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China crash leaves Australia in $10 billion a month free fall

All eyes will be on the Asian superpower and what impact it might have here.

China's leader Xi Jinping with a graph of economic data in the background
China's economy is struggling at the moment and that could have severe implications for Australia. (Source: Getty)

As Australia’s domestic economy hits a brick wall sparking concerns of yet higher unemployment, rising mortgage arrears and higher business insolvencies, Australia’s dominant export market – China – is in serious economic trouble.

If we are to see a period of ongoing Chinese economic weakness, it would present deeper problems for an already vulnerable global economy. It would almost inevitably see further weakness in commodity prices and the volumes of goods and services exported by Australian firms, dragging domestic economic growth yet lower.

After what for China is recessionary-like growth of 3.0 per cent in 2022 and a tepid recovery to 5.2 per cent in 2023, GDP growth is forecast to ease back to 5.0 per cent in 2024, dropping further to 4.5 per cent in 2025 and 3.8 per cent in 2026.

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By Chinese standards, these are signs of weak and faltering economic activity.

Such is the depth and now duration of the economic slump, that an already moderate peak for inflation of 2.8 per cent in late 2022 has morphed into deflation with the annual change in the CPI stuck between -0.8 per cent and +0.7 per cent since March 2023. And this, it is important to emphasise, is when the bulk of the rest of the world is fighting to return their inflation rates to their respective targets.

As a result of this economic funk, Chinese authorities have slashed interest rates in an attempt to underpin activity and reflate the economy.

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China is the dominant market for Australia, accounting for one-third of all export values.

This has been a major contributor to Australia’s economic success in recent decades, adding to national income and economic growth.

But it does leave Australia vulnerable to a downswing in China’s economy.

There is growing evidence that the Chinese slowdown is already impacting Australia’s economic performance.

The Reserve Bank of Australia's (RBA) index of commodity prices which is based on the relative importance of Australia’s export values, has fallen a massive 26 per cent in Australian dollar terms from the peak in October 2022.

The price of iron ore, Australia’s largest commodity export to China, has fallen from above US$150 a tonne in early 2022 to US$135 a tonne in early 2024 to a current price of around US$107 a tonne.

The impact on Australia is there to see.

Export volumes are topping out and the slump in commodity prices has been one factor behind the fall in Australia’s monthly international trade surplus which in 2022 was generally between $12.5 to $15 billion to current levels around $5 to $7.5 billion a month.

Australian policymakers will be watching trends in China, and the rest of the world, for factors that influence local growth, inflation and financial markets.

It was odd, to say the least, that in making its interest rate decision last month, the RBA noted “there has been improvement in the outlook for the Chinese and US economies, and many commodity prices have picked up”.

Perhaps the RBA had a more gloomy view of China and its assessment was things were ‘less bad’.

There was no elaboration on this point.

But as alluded to above, the RBA’s own index of commodity prices has fallen every month so far in 2024 and Chinese authorities are easing policy in response to its fragile economic conditions.

It is to be hoped the RBA clears up this confusion with the release of the next Statement of Monetary Policy in early August.

Misreading trends in China’s fragile economy would add significantly to the downside risks to the Australian economy which is already flatlining near recession.

Financial markets, which are a good measure of economic health, are painting a concerning picture for China.

The Shanghai Composite Stock Market Index is currently trading around 3,000 points, well below the 2021 peak above 3,600 and the 3,300 point level a year ago.

The 10-year government bond yield has fallen to a record low of 2.25 per cent as the weak economy and disinflation problems impact sentiment and investment activity.

It is to be hoped the Chinese economy registers a sustained recovery soon, as it is a driver of global growth and Australian exports.

But until it does, there are more downside risks to the troubled Australian economy, which should be featuring prominently in the RBA monetary policy deliberations.

A more material weakening in China would demand the RBA cut interest rates to help insulate the Australian economy from the fallout.

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