In November 2020, a Chinese diplomat called Zhao Lijian sent out a tweet that shocked and outraged Australia. Publishing a digitally altered image of an Australian soldier preparing to slit the throat of a young Afghan boy, Zhao wrote that he was “shocked by murder of Afghan civilians & prisoners by Australian soldiers.“
“We strongly condemn such acts, & call for holding them accountable.”
This tweet perhaps represented the high point of both Chinese “wolf warrior diplomacy” and its aggressive stance towards Australia. The tweet came just days after Beijing had escalated its severe economic measures on Canberra, imposing tariffs of up to 212% on Australian wine and effectively banning imports of Australian coal. This was in response to the Australian government criticising China’s attempts to block international investigations into the origins of the Covid-19 pandemic, and banning Huawei from the country’s 5G network.
But is Beijing’s approach to Australia changing? It certainly seems that China is seeking to drop the more aggressive elements of its foreign policy manoeuvrings, with Zhao Lijian, the most prominent Wolf Warrior diplomat, taking up a new post in the country’s obscure Department of Boundary and Ocean Affairs. Beijing has also moved to ease restrictions on Australian coal and repair ties with Canberra, with officials in the port city of Guangdong now reportedly processing Australian coal cargoes.
After more than two years of economic war with its biggest export market, could the outlook be getting brighter for the Australian economy?
The Pain Inflicted
Australia has certainly had a challenging couple of years in light of its strained trading relations with China. Stuart Crockett, former Australian diplomat and CEO of Perth-based consultancy firm International Channel Partners, told Disruption Banking that “China is an extremely significant market for Australia and will be well into the future.”
“The loss of trade in goods such as coal, beef, lobster, wine, and other products has had a significant impact,” he added. “Fortunately, Australia is still exporting significant amounts of iron ore to China, and this has buoyed the Australian economy somewhat.”
As Crockett noted, trade in iron ore, which totalled 694 million tonnes in 2021, helped avert the worst economic consequences of China’s trade war. Yet the pain was still substantial. At the start of November 2020, before Zhao Lijian’s notorious tweet, the Aussie Dollar (AUD) was trading against the greenback at a rate of 0.7528. By October 2022, AUD was down to around 0.6199 – a decline of over 17%.
Heavy restrictions on trade with its biggest market also meant that Australia’s current account balance decreased significantly. In fact, in the September quarter of 2022, Australia recorded a $2.3 billion current account deficit – having run a surplus for thirteen consecutive quarters. It is particularly unfortunate for Australia that it should experience a weakening currency and current account deficit at a time of global inflationary pressure. A weaker currency makes imports more expensive in dollar terms, therefore contributing to higher prices, while trade deficits can also lead to a higher rate of domestic inflation.
While global economic factors will also have played a role in this, yields on Australian government bonds also increased during this period. Yields rose from 0.75 in November 2020 to reach a peak of 4.20 in October 2022. Higher bond yields reflect higher risk conditions and make it more expensive for the government to borrow money.
Assessing the extent of the pain China inflicted on Australia is a difficult task. Warwick Powell, Founding Member of the China Collective in Brisbane and Adjunct Professor at the Queensland University of Technology, told Disruption Banking that there are several interpretations.
“As for the impact of China’s restrictions, the predictions have ranged from “there’s been no impact as exporters were agile and found other markets,” to estimates of a net loss of 10% or more,” Powell said. “That’s equivalent to billions of dollars.”
Some Australian sectors, particularly in commodities, did manage to diversify into other markets given what Powell called “an adjustment of global value flow networks.” This would help to explain why the Australian Securities Exchange (ASX), where commodities companies account for almost a third of its main indexes, has performed strongly in the last couple of years – the ASX is currently up 20% since November 2020. However, commodity exporters would likely have posted even better results if they had free access to Chinese markets. Powell noted that the prices commanded for commodities in non-Chinese markets “have been somewhat below the premiums paid by Chinese buyers.”
The Next Steps
China’s apparent willingness to reengage with Australia, both economically and diplomatically, is certainly a positive development for the Australian economy. The Aussie Dollar has strengthened on the news. Australian mining shares are approaching all-time highs. JP Morgan has revealed that Australian business leaders are “cautiously optimistic” about the economic outlook.
But can Australia’s relationship with China simply go back to how it was in 2020, as if nothing has happened in the meantime? Dr Edward Howell, a lecturer in East Asian politics at the University of Oxford, fears that “Sino-Australian trade relations could quickly sour again.”
Howell told Disruption Banking that there are numerous geopolitical issues which remain unresolved. “One point to consider is the implications such rapprochement will have on other countries in the Indo-Pacific, particularly Japan, whose relationship with Australia is arguably the closest within the region,” he said.
“China has, in recent years, been irked at Australia’s membership of the AUKUS security pact. China is far from a reliable bilateral partner: it is volatile. One concern for Australia will be how to manage this relationship, such that China does not use economic ties as leverage to prevent Australia from ensuring its security interests.”
Another question that is still outstanding is Australia’s relationship with the Chinese Renminbi (RMB). Powell said that “trade with China will continue to raise questions around the denomination underpinning trade deals […] some iron ore deals have already been executed in RMB, and we can expect the RMB to play a greater role in trade as the years go on.”
It would seem strange for Australian firms to play a role in the internationalisation of the renminbi, given how hawkish successive administrations in Canberra have been towards Beijing. Many suspect that China sees a greater role for RMB in international trade as key to crafting an international monetary environment in its own image. This would also have the benefit of minimising the foreign exchange risks for Chinese citizens, businesses, and authorities, and would ensure that Chinese payment systems would oversee foreign trade transactions. Powell also noted that China is a “global leader” in developing what could be the financial infrastructure of the future – such as the digital RMB and cross-border payment channels like mBridge – and has led “harmonisation of e-payments across ASEAN and multilateral trade-focused blockchain networks.”
Over time, the power this would offer China could allow the country to use the renminbi as a tool to further geopolitical aims – as the United States has also done. The rhetoric from Canberra suggests that contributing to an internationalisation of the RMB would be uncomfortable, to say the least, but do they have any choice if they wish to repair trading relations with their biggest export market?
While Howell does not believe that China is a particularly reliable economic partner for Australia, both Crockett and Powell think that Sino-Australian trade is on a relatively sure footing.
Powell argued that, despite geopolitical tensions, “trade with China, for companies across the globe, has risen over the last three years.”
“Business have traded, and will continue to trade, reliably with Chinese counterparts,” he added.
Crockett said that, while “it is extremely difficult to say how long it will take for trade to get back to where it once was,” he “absolutely believe[s] that Australian companies can trade with Chinese companies with confidence.”
“There are great people-to-people and business-to-business relationships that exist, and will exist, well into the future. Yes, there are fears that trade may be stopped and restricted again, but goodwill between governments to engage in a respectful, diplomatic manner will go a long way to ensure trade and relationships grow uninhibited.”
For now, the diplomatic and economic relationship between Australia and China seems to be improving after a frost of arguably unprecedented proportions. The initial reaction from the financial markets suggests, unsurprisingly, that this will offer a much-needed boost for the Australian economy in a year of tricky macroeconomic conditions. But to what extent can Canberra trust their counterparts in Beijing? As the events of 2020 demonstrated, China can act in unpredictable ways. Trust will have to be earned.
Author: Harry Clynch
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