In the endless election cycle that Australian politics has become, Malcolm Turnbull is facing a greater threat to his chances of an against-the-odds win than the citizenship ruckus, Tony Abbott-led right-wing white-anting and Labor party polling strength combined: the economy, stupid. Asian-based freelance journalist and China-watcher, Michael Sainsbury, reports.
THE THREATS are largely external and from Australia’s greatest “friends” – trade paramour China and joined-at-the-hip strategic bedfellow the United States – and therefore un-manageable from Canberra. Topping off what is an emerging perfect economic storm is the potential hit to the housing market triggered by the banking Royal commission.
Changes at the top in China – Australia biggest trade partner and export destination now by a country mile or five – clearly poses the biggest threat. The largely new-look authoritarian China was unveiled by Emperor Xi Jinping at the annual “two meetings” — the rubber stamp National People’s Congress parliament and its toothless advisory body, the China People’s Political Consultative Committee.
— ▌│█║▌║▌║ (@AnodyneParadigm) January 13, 2017
From our besties across the Pacific, the unfathomable Donald Trump has escalated his response to China’s decades long trade war against the rest of the world with tariffs on steel and aluminum (the end product of processing bauxite).
There has been much wringing of the hands in the west about, oh, how we got China so wrong. But it’s been increasingly clear over almost three decades now since the massacre in Tiananmen Square in early June 1989, that China would carve its own decidedly non-democratic and authoritarian path towards what it describes as its “peaceful rise”— the early, relatively brief misreading of Xi as a reformer notwithstanding.
Indeed, after five and half years in power, Xi now (his real power from his role as Secretary General of the party) finally has internal clout. He’s wiped out the power of other major factions and formed his own and has now put the pieces in place, including a major bureaucratic overhaul and consolidation of government. This reverses a process begun by Deng Xiaoping. He is now finally positioned to enact reforms on China’s bloated industrial sector and to open up its financial sector as rising debt approaching 300 per cent of annual GDP threatens to tip the economy into possible decades of stagnation.
He has installed members of his inner circle as well as expert financial technocrats – many trained at US universities – into top jobs. His former corruption tsar Wang Qishan, 69, bumped out of the elite Politburo Standing Committee because of the unofficial age limit, is now Vice President and expected to wield more power than any previous holders of the job.
Longtime behind-the-scenes economic policy maker, Liu He, believes in a greater role for the market in the Chinese economy. Xi has unexpectedly split the top job at the People’s Bank of China —a surprise announced last month (so there may be even more to come). Yi Gang has been named governor of the bank and Guo Shuquing as the bank’s Communist Party secretary, with oversight of the governor. They are expected to continue the work of outgoing 15 year chief Zhou Xiaochuan. They will both answer to Liu.
Less than a week after naming Yi Gang as the governor of China’s central bank, Guo Shuqing has been added as the Communist Party secretary at the bank https://t.co/SowwjeWrsX
— NYT Business (@nytimesbusiness) March 27, 2018
On the flip side, Xi’s program of repression has been amped up with the much-feared United Front Work Department – already in the global headlines for its international influence peddling amongst overseas Chinese – handed more power over religious and ethnic groups inside China. It’s an “against all enemies (real or imagined)” agency if you like.
There is both good and bad news for Australia. In the long term, China’s continuing economic health is essential for the Australian and global economies. In the short term, the country will continue to try and deleverage corporate debt and remove capacity — most pointedly in the steelmaking industry where Australia’s No 1 export, iron ore, heads. The country is also belatedly trying to clean up its decades of environmental destruction. A key element is to improve its environment, reducing its rebalance on coal, Australia’s No 2 export. Australia has missed the boat for now on coal’s main replacement —LPG.
The concomitant expect the fall in commodities prices will reduce Australia’s tax receipts and slow various sectors of its domestic economy. This will be exacerbated by Trump’s tariffs on steel and aluminium aimed at halting China’s serial dumping of excess capacity, further fast-tracking the shut-down of its steel-making capacity. At the same time, the falling student visa numbers to Australia from China, highlighted by Crikey last month, will hit international education. Chinese-Australian tourism’s growth is also tailing off.
The prospect of a fuller trade war with the Trump administration expected to announce more measures against China, is already hitting global stock markets lowering corporate values and, therefore, their incentive and ability to make capital investments. This will also put the brakes on the global economy.
The only good news is that an Australian dollar linked to commodity prices means the agricultural sector will gain in competitiveness for a growing list of Asian customers. But it is still a piss in the ocean compared to the decline of resources and education sectors.
If there was any doubt that Xi must move quickly, check this sharp, pithy analysis of the state of play by University of Miami Politics Professor and long-time China watcher, June Teuful Dreyer. In her paper for the Foreign Policy Research Institute, she says:
“Worrisomely high levels of debt (In China) continue to exist, both at local and central levels, much of it due to earlier stimulus measures. China’s debt-to-GDP ratio is estimated to be an unacceptably high 260 per cent.”
Economists warn that if this is not dealt with, the inevitable collapse will be more severe. The CCP has now made strides to rein in the free-spending of corporations.
In February, the government seized Anbang Insurance Group, whose prior purchasing spree included acquiring New York’s iconic Waldorf Astoria Hotel. Its boss was put on trial last week. Many others are on shaky ground. Hainan Airlines’ (HNA) regulatory filings revealed that it is $90 billion in debt, one third of which is due in 2018. HNA and Dalian Wanda Group are currently trying to divest billions of dollars of assets, including major Australian property investments.
Yet, as Teufel Dreyer notes — “concerns about indebtedness and territorial disputes seem to be outweighed by desires to capture some of Beijing’s promised largesse” by foreign governments and companies.
This fits right in with Canberra’s continued flip- flopping ambivalence to China. Be prepared for that to continue as all things China start hitting the economy as the 2019 election looms.
A different version of this article also appeared in Crikey.
Michael Sainsbury is a freelance journalist based in Asia with more than 20 years’ experience writing about business, business politics and human rights across Australia and the Asia Pacific.