Because of its extensive financial ties to China, Australia is bracing itself for the damage on currency that will result from China’s worsening economic troubles, which affect the countries with whom it trades.
At the same time that a property crisis is worsening in China, growth and foreign investment have both come to a standstill there. The real estate developers Evergrande and Country Garden are currently experiencing serious financial difficulties.
Before Beijing unexpectedly paused the data series, the rate of youth unemployment had skyrocketed to 21.3%, causing alarm bells to start ringing.
Before indicators arose that all was not well with the key iron ore customer and sender of visitors, Australia had planned to profit from China’s economic recovery. China is Australia’s largest customer for iron ore.
A severe slowdown in China would have a negative impact on economic growth in Australia since it would result in lower levels of investment and exports, particularly in the resource and tourism industries.
There would be an increase in the rate of unemployment, and the rapidly growing company and personal tax collections that are currently contributing to the expansion of the Alban government’s budget would come to a grinding halt.
Additionally, the pursuit of future surpluses, which would be delivered in 2022–2023 for the first time in the past 15 years, would become a far more challenging duty.
Peter Strachan, a veteran mining analyst based in Perth, believes that a significant economic slowdown could be on the horizon for China after several decades of robust economic expansion.
“I can’t see why China, after having 30 years of extraordinary growth, won’t come up against some sort of economic or social crisis,” says Strachan. “I can’t see why China won’t come up against some sort of economic or social crisis.”
“This could very well be it.”
According to figures provided by the Australian government, China is Australia’s most important trading partner, accounting for over one-third of the country’s total exports. This relationship is supported by huge quantities of iron ore, coal, gas, and a variety of minerals.
Given China’s outsized role as a customer, Strachan predicts that the slowdown in China’s economy will have an immediate impact on Australia’s exports and the prices of commodities.
According to what he has said, “If the Chinese are buying less, then they will be building less, and as a result, they will buy less iron ore.”
As a result of the slowdown in the economy, they will purchase less liquefied natural gas from us as well. I have a sneaking suspicion that over the course of the next year, China’s need for iron ore and liquified natural gas will not keep us running on all cylinders.
As a result of a downturn in global economic activity, the price of iron ore has already dropped significantly from the highs it reached during the past two years.
According to ANZ, “China’s beleaguered property sector shows no signs of improving,” despite fact that the sector consumes more than one-third of the country’s total steel production.
“The subsequent weakness in steel demand is likely to put decline pressure on iron ore prices,” which translates to “iron ore prices are likely to fall.”
Given that there is a strong foreign ownership component of large miners and that revenues do not necessarily feed other sections of the economy, there is a great deal of disagreement regarding the impact that a mining downturn would have on Australia.
A decline in rate of iron ore would result in a decrease in the amount of tax revenue collected, despite the fact that resource towns may become more cheap during a mining slowdown. There are also a great number of businesses that have been established to serve miners.
When prices and export volumes decrease, the Western Australian government’s income from iron ore royalties also decreases. This has an effect that reverberates throughout the country as a result of the manner in which GST revenue is distributed among the states.
After the pandemic travel ban was lifted, there were strong anticipation that China’s high-spending tourists would stream back into Australia. However, the reality was that only a trickle of Chinese tourists returned.
According to the Bureau of Statistics, during the years 2022 and 2023, more visitors came for visits of less than one year’s duration from the island nation of Singapore than from the entirety of China.
There has been a significant drop in the number of Chinese tourists, which is now just 17% of what it was before the pandemic. This drop has been connected to a lack of flights, expensive air tickets, and a government ban on group tours; the latter limitation has only recently been repealed after Beijing eased travel restrictions.
According to Grant Wilckens, chief executive officer of G’day Group, which owns vacation parks, the real estate collapse occurred at an inconvenient time.
“They’re a massive population base, and they were here in droves, and now this is another reason for them not to come, or to put off their trip,” Wilckens says.
“The real estate situation in China’s downtown is very troubling,” said the speaker.
According to him, the amount of Chinese tourists visiting his establishments is approximately sixty percent lower than it was before the pandemic.
The number of people who travel within their own country as well as the number of people who go abroad are both intimately tied to wider financial considerations. Whenever there is a downturn in an economy, this often results in a decrease in travel. The quantity of jobs available in the tourism sector is therefore impacted as a result of this.
The market for international students is impacted in a similar manner.
After a decline in the quality of bilateral relations in late 2020, China began to implement a number of product restrictions and taxes on Australia. These measures have made it more difficult for Chinese tourists to visit Australia.
According to Wilckens, a further relaxation of trade and currency restrictions could contribute to the creation of more flights to and from China.
“That actually puts freight into the bellies of aircraft, creating more demand for flights in and out of Australia with tourists on them,” he says. “That puts freight into the bellies of aircraft.”
As a result of the significant impact that changes in the price of iron ore have on the Australian dollar, a general decline in the value of the local currency—which is regarded as a commodity currency and a proxy for the Chinese economy—tends to occur whenever there is price weakness in the resources sector.
The value of the Australian dollar fell to US63.63 cents just the week before, which is its lowest point since November of last year. The decline as compared to the value of the dollar is approaching levels that were seen during the most recent global financial crisis.
Given that currencies operate as a gauge of the health of their respective economies, a persistent slowdown in China would probably have a negative effect on both the yuan and the Australian dollar, according to Carlo Pruscino, senior sales trader at CMC Markets.
According to Pruscino, “If the Chinese slowdown continues, then it could lead to a sustained drop in demand for Australian exports, which would mean decreased revenues for Australia.” “If the Chinese slowdown continues, then it could lead to a sustained drop in demand for Australian exports.”
A weaker Australian dollar can be beneficial to the nation’s exporters since it causes their products to become competitively priced against those of their competitors whose countries have currencies that are stronger. It is also an attraction for tourists from other countries, who can profit from the differences in currency conversion rates.
The other side of the coin is that importers and Australians traveling outside the country have less purchasing power and currency.
Although China could yet try to boost itself out of its economic woes, which would generally lift resource prices along with the Australian dollar, there is a risk that Beijing will take on too much debt if it does so, according to some experts.
Given how much of the country’s infrastructure and currency is already underutilized or vacant, its time-tested approach of investing in roads, housing, factories, and bridges makes less sense now than it did before.
To this far, Chinese officials have revealed a large number of insignificant changes, leaving the market unimpressed and leading to a decline in prices for iron ore and the Australian dollar.