Probably one of the most bizarre outcomes of our political process in recent years has been the deterioration of our relationship with China, as we have ignored the significance of the Chinese economy to our own.
Much of the discussion about China has distracted from the fact that the Chinese economy may well be in an accelerating long-term decline, such that it will become a major constraint on our economy. Gone are the days of the China-driven “resources boom” of the Howard era and the supportive role China played in our response to the great financial crisis, helping us to avoid a recession. This year the United States is forecast to grow faster than China for the first time since 1976. The World Bank predicts China’s growth will “slow sharply” this year, to 4.3 per cent, almost a full percentage point below their estimate last December.
Their revision “largely reflects the economic damage caused by Omicron outbreaks and the prolonged lockdowns in parts of China from March to May”.
Don’t get me wrong. I am not saying that growth is the be-all and end-all of the relationship, nor would I want to overlook other important aspects of our ties to China. My concern is that so much is taken for granted about Chinese growth in forging our path ahead.
It is also necessary to recognise that Chinese growth numbers are “manufactured” to suit the government circumstances of the time. I recall from a business trip to China a few years ago that the growth rate for the September quarter of that year was announced in mid-September, before the quarter had finished. In Australia, the September quarter growth rate wouldn’t normally be released until early December.
There is no shortage of challenges facing the world’s second-largest economy. The pandemic has buffeted Chinese growth and made existing supply-chain disruptions more severe, with serious consequences for world output. China’s economy has grown just over 9 per cent a year on average since 1989, but it shrank 6.8 per cent in the first quarter of 2020. Growth rebounded to a record high of 18.3 per cent in the first quarter of 2021, making for an annual rate of 8.1 per cent last year. The most recent numbers have been of concern. Beijing is targeting 5.5 per cent for 2022, but the first quarter was weak and characterised by China’s Statistics Agency as “hard-earned achievements”.
The recent uncertainty about China’s growth, and therefore about global growth, relates to the difficulties in judging the continued impact of the pandemic and the likely effects of the Chinese government’s policy responses.
It is still unclear whether the government intends to continue pursuing its zero-Covid policy, which makes it difficult to judge the role of lockdowns and other restrictions. The Chinese government has obviously been concerned about the economic effects of such restrictions, having adopted a number of stimulatory measures, such as infrastructure spending and other targeted programs, tax rebates and more policy support for the property sector, and most recently a reduction in official interest rates. The World Bank expects growth momentum to return in the second half of 2022, “helped by aggressive policy stimulus to mitigate the economic downturn”, but it also warned that “the reemergence of new, highly transmittable variants of COVID-19 could lead to more prolonged economic disruptions”.
Beyond the short-term challenge of balancing Covid mitigation with supporting the economy, China’s government faces many longer-term structural challenges that will work against sustaining exceptional rates of growth. The world economy is moving towards stagflation at best – that is, a painful combination of stagnating growth and rising inflation – but perhaps with a serious recession as the monetary authorities of the developed world move quickly with sizeable increases in interest rates to curb the rising cost of living.
The Chinese government has been focused on transitioning the economy, from one driven by high investment spending – which had accounted for almost half of gross domestic product – to more of a consumer-led strategy. This has been happening, but at a slower pace than the authorities had hoped. Most recently consumer confidence has been particularly weak. China also faces some serious structural social challenges concerning inequality. This includes a rapidly ageing population with inadequate social-support systems and the lack of a commensurate younger workforce to carry the load, and there is the legacy of the one-child policy. Corruption is still a significant challenge even though the government has driven strong campaigns against it.
There are also significant financial constraints in terms of bad loan exposures among China’s banks and fringe banking institutions, and unsustainable local government debt. The property sector is still undermined by major weaknesses, with some major players teetering on the verge of collapse, including Evergrande, which was once China’s biggest developer. Home buyers have also been losing patience, threatening mortgage boycotts – refusing to pay until their housing projects are completed. China is also struggling to meet the realities of the transition to a low-carbon world.
Beyond the economic and social challenges there are a couple of geopolitical risks for China, most importantly its relationship with Russia and what actions, if any, it plans to take against Taiwan. These two factors could also have significant consequences for its capacity to sustain growth. It is not widely appreciated that a large proportion of the investment in China’s industrial base has come from Taiwan.
I can’t help but be concerned that while there may be many other important political and strategic concerns in terms of our relationship with China, we should not be downplaying the economic realities. It’s possible to draw a comparison with Brexit, where the decision-making process seemed to ignore the fact that Europe was Britain’s major trading partner and vice versa. Both are now having to face the economic realities of that political decision, under especially challenging world economic and geopolitical circumstances.
It is most unfortunate that Australia’s relationship with China has been driven more by scaremongering for short-term political gain rather than by a mature, constructive debate about the value of a broad-based relationship.
We know we have serious skills shortages. We know we need nurses, teachers and workers with a multiplicity of other skills. Perhaps we need to extend our focus, to encourage our students about the importance of effective engagement with China, and of learning its language and culture.
We need to train our students to understand China and the benefits of constructive relationships on a number of fronts. We also need to create an environment that is welcoming, rather than hostile, to Chinese students and their families.
We must work on collaborative research, academic and cultural exchanges. We have trained so many Chinese students in Australia but very few have remained for us to gain any benefit from their education. As a nation we have to rise above this latent racism; some people in responsible positions are fostering fear, which is then fuelled by an irresponsible media hungry for salacious headlines. Surely a mature engagement with China would provide the scope to register our concerns about issues such as human rights abuses, detention of our journalists and others.
The basis for any effective relationship is surely mutual respect. We should recognise and respect China’s many economic achievements, most notably moving millions of their people out of poverty. Misinformation and a longstanding culture in Australia of suspicion towards China is stopping us from moving forward.
Many seem stuck on the idea that it is a choice between the United States and China, and we should let the US dictate what we do, how we respond to the rise of China. The Americanisation of Australia has gone too far – we are in danger of losing our national identity. We don’t need to choose. We need to be the best we can be, and extract all that is good in our national interest from both of those relationships.
This article was first published in the print edition of The Saturday Paper on August 20, 2022 as "Big trouble in belittling China".
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