International | Mar 07 2023
The Albanese government is enjoying a thaw in the relationship with China, but that doesn't imply a return to the good old Halcyon days is on the cards.
-The end of the zero covid-19 era in China will redefine the nation’s economic landscape
-For Australia, numerous Chinese-linked economic avenues now (re)open for growth
-Immense hurdles remain in the path to a return to the ‘golden years’ of the Aus-China economic relationship
-Highly unlikely such strong ties will be restored
By Ed Kennedy
Just as the covid-19 pandemic originated in China, so too by many measures has it recently felt like the pandemic would ‘end’ in China.
Yes, covid-19 remains a serious and ongoing health challenge around the world, especially with the ongoing concern that new mutations may arise that are more dangerous than any prior.
But, whereas previous years saw people in many jurisdictions deal with strict lockdowns accompanied by thousands upon thousands of new covid-19 cases daily, countless communities have started 2023 differently.
This year these locales live in the ‘new normal’ following public vaccination drives, with few, if any covid-19 restrictions, and an aspiration that the focus can move beyond the protection of public health, to economic recovery and growth.
The Communist Party of China (CPC) has been operating via a different playbook. Pursuing a ‘zero covid’ strategy for years up until the announcement in December it would end swiftly.
So, now the CPC has ended its zero covid strategy, what are the prospects for China’s economy, and the benefits of that flowing on to Australia, and the wider global economy?
Recapping Recent History
The Chinese government’s zero covid strategy faced heavy criticism, including from the World Health Organisation which declared it unsustainable, and protests to a scale domestically that Human Rights Watch called “unprecedented”.
The zero covid policy not only demanded strict obedience to harsh restrictions domestically – and contributed to the nation’s economic growth going backwards – but also resulted in a substantial diminishment of economic confidence globally.
Furthermore, the latter stages of it occurred in a period where many other nations had long since acquired the firm aspiration to try and shift to a post-covid era, with lockdowns and significant covid restrictions regarded (hopefully) as a thing of the past at that point.
In turn, the CPC’s unwillingness to allow western vaccines throughout the zero covid era not only prolonged the pain being suffered by the Chinese people during the pandemic in terms of health, but also hindered the capacity of the country to reduce covid cases, and thus reopen sooner and commence the work of economic growth.
This strategy contributed to China’s growth rate shrinking to just 3% in 2022. By doing so, it missed the official growth target by -2.5%. This saw 2022’s growth be a striking low amidst the annual figures since the Deng Reforms opened up the Chinese economy in 1978.
This outcome certainly does not augur well for the CPC in its aspirations to preside over continued economic growth, with the Lowy Institute predicting last year that – even with “continued broad policy success” – annual growth would sit at 3% a year until 2030.
Indeed, any ongoing stagnation and/or shrinking of the Chinese economy in future could sow the seeds of far greater social unrest, and potentially come to pose a significant threat to the stability of the CPC’s rule.
The Figures Amidst the Forecasts
Three major areas in China to watch in this new era will be real estate activity, consumer spending activity, and the perception around predictability (or otherwise) of the CPC’s governing.
Real Estate
It’s held that around 70% of Chinese household wealth resides in real estate, with it estimated to be worth 30% of China’s GDP.
The CPC has taken numerous steps in recent times to try and help shake the sector out of its woes, following the crisis which kicked off in 2021 with numerous leading developers defaulting on their debt – with a 16-point plan unveiled late in 2022 especially notable – and the outcomes of which remain worth watching closely indeed.
Yet, ultimately, the enduring problems surrounding the sector do not augur well for it improving in the near term.
Will a Spike in Consumer Spending Sustain?
It’s known the CPC’s covid-related restrictions have seen many Chinese households look to stow their money in savings. According to a Financial Times report in January, US$2.6trn in household savings was put away in just 2022.
There’s little doubt with the winding back of covid restrictions an increase in consumer spending will occur.
Not only have Australians seen this happen when lockdowns in various domestic jurisdictions ended, but it’s occurred elsewhere around the world too.
But, any presumption this spike in spending will be maintained is far from certain.
The fact is the real estate downturn and the slowing economy, among other factors, will certainly give pause to many consumers who would otherwise have been keen to shop, now the restrictions of the zero covid era have been scaled down.
The CPC and the Creation of Uncertainty
A factor that is set to also embattle China going forward is that when it comes to encouraging and retaining international commerce, the CPC is perhaps yet to grasp it can’t just ‘switch the tap on and off’ as it pleases.
Even for an economy like the size of China’s – which due to its scale will always have some international businesses knocking on its door – the reality is the nation presents a markedly more challenging business climate for international firms in the early 2020s, than it did in the early 2010s, or 2000s.
Since Xi Jinping ascended to power in the early 2010s (becoming general secretary of the CPC in 2012, and assuming the presidency of the nation in 2013), the years since have seen China become a far, far less attractive prospect for international businesses.
This is owing to Xi and the CPC’s greater crackdown on human rights domestically alongside other internal incidents, as well as the effectual neutralisation of Hong Kong’s semi-independence by Beijing – in breach of the “one country, two systems” policy which was set to run until 2047, as agreed to during the handover of Hong Kong with the UK in 1997.
Another factor is the CPC’s contribution to ongoing tensions surrounding Taiwan, alongside other areas of geopolitical friction such as the South China Sea.
These events have all worked against the notion that China in Xi’s era is a safe and predictable place to operate for international businesses.
These pursuits by the CPC have also evidenced to the world that its prior stated desire for China to have a ‘peaceful rise’ to becoming a global power is certainly no longer the case – if it ever was.
Such unpredictability in Xi’s era marks the end of a period since the Deng Reforms commenced where it was presumed China’s liberalism would grow as its economy did.
Now that Xi has clearly reversed the trend in the former, it’s no surprise that international businesses look upon the commercial climate in China with a great concern about the present conditions, and a weariness they shall grow even more difficult in future.
As a result, the economic ‘uncoupling’ of trade between China and many nations such as the US and Australia that started some years prior – and was made even more evident throughout the pandemic – is set to continue.
Make no mistake, the size of the Chinese economy is not set to dissipate overnight. In numerous locales around the world its reach is only set to expand.
But ultimately, the consequences of a shift back in the direction of greater authoritarianism by Xi and the CPC, alongside a readiness to pursue actions which create greater geopolitical instability, will continue to see businesses in many nations make the assessment that they now can’t pursue new operations in China, and/or must withdraw any they had.
The Implications for Australia of this New Era
Three areas where Australia stands to benefit from an uptick in economic activity surrounding China in this new era concerns the education and tourism sectors, as well as the prospect of trade picking up due to tariffs imposed by the CPC in recent times easing.
Education
In January, it was announced by the Chinese Service Centre for Scholarly Exchange that it wouldn’t recognise diplomas and academic degrees done online.
Yes, Australia has retained a sizeable number of Chinese students studying at local institutions via online learning during the pandemic.
In turn, some who’ve studied in Australia in-person throughout the pandemic.
Yet, the announcement these aforementioned qualifications would no longer be recognised in China if studied remotely online has resulted in a huge and rapid increase in the relocation of Chinese students to Australia.
Following this announcement, a subsequent update from Chinese education officials in late January provided for the possibility that students would have the chance to seek an exemption, and still have their qualification certified if unable to get a visa, flights, or accommodation in time.
Nonetheless, a rush by many students to relocate and acquire the necessities which accompany it had already commenced. The Australian Parliamentary Library contends there were 164,306 Chinese students studying in Australia during 2019, and 160,430 in 2020.
Accordingly, it’s plain to see how a big spike in returns could deliver a significant boost to education and education-ancillary goods and services, with the AFR estimating in January that inner-city rents in Sydney and Melbourne could rise by 5% on the back of more than 50,000 Chinese students entering the tenancy market.
Tourism
With the reopening of Chinese borders commencing with the end of the zero covid era, it’s expected Chinese tourists will be contributing once more to the profitability of the global tourism industry in a significant way going forward.
This said, as distinct from education – where the edict for in-person attendance being mandatory has created a rush to return to in-person study – it’s expected this increase in tourism will be gradual.
The early indicators suggest this is indeed the case, with the pent-up frustration many Chinese have felt being unable to holiday abroad countered by the high cost of airfares, among other issues.
Ultimately, just as Australia’s substantial delays in getting passports issued (when not using the priority service) has surely delayed – or outright spoiled! – some trips abroad, there is of course the expectation that in the long term a sustained growth in tourism building back from the lows generated by the pandemic will occur pertaining to Chinese tourism in Australia.
This said, Down Under is sure to remain a long way away from the pre-pandemic rates of getting around 1.4 million visitors in the 12 months spanning November 2018 to 2019.
Tariffs
With China’s opening up in the post-zero covid era, there is the expectation some tariffs imposed on Australian goods will be consigned to the past.
Yes, it remains far from the case that the present tensions between the Australian government and the CPC have resolved (more on this in the forthcoming section).
This said, a change in government within Australia last year, and an enhanced need to boost activity in the Chinese economy, means new pathways are potentially open for progress.
Presently, it’s held there are $20bn of trade sanctions placed on Australian goods, with restrictions on wine, beef, and timber continuing to hurt these Australian industries.
Undoubtedly an end to the tariffs would be welcome in the Great Southern Land, but the old adage by Heraclitus – “No man ever steps in the same river twice, for it's not the same river and he's not the same man” – could be regarded as applicable by many measures to this trading relationship going forward.
In recent times China has come to place greater reliance on Brazil in sourcing beef (though an outbreak of mad cow disease in the South American nation has seen exports temporarily suspended in late February).
What’s more, there is a feeling among the Australian coal sector that even if the CPC’s tariffs on local coal are wound back, it wouldn’t be a huge boon given the successful redirection of supply to other markets since the imposition of the tariffs.
Looking Ahead in the Australia and China Relationship
Since the change of the federal government last May in Australia, multiple indicators have suggested relations between Canberra and the Chinese government have started to thaw in some areas.
Over the past decade numerous events saw them become colder, and they’ve been essentially on ice prior following the period in 2020 where the CPC looked to punish Australia after the former Coalition government called for an independent investigation into the origins of covid-19
In some respects this can perhaps be attributed to the proactive effort by Prime Minister Anthony Albanese and his government to extend the olive branch and improve relations where perhaps possible, in contrast to his predecessor Scott Morrison and his colleagues, who at times were criticised for being needlessly ‘hawkish’, and not anxious to try and move relations out of the freezer.
This said, the reality is both Labor and the Coalition support the AUKUS security deal done with the US and UK in 2021 which would give Australia nuclear-powered submarines, and recognise the growing threat of the CPC’s reach in the Asian region.
This is further evidenced by anti-foreign interference laws passed during the former Coalition government’s time in office in 2018 – after growing concerns about the subversive activities by the CPC (alongside other regimes) in Australia – and the Albanese government’s signification of a boost to defence spending in early 2023.
Thus, with clear evidence the CPC has been engaging in improper influence activities in Australia, and Canberra seeking to ratchet up Australia’s defence capabilities, any prospect of a ‘reset’ of relations and return to the relationship the Australian and Chinese governments held a decade or more ago is basically nil.
Canberra has essentially no levers it could pull to try and remedy this, save for those which would compromise Australian sovereignty and the nation’s intrinsic values which underpin a free society.
Instead, while Australia can likely anticipate some potentially beneficial (in addition to some unbeneficial) twists and turns in trade given the secrecy and unpredictability of the CPC’s rule, it’s unlikely Australia will enjoy a great warming of relations between Canberra and Beijing anytime soon.
Furthermore, it’s unlikely it will see an uptick in moves which diminishes the frost between them.
It appears the economies of both nations shall unfortunately continue to suffer in many ways, albeit with some rays of light set to (once more) shine through now the zero covid era is at an end.
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