Australia will be absolutely fine without China

We were fine before it. And we will be fine after it. So disregard the panic coming from the likes of Terry MCrann:

…all of those Chinese benefactors outside iron ore are currently on Covid-hold, along with other more “minor” exports which China, unrelated to Covid – apart from perhaps, a certain ­irritation over a certain lab – is happy to do without for the ­moment.

They’ve been replaced by the biggest national credit card binge in our history and an accommodating – very accommodating – Reserve Bank. But can that really be a permanent substitution? I think not.

In crude macro policy terms, we can go back to, indeed stay with, China or go back to something akin to an “Argentinian ­future”.

So it was at least “interesting” that in the same week we put China in the geopolitical stocks, so to speak, the iron-ore price plunged to just over $US100 a tonne, less than half its recent peak and about two-thirds the ­average price over the 2020-21 ­financial year.

[Iorn ore] gave us a jaw-dropping $68bn current account surplus – together with 2019-20’s somewhat smaller surplus, the first surpluses in just shy of half a century, at least halting and indeed temporarily reversing our seemingly inexorably escalating foreign debt.

It meant that iron ore all on its own contributed about 7 per cent of our entire $2 trillion nominal (cash) economy in 2020-21; and oodles of tax revenues to Canberra and Perth. Now of course not all our iron ore goes to China, “only” about 80-85 per cent; but Chinese demand – and it’s willingness to pay the price if not the piper – sets the price that everyone pays.

…Imagine such a world where the iron-ore price went back to averaging, say, $US50 long term, far less the $US20-$25 that the Pilbara miners used to think was their reasonable lot.

Yawn. I used to be a doomster like this but I was wrong. We don’t need to darkly imagine life at $50 iron ore. We experienced it in 2015. It was:

  • A budget crunch resulting in having to cut some middle-class welfare.
  • A few years without wages growth and a one-off modest adjustment to living standards (slightly more expensive TVs, less international travel etc).
  • Much lower interest rates and higher house prices, and
  • A much lower Australian dollar.

That’s not Argentina with its endless crises and falling living standards.

We’ll see the same again as our commodity exports go to destinations other than China and the AUD falls to 40 cents, boosting every import competer and exporter not tied down.

Plus we’ll get a flood of foreign capital into Australia’s highly skilled economy on the doorstep of the fastest-growing region in the world.

And no, there won’t be any inflation with wages stalled for a few years and, no doubt, mass immigration still growing the population.

Chill Tezza. It’s called a real exchange rate adjustment and it is entirely manageable for the economy so long as we pull together with appropriate expectations for a few years.

Houses and Holes

Comments

  1. And that’s the problem- the pulling together.Any nation is capable(just about) of fineness with the correct attitude of the people
    Do we have the correct attitude- not convinced.At the least this is going to take many years of the correct ingredients

    • “Attitude” – you may have a point. Perhaps a new “understanding” is another one of your needed ingredients.
      It seems some don’t want to admit pain is a necessary part of free market capitalism. Plenty of people remember half the workers over 50 that were made unemployed in the early 1990s recession never worked again. They were tough times but, when we emerged from that house prices had dropped and, as the subsequent productivity gains were shared with workers in the years that followed, wages went up. When we are honest about the pain though, we permit space for a conversation about how we treat those that suffer as part of this process (part of that needed attitude).

    • 40 Cents AUD, no impact on a country which is 90% reliant on imports.

      What an absolutely absurd piece of writing. It is shocking to see this article actually exists.

      Completely eviscerated any credibility left on this “blog” – because its certainly not news or analysis – its just a Tumblr blog with stuff like this.

      China is 50% of our exports – taking that away is not meaningless.

      • I am a few days into a free 14 day trial and couldn’t agree more. If the author concentrated less on criticising other people and cut and pasting selected sell side notes which support his emotive view of the world it would help.

        The above is tabloid nonsense.

      • Even StevenMEMBER

        Yes, our iron ore producers will have to make do with massively lower profits if China’s construction sector falls over. They’re half owned by foreigners anyway so I’m not going to cry for the shareholders.

        I do agree with you that the AUD at 40 cents (for a significant period of time) will have profound implications. On balance, I think good implications. It will encourage local manufacturing and a more diverse economy. Some belt tightening on our consumer imports will also be required. Have to wait unyil the TV is truly cactus before upgrading it. Short term pain, long term gain.

        • That’s the problem with you guys
          You all think you can unf#uck a dog
          As far as global manufacturing is concerned Australia screwed the pooch
          That’s it, that’s all there is to it.

          • Jumping jack flash

            This!!

            Maybe its time for National Industry?
            Only 10 years too late.

            The government needs to step up and actually take some action. Its a shame we have a bunch of lazy, pasty, bloated buffoons leading us.

  2. Yeah nah. Not much detail there.
    Currency collapses are very overrated. Has looked good for Oz previously as corresponded with big rates cuts and subsequent debt binge. No capacity for more debt binges.

    • It took almost 5 decades to build Australias manufacturing with no competition from Asia outside Japan – it took 2 decades to destroy it.

      We are NOT going to return to manufacturing, nor high tech. That is not going to happen in todays world.

  3. Australia’s highly skilled
    Absoloodley. The Wallabies almost as good as the Pumas, the Boomers won the Olympic bronze
    (after beating Argentina), the Soceroos have been quite decent… So that’ll be the future when the dollar is at 40c.

    • Interesting. Now if we could just give up on the mandated extortion for electric car servicing they would have a proper model.

    • NoodlesRomanovMEMBER

      I can see the website workflow: you find the car, add the extras you want, pick your color and interior finish, add to cart and click checkout. The text ‘I’ll have to run this past the manager, I’ve never done a deal like this before’ will pop up.

    • That’s right. Seriously considering getting a Canyon (direct to consumer bikes)…pfff, when they have some stock again…
      Haggling is over. I don’t need a fight with a sales person forever tarnishing the buying experience. Buying through a dealer is always the worst part of the entire experience. All those shops are finished. They can sell bikes to newbies. Enthusiasts can do their own building and servicing.

      • There he was, pasty, overweight, middle-aged and desperate. Could I out-negotiate the guy who’s food was leaving his table with each dollar down? Where was the value in this guy? This real estate agent. Then I realised as an Ozzie, in my own office, he was me and I was him. I saw my face in his. Then I squeezed him as hard as I could!

  4. Australia can survive without export to China, but Australia cannot survive without import from China.

      • If we can there is nothing being done that I can see to invest in capability to produce a light switch or tap cartridge. How long will it take to restart small goods manufacturing or is the plan to retool Thai industry for Australian needs.

    • NoodlesRomanovMEMBER

      Genuine questch… what do they make that we can’t get elsewhere? At best they are only 5% cheaper than the South Koreans once you start enforcing quality to some level, so the minute they put tariffs on exports to Australia I could just see us buying the same thing from somewhere else in Asia or South America. Not expecting us to ever make things though, perish the thought.

      • I don’t expect China to ban export to Australia, which is unenforceable anyway. Rather, it is an observation on how much of what Australians cannot live without are made in China now.

    • We can, definitely, and we will be like Argentina – there is no question about this.

      Morrison is guilty of treason.

      This article is complete trash and not worth the bytes it uses.

      China is 50% of our exports, that is gone and Bahrain isn’t going to make up those numbers.

      HUGE economic impact, living standards will plummet.

    • Camden HavenMEMBER

      I believe that 70% of Chyna finished product are foreign brand foreign company and they are going elsewhere fast.

    • We were a basket case – WTF are you talking about.

      Our entire wealth and -prosperity is 100% linked to China.

      Beggars belief that people are this stupid.

  5. The acronym AUKUS is not the full story.
    Considering the French are intimately involved , the correct acronym is
    FAUKUS
    and I think we will be.

  6. Iron ore benefits WA and billionaires, who gives a stuff about % on spreadsheets. The bigger issue is how we build a supply chain not as dependent on Chinese manufacturing. If we could sort out our local cartel energy industry there may be incentives to bring back heavy manufacturing locally.

    • China is 50% of Australias entire export revenue.

      Stop bleating to this drivel – its an insane article.

      • Even StevenMEMBER

        Elgin, China has already imposed tariffs or bans on Australian wine, beef, barley, meat, coal. They’ve also tried to discourage tourists and students. Did the world end? No. The reason is because Australian exports are displaced to other countries instead (albeit probably at a slightly lower price). Other than iron ore, there is not much more that China can do economically.

        As I’ve said above, I do think there are significant ramifications from China’s property/construction sector from imploding. Because this would represent an actual reduction in demand across the globe for iron ore. Displacement effect will not apply and iron ore price will get crunched. Fortunately Australia is lowest cost producer of iron ore so probably not that much impact upon operations or employment (just revenues and profits that drop).

        Now on the other side of the equation we have a heavy reliance on imports from China for manufactured goods (circa 90%). As you’ve pointed out, China unlikely to ban. But even if they did, displacement effect would apply (Net impact we pay slightly more for the products coming from South Korea, Thailand, Vietnam etc).

        Suggest you calm yourself down. Maybe have a little whisky to settle your nerves (or Chinese rice spirit if you prefer).

        • EvenSteven,
          I don’t think you’re getting anywhere near creative enough on what China “could” do to enact its revenge on Aus for the Subs deal et al.

          The dollar won’t take two years to get to the 50s if the Chinese decide to get all biblical on us.

          Xi has spent considerable time warning his people to prepare for hard times. He will push the cost on them under his uber-nationalist bus and ramp strident Anti-australian rhetoric and behaviour to distract the locals from their own pain.

          They’ll start by subsidising their own iron ore production more and tearing down chunks of ghost cities to maintain employment and stability. Allows them to recycle more steel and buy less iron ore, driving down price and volume. Iron ore to $50 or lower on that alone and the A$ tracks iron ore price. China is reaching its urbanisation limits anyway, and this construction-driven growth model funded by outrageous leverage is having the pin put into it as we speak.

          Expect they’ll pretty much forbid students and tourists from Oz, except for the spies they want to embed. Universities are already in deep shit. Chinese were our largest tourist source, albeit they spent most of their money with Chinese companies.

          China cut Oz coal imports, but in reality they still buy our coal through Indonesian proxies who clip the ticket, push the price up and China pretends they don’t buy from Oz. Expect coal volumes to shrink as China pivots to more Russian (and US) gas.

          In other fungible commodity markets its a bit harder for China to hurt Oz long-term, but sure can cause some pain in the short.

          If I was China I’d force all Chinese owners of Australian property to divest it and return the funds to China on pain of family imprisonment back home if you don’t. Pretty easy call under the guise of fighting corruption, common prosperity etc. and with their spies already here they’ll root out the Chinese owners fast and make an example of quite a few as a warning to the rest. Imagine several hundred thousand properties going on the market in a month or two. Housing market crashes overnight, banks have to be bailed, A$ plunges, egg all over Scomo’s face. And Labor win the election, with all the Labor greybeards already cosying up to China. Best of both worlds for China.

          China will ramp up soft power in our backyard, forcing us to spend way more money bribing small neighbours not to roll over to China. They’ll wedge NZ, hard.

          Next there’ll be an increased focus on digital attacks on Oz. Expect them to try crippling attacks on key systems and infrastructure.

          China is behind the opioid crisis in the US, having used Vancouver as a gateway. Dump vasty quantities of cheap and nasty drugs on the black market here and see what can fester.

          Lots of distractions, not enough bandwidth or capital to cope. Could get ugly fast.

          I can think of more…

          • Even StevenMEMBER

            Well I admit, you are creative! I do think many of the scenarios you’ve outlined are unlikely, verging on implausible, but I also would have said interest rates couldn’t be at zero 20 yrs ago, so accept the world is a strange place.

            I like this bit: “If I was China I’d force all Chinese owners of Australian property to divest it and return the funds to China on pain of family imprisonment back home if you don’t.”

            Not just like. Love. As in, the level of gratification I would get if China actually did such a thing.. Well, it’s unseemingly of me to go into detail. Suffice to say I would be a very happy man.

            Sure, there are things China *could* do, but the easy levers have already been pulled. As you say, they’d need to get creative. And at what point does this just look like a big bully picking on a small little country?

            Granted, self-awareness is not the CCP’s strong suit.

          • EvenSteven,

            With Xi going all in on “common prosperity” he could easily use this to placate the poor while he redistributes wealth from those who have clearly corruptly obtained the money and illegally transferred it into offshore property – outside the $50k annual rule. Of course, this forced return of capital would only apply to those outside Xi’s faction, and any dissent from those negatively affected would be squashed post-haste.

            The approach has much to recommend it to Xi as it ticks a bunch of boxes.
            – Placate the poor and throw them the bones
            – Crucify his opponents a bit more
            – Provide a major source of foreign capital back into Chinese coffers
            – Force-feed that money back into the local property sector to rescue homebuyers caught out by the default. Why spend gov’t money on a rescue when you can use your enemy’s?
            – Order it after the currency falls on Evergrande et al and then devalue the Yuan to increase the value of that money internally while boosting export competitiveness
            – Give Australia a proper smack in the mouth and then run propaganda for local consumption on how China can restore order in its housing market while Australia’s falls to capitalist greed

            I expect the Chinese read MB…

          • Even StevenMEMBER

            “I expect the Chinese read MB…”

            Ahhh yes, I think I see what you’re doing there. Indeed, the wise and prudent Chinese people should pre-position themselves for just such an outcome. Don’t wait for your God Emperor to decree it.

            *wink*

            Who knows, maybe this will be the spark that ignites the Great Property Collapse of 2021.

          • If I was China I’d force all Chinese owners of Australian property to divest it and return the funds to China on pain of family imprisonment back home if you don’t. Pretty easy call under the guise of fighting corruption, common prosperity etc. and with their spies already here they’ll root out the Chinese owners fast and make an example of quite a few as a warning to the rest.”

            Brilliant idea! How do we get it to Xi?

        • EvenSteven,
          See reply below.
          Also: This idea gives the Chinese a ready-made weapon that has zero trade war or diplomatic risk attached. If I was Xi I’d pull it on Australia and use that result to threaten his offshore buyers with the same treatment in all other offshore property havens like NZ, UK and Canada. Remember, he wants to crack down further on offshore capital flows. Two birds, one stone.

        • Even Steven
          I was thinking more of the local Chinese consulate apparatchiks reporting back to central command. Popping an idea like that on a superior’s desk could earn a fat promotion for helping the Party party on at Australia’s expense

          • Even StevenMEMBER

            Ahhh. I see. Yes, I sincerely hope that there is no one from the CCP operating on this forum that would take such a nefarious and evil plan to bring misfortune to such a staunch and and dependable ally as Australia. This would truly be a ruthless and savage method of inflicting harm upon us.

            Yes, I hope there is no one at all of that sort here.

    • WA are doing some interesting things on this front – locally manufactured fertilisers will be a start
      https://strikeenergy.com.au/project-haber/

      All comes down to renewable energy long term which Aus should do well on – so I wouldn’t bet against a green steel mill up in the Pilbara in the next 10 years or so.

  7. Agreed, the main difference between us and an Argentinian path is integration with Asia including restarting the population ponzi to stabilise house prices. And when the subs are in town we’ll be able to hook them up to a local desal plant as well!

  8. The Russians have a word for it……..it translates as not agreement capable……we have now joined the ranks of these countries. If these clowns really let IRBM’s be installed here Indonesia will have to get Russian missiles to counter them and we will have lost our greatest strategic asset…….5,000 kms of strategic depth without a shot being fired.

    • The best defence is avoidance of needing one.
      We’d be sitting ducks in case of a hot war if we made ourselves a target.
      Couch war shills forget that bit conveniently.

  9. Wow – big claims with less than ZERO back up.

    China was 50% of our entire trade revenue in 2020 – since then the trade war has collapsed our entire trade with China.

    we may replace SOME volume, but absolutely not VALUE.

    Students, coal, ore, tourism – our biggest exports all eviscerated.

    what a complete joke of an article – thank GOD absolutely no one, not one single person with any degree of credibility, outside the LNP fascist apparatchik and macrobusiness (same same) thinks this way.

    Just an absurd thing to post. Utterly inane.

    https://www.afr.com/policy/economy/china-hits-48-8pc-of-australian-exports-20200804-p55i9d

  10. FatAlbert17MEMBER

    What is the precise benefit to the Oz population in general from iron ore exports? Most of the profits go elsewhere.

        • Frank DrebinMEMBER

          Amen to that – Trillion Dollar Baby indeed.

          We really are the quintessential dumb/corrupt country.

      • Jumping jack flash

        All 20 of them… well obviously more than that but the point is that mining workers are only a small subset of the people

    • Despite the profits going OS, mining still uses a lot of local servicing, supply and engineering inputs, and labour is often 50% of their costs as well. And miners love spending it.
      We are a medium/large operation and our annual budget is approx $300m.
      When things slow down, they tighten quick. Contractors first to go, projects slow down and its batten down the hatches. We dropped $25m in costs in a month after the GFC hit.
      We are owned by a global org, who claim $4b+ of inputs to local economy pa. Probably about right.
      I know blokes who took a 30% haircut on property last downturn, and thats not as bad as the IO and coal towns. It’ll hurts somewhere

    • Even StevenMEMBER

      1. Australian Employment and high salaries (as mentioned below) with monies that get respent in our economy.
      2. High tax revenues to the Australian government (which takes pressure off other areas that would otherwise need to be taxed higher). Smaller deadweight economic loss.
      3. Raw production capacity and know-how in the event we need it either militarily or for construction (potential benefit only)
      4. Profits that accrue to the shareholder ownership base that is Australian and gets respent within our economy.
      5. Higher Terms of trade (enables us to acquire foreign currency) allowing us to purchase from other countries what we do need.

  11. FDA Banned Boosters

    We should have been nicer to China. Just about everything other than Subway subs and flat whites in this country are made in China and I’m sure most of those ingredients are imported anyway.

    We have absolutely no capacity to make anything more complicated than takeaway food.

    And then there’s our exports which there is really only one and China is trying to buy that product from anyone but us.

    • Even StevenMEMBER

      Nicer to China? We’ve been *too* nice to China over the last 20 years. That’s how we’ve found ourselves in our current predicament both economically and politically.

      Imagine if you will, a scenario where Australia had been very cautious, reserved even, in our dealings with China over the last several decades. Where we had made it clear from day one that our strategic manufacturing base was of primary importance, no depdency on others, and that we didn’t want to establish close ties and we’d only do so where it suited us.

      The lovers quarrel we’re currently having with them certainly wouldn’t have happened as there wouldn’t have been an opportunity for China to feel ‘spurned’.

      No crying over spilt milk. What is done is done. Let’s be firm and fair in our dealings with them. We tell them on what basis we will engage. I’m sure they will do likewise. If there’s no middle-ground to be had, then so be it.

      The only alternative is capitulation. I presume you’ve seen the 14 directives from Sun King Xi Jinping? Submit, or forever be in our disfavour! Sorry. I can’t take Winnie the Pooh seriously.

      • I really wonder what Australia you live in. or maybe it’s like a time warp thing
        The Australia that I live in is not the same Australia that you talk about, near as I can puta a date to it that Australia died 20 years ago. Sure the final bullets only left the barrel a few years back, but if we’re honest that was a mercy killing, they were dead anyway.
        I’d love for Australia to fall out with China, land on its feet, start making stuff. But to be honest making stuff is not that easy anymore and the low hanging fruit has all already been picked. As for the ripe juicy fruit near the top of the tree, well were just not tall enough to reach it anymore.
        Maybe, best case, we start substituting local produce for imported but it won’t be a high margin substitution, were talking sub 20% gross margins for local manufacturing to displace low /mid end imported stuff (and that’s if you can even identify a component source that will deliver competitive priced components)
        There’s a thing that we used to call “Kuai dollars” basically whatever price you could get components for in China (Kuai) is what it would cost you here in Australia in Aussie Dollars (typically the exchange rate is around 5:1) put the two prices tend to be the same in their respective currencies.
        How the heck could a local manufacturer start with a component cost 5 times higher than their Chinese competitor and still end up with a competitive mid to low end product?
        It’s all but impossible, so many things need to change before that dream has any hope of success.
        The main change that needs to happen is to find anyone with the experience to run a manufacturing business that has even the slightest interest in trying to resurrect Australian manufacturing.
        These guys haven’t just been politely sidelined they were stood out in front of the cameras and publicly reamed. Tony Abbott had needs and all that stuff, free up capacity etc.

        • Even StevenMEMBER

          I’m under no illusions we can produce manufactured items as cheaply as China. They pay their people peanuts and that’s even before we consider scale benefits.

          I am not as pessimistic as you, however. We could have maintained some diversification in our manufacturing base. I believe we still can – but it will take decades. That’s fine. Let’s make a start now.

          We have plenty of educated, talented people in Australia (when we’re not stupidly trading houses).

          We will always have natural advantages in minerals, energy and agriculture, but introducing some capabilities in strategically important areas that reduce our reliance on other countries (including China) makes a lot of sense to me.

          You seem to think it’s too late. I don’t.

          • I’d guess the single biggest difference, between us, is that I spent my career in high tech manufacturing, I’m not sure where you spent yours.
            I’m not having a cheap shot here, it’s a matter of perspective
            I’m very familiar with both Chinese and US high tech manufacturing, I’m aware of the competitive advantages that each country has and I’m equally aware of the systemic disadvantages of each system.
            To be honest the manufacturing ecosystem that I have the least experience with is Australia’s. At one point I tried to get involved but I was horrified by what I found.
            The problem is not that we don’t have some very capable engineers graduating from our universities, rather it’s the structure that we’re inserting these people into that is deficient. In today’s environment it’s the combined skills of the entire ecosystem that defines our capabilities, if your missing critical elements of this skills base then you’re simply not going to get the project finished successfully.
            That’s the basic problem, we’re good on some areas, great in other areas and a complete no show for other critical elements of modern manufacturing. The real problem is that even Aussies working manufacturing don’t know what they don’t know and you can’t fix a problem that you don’t even perceive yourself as having.
            Put simply we’re so far out of the loop that it is easier to take our few good elements and integrate them elsewhere then it is to fix all our deficiencies so as to enable competitive local manufacture.
            My experience is primarily with high tech manufacture so I have no idea what Australia might be capable of doing wrt minerals processing or some other related activity.
            Anyway that’s my honest read on our situation.

          • @ Steven

            to have a product that is worldwide competitive, even as a high tech, you must compete with the rest of the world as domestic market is too small for any high tech business to have a substantial advantage. To put it simple, US can because they sell to their domestic market first (new tech) and then with a rolling start sell to the RoTW. The difference is in 275mil plebs more and a consumer base that is prone to buy new stuff. On top of that, when everyone else is making themselves competitive by offsite manufacturing in china, we’d be even less competitive not to make our high tech (if we had one) there.
            AUS (or any other country) cannot do without china as long as the rest of the world does business with them in any said field.
            What we can do is minimise reliance on China but that bit has to be decades of evolution and severe pain, not a quick blitzkrieg revolution as couch-war-shills prefer. It is next to delusional as it would take very long lasting orchestrated and coordinated efforts which will unseat every imaginable power structure in AUS to decouple from china and big cut in their profits. People will rise to streets when they begin to pay extra premium fo Chinese made iphone that came here via US dispatch centre.

          • Even StevenMEMBER

            Thanks dodgy as and Djenka. No. I have no expertise in manufacturing. My background is finance and investments.

            Other developed countries produce hi tech items so it seems preposterous to me that we cannot (over years or even decades) develop similar capabilities. No doubt it will require government support, subsidies, particularly in their infancy.

            Need is the mother of invention. We have a need. We didn’t 10 years ago.

    • I agree with the premise of the article. We need to give China the boot. I cant remember a time when Australians have turned into such cowards.

      Australia should NOT be selling its Sovereignty out to China for Money. Thats not a fair deal in anyones mind.

      I guess the Baby Boomers are about to be in for a huge shock.

      If ever Australia does manage to get an Anti-Corruption Commission off the ground ( how many years has it been now? ), half this country will be imprisoned and up on charges. I dont think its a question of, ” Who’s corrupt? ” but more, ” Who isnt corrupt? “.

      But yeah… the Baby Boomers. What the hell have they done? How do they expect to have a pension after what they’ve done to this country?

      The funny thing is, they thought it would end different to this? lol. They buggered themselves. Thats what the boomers get for being so damn arrogant, I suppose.