prop up its economy. From Bloomberg:
“The growth rate in China was a bit stronger than expected, supported by continued policy stimulus,” the IMF wrote in its latest outlook.
But the Washington-based fund repeated a warning that China’s credit-fueled recovery could only be storing up deeper problems.
“Continued reliance on policy stimulus measures, with rapid expansion of credit and slow progress in addressing corporate debt, especially in hardening the budget constraints of state-owned enterprises, raises the risk of a sharper slowdown or a disruptive adjustment,” the IMF warned.
China’s total debt grew 465 percent over the past decade, according to Bloomberg Intelligence. Total debt rose to 247 percent of gross domestic product in 2015, from 160 percent in 2005, with corporate debt jumping to 165 percent of GDP from 105 percent.
A significant up-tick in capital outflows in recent months as the yuan weakened against the dollar adds to the worry list given the rapid debt build up. “These risks can be exacerbated by capital outflow pressures, especially in a more unsettled external environment,” the IMF paper said.
So a trade war between Chimerica is something Australia can handle with aplomb, is it? Too bad a lower dollar is too late for Australia’s manufacturing and export industries, and you can guarantee plunging volumes in commodities resulting from any “slowdown or disruptive adjustment” would exacerbate the decline in the terms of trade and push over an already weak employment market.
In short, there is nothing good here for Australia. If a trade war erupts then:
- global inflation will surge and the Aussie dollar collapse;
- local inflation will surge as both pour higher prices into Australia;
- the RBA may be forced to hike interest rates but even if not offshore funding costs will jump for any and all externally funded lowflation dependent economies (i.e. one with high debt like us);
- both sides may force us to choose between them with either/or strategic and economic punishments;
- Australian housing will confront its sternest test at our weakest moment.