The contraction of China’s economy will have a significant impact on Australia’s export earnings, according to Treasurer Jim Chalmers. Despite expectations that Beijing’s decision to end its strict “zero COVID” policy would revive the economy, it has instead faltered. The country is experiencing sluggish GDP growth, falling consumer confidence, and a collapse in property prices that has led to loan defaults and company collapses. Official data from July 2024 revealed that GDP growth was falling behind the government’s target of around five percent.
China faces several economic challenges, including a real estate crisis and an aging population. Additionally, Chinese leader Xi Jinping’s interference in the market exacerbates these issues. However, the main weakness lies in an economic strategy that prioritizes industrial production above all else. This has resulted in overinvestment in sectors such as raw materials and emerging technologies like batteries and robots.
To finance this overproduction, many companies have taken on substantial debt burdens to meet output levels that exceed both China’s domestic demand and foreign markets’ needs. As revenues decline, producers are increasing output while heavily discounting their products to stay afloat and repay debts.
In China’s controlled market environment, companies with close ties to the Chinese Communist Party (CCP) often survive due to access to cheap financing. This situation creates a “doom loop” where falling prices lead to insolvency, factory closures, and job losses.
Australia faces risks from a contracting Chinese economy beyond competition from cheap Chinese goods flooding international markets—such as what happened with nickel recently. The biggest concern is a decrease in demand since China is Australia’s largest trading partner. In 2023 alone, China purchased $219 billion worth of Australian exports—equivalent to 32.5 percent of Australia’s total exports worldwide—making it crucial for agriculture resources and services.
Treasury forecasts predict China’s GDP growth will remain below five percent for the next three years—the weakest performance since opening its economy in the late 1970s.
Treasurer Chalmers emphasized Australia’s dependence on China’s economy: “Our resilience and prosperity are closely connected…a one-percentage-point drop in China’s GDP growth roughly costs Australia about $6 billion.” Given that iron ore comprises 80 percent of Australian exports—with most going directly to China—the country is particularly vulnerable if there is softer demand for this commodity due to slowing Chinese economic growth.
Despite these challenges, Chalmers highlighted some positive developments during his recent visit with Chinese counterparts: “Total two-way trade reached a record $327 billion…more than double what it was when the China-Australia Free Trade Agreement commenced.” Additionally,” trade impediments affecting more than $20 billion worth of Australian exports have been lifted.”
The government aims not only at traditional exports but also at exploring new industries where Australia can leverage its advantages as global efforts shift towards achieving net-zero emissions goals.
