Australia has a devastating secret weapon against China

See the latest Australian dollar analysis here:

Macro Morning

What is Australia’s secret weapon against China, I ask?

Iron ore! I hear you scream.


Sure, iron ore’s good to have. It makes steel. That’s pretty important if you want to build apartments, bridges…and guns.

But iron ore is not forever. Even if it seems so.

Why, you say? For one thing, those really big guns may be pointed back at you, or at somebody you know, before too long.

Then there’s the natural end to the historical episodes of urbanisation that drive developing economies, even on a colossal scale. For China, this moment approaches. Most developed markets peak at 80% urbanisation rate. China has reached 64% and it moved 14% of the population into concrete jungles in the decade to 2020. If it does the same in the next 10 years then, well, they’re at the end!

And then there is a simple fact that Australia and China are now frenemies. We don’t like each other as nations. For good reason.

China is the evil communist empire reborn.

Australia is the “tip of the spear” in the liberal American empire.

I mean, really, that was always to end in tears. So China can’t rely on Australia to supply iron ore when it needs it. Especially so when it needs it most. Amid conflict.

For these three reasons, China is going to cut off Aussie iron ore over the next decade.

So, if iron ore is not our secret weapon then what is it?

Coal. Nope.

LNG? Nope.

Lobsters? Nope.

Ludicrously expensive houses? Nope.

ANZUS, surely? Nope

Our secret weapon is hiding in plain sight. It means that no matter how much pressure China applies to our economy via trade boycotts, we can come through it relatively easily and quickly. It enables us to rebalance our trade to other nations. It enables us to devalue externally rather than internally when needed. It keeps us competitive in asset prices, wages and inflation such that capital will always seek us out as a great place to invest and get a return.

It’s the Australian dollar of course.

No matter what China does to Australian exports, it cannot break us while we have a floating Australian dollar. The more harm China’s trade war does to us, the lower the AUD will go, and immediately and surprisingly swiftly repair the damage.

The math is simple. In 2019, Australia exported $373bn in goods and services. $135bn went to China. Most of it is commodities so all but iron ore would simply go elsewhere if cut off. Not so iron ore because there would be too much of it.

Let’s be pessimistic and say that if China cut off the whole lot then Australia would see roughly a $100bn hit to exports.

Now add an Australian dollar plummeting to $0.50 cents.  That adds $98bn to the remaining export base. So, in fact, we’d come out even.

And once we did, an uber-competitive Australia would suck in capital from every quarter as our post-carbon advantages, position on ASEAN’s doorstep, prominence and reliability within the US liberal trading bloc, and smart people drew investment.

Sure, there’ll be losers. But even more winners. That’s business.

And Australia itself will still be young, rich, and, most importantly, free.

Houses and Holes
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  1. Yes. A floating dollar CAN act as a regulator to ensure balanced trade.

    Unfortunately predatory capital flows can spoil this function. Stop the predatory capital flows and then the dollar WILL ensure balanced trade in the long term.

  2. ErmingtonPlumbingMEMBER

    David you articulate not so much a weapon against China but rather a reassurance that Australia going our own way isn’t really that difficult or that much of a big deal.
    Why use all the sabre rattling terms?

      • Arthur Schopenhauer

        “Sucking capital”? So it’s all going to be done with other people’s money?

        Not sure repeating the 19th century model will work in the 21st.

      • “True. Weapon against Chinese bullying then…”
        One could also argue it is an election weapon as well. Hawks tend to validate the views of hawks on the other side and in doing so make them stronger.

  3. Nope. Too late, the war is already over. Take a drive through Ashfield, Burwood, Hurstville, Eastwood, Chatswood and tell me we are not already a southern CCP province.

      • Yes. Most are definitely not fans of the CCP, and some are vehemently anti CCP for any number of reasons. However if you criticise China they will tend to defend their homeland, it’s quite natural as most people tend to take it personally, but a few days later they’ll be back to criticising Xi’s actions. Sure there are some who will back CCP whatever, but they are the exception in my experience.

        • They have to be careful what they say or folks back home could get in trouble.

        • Wow, Zulu, that was spot on.
          Typical westerner view is that because local media successfully peddles hatred towards a nation/state as hatred towards a ” regime” that expats must hate their country in a round trip back reference. Silly.

    • Arthur Schopenhauer

      And can you imagine how much more it will cost to set up any kind of productive or innovative business?

      Once the depreciated industrial plant has left the country, it costs far more to bring it back.

  4. Australia has a devastating secret weapon against China
    I’m lost: How is China adversely impacted by the Devaluation or Revaluation of the Aussie Dollar?
    Without a doubt the AUD Exchange rate impacts the viability of externally facing ventures, which could be undertaken by Aussie companies, but it’s a bit of a reach to suggest that our success equates to their failure.

    Australia can succeed with China or without China, that’s clear. However in choosing the latter we are choosing to detach from the fastest growing economy and thereby give up our best growth and diversification opportunities.
    Why do this?

    • Yes I agree David is making this transition look a lot easier than it will be in reality. I think the sensible middle ground argument goes that we need to reduce our dependence on China. I’m all for that but, for many it will be a tough transition.

    • Fishing72MEMBER

      To preserve the remnants of our sovereign democracy. One of the few things you can’t buy from China.

    • Even StevenMEMBER

      There’s something called ‘principles’, dodgy. It’s not all just about economics.

  5. What’s to stop them actively buying Australian dollars? Maybe even buying vast amounts of property with excess dollars to further undermine our competitiveness? Surely it would simply be pocket change.

    • buying vast amounts of property
      That is part of the the predatory capital flows I mentioned.

      • Even StevenMEMBER

        In what way? AUD ends up higher than it should be and because of this more people in Australia buy crap they don’t really need?

        • Correct. You have figured it out without me.
          In the absence of capital flows, the exchange rate will act as a regulator and ensure that trade is balanced over the long-term.

  6. SchillersMEMBER

    Exports of LNG from Australia are booming. 78 million tonnes were exported in 2020, more than the total production capacity of Qatar. The three LNG plants at Gladstone are shipping record tonnage, with the bulk going to China. That’s right, China.
    It begs the question, why, when China is blocking most of our exports except for gas and iron ore, we don’t do the same to them with gas? There are no upside benefits for Australia selling gas to China. There is no tax revenue earned on these exports (thank you Julia Gillard), the gas cartel employs an insignificant number of Australian workers whilst hoovering up one of the last remaining transitional fuel resources we have.
    There would be zero need for public investment in new gas plants if we simply redirected the gas (our own gas after all!) away from China and back to the country that matters.

    • MathiasMEMBER

      Yeah… which paddle do you want shove up your a$$… a blue one or a red one.

      Pick your pain.

      Personally, I find both of them to be just as bad.

  7. MathiasMEMBER

    > And once we did, an uber-competitive Australia would suck in capital from every quarter as our post-carbon advantages

    Ah, well yeah. I get the positive spotlight to all this… but doesnt it mean half our assets get owned offshore? As the dollar collapses the foreigners will be jumping in and buying up every Australian owned Asset they can get there hands on at bargain basement prices. Young Aussies will be renting to some offshore Foreigner holding half of Australias Real Estate Assets ( sounds like it’ll be America if things continue to go this way ). So we will have foreigners buying out practically everything thats Australia made while Young Aussies pay twice as much to buy the home of there dreams.

    Great for manufacturing but absolutely garbage for Home Ownership rates in Australia.

    Do you honestly think Australia would Tariff Americas buying of our Real Estate if it meant protecting our Young Generation from Rising House Prices? First we’d need a Government ( god forbid ) and second we’d need them to actually do something ( it’d make history ) and thirdly, it would go against America ( You’d have the CIA knocking off another Australian Government again when it didnt serve there interests ).

    We need to restore Australians back to power of there own Country again. I dont know how but in my opinion, that needs to happen urgently. Australian Citizens arent even listened to and are just pawns in a bigger game of chess. That says really bad things in my books.

    > And Australia itself will still be young, rich, and, most importantly, free.

    Hmm. ‘Freedom’… Is that what Australias fighting for now? We’ve clearly fallen a long way.

    If its all Australia has left then yeah, guess it has to be enough.

  8. call me ArtieMEMBER

    Show me one country with a really weak currency that you’d like to live in. Just one. Any one would do…

    • MathiasMEMBER

      I hear Venezuelas nice. Beautiful Waterfalls ;p Real Estate at Bargain Basement prices.

    • Hey Artie,

      Didn’t you read the article?
      At 0.50 aud and we’ll be all rich and China will choke in own vomit.
      At 50 cents all loans will be cheaper, all import cars will be less costly, phones too (someone said already) , all the things, tech…. oops, sumtins nor right here, hold on…

      But hey, everything else we actually **export** will be more competitive. And the list of what we make is here:
      1. Nuttin

  9. “Sure, there’ll be losers. But even more winners. That’s business.” – sigh – if only more media commentators (and politicians for that matter) – especially at the ABC – has even the tiniest grasp of this 🙂

  10. And Australia itself will still be young, rich, and, most importantly, NOT HARVESTING THE VITAL ORGANS OF ITS ETHNIC MINORITY GROUPS

    • True, it will be sending instead its ethnic majority as a cannon fodder for US politico-fiancial-pharma-military industrial complex.