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With a weakening yuan, Australian exports risk a precipitous decline. It is clear that diversifying the nation’s economy must be a priority as we seek to safeguard Australian interests.
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China’s Evergrande filed for US bankruptcy protection in mid-August, two years after credit ratings agencies declared the nation’s then largest property developer was in default.
The announcement is the latest to emerge from China’s tumultuous housing sector, with Bloomberg estimates this week recording 34 of the nation’s top 50 developers as defaulters.
For housing-mad Australians, the genesis of China’s housing woes would come as no surprise.
On the one hand, investors sought to capitalise on years of positive house price growth, taking on mounting rates of household debt to buy more and more properties off the plan. On the other hand, developers exploited the country’s laxed capital lending rules to borrow funds to service their growing debt.
But the borrowing rules didn’t stay laxed for long with the Chinese government introducing new guidelines that banned companies borrowing funds to service debt.
Business as usual was over. As developer after developer collapsed, local Chinese businesses were left with millions in unpaid invoices and investors were left with unfinished homes. In some cases, owners have even refused to pay mortgages for their unfinished homes.
While China’s housing crisis will continue to hamper its economy for the immediate term, it is also straddled with a potentially existential long-term liability: an ageing demographic.
By numbers, China will have 100 million fewer people by 2050 and 600 million fewer people by 2100. Such a reduction in population represents a significant decrease in domestic consumption, restricting investment and constricting the economy.
A shrinking population represents such an acute economic threat that even the Reserve Bank of Australia issues population warnings.
“Lower population growth has important implications for the economy. It lowers the growth in demand for goods and services, as well as the economy’s capacity to supply those goods and services.
“On the demand side, lower population growth would, all else being equal, be associated with less growth in consumption. Over time, it may also reduce the need to expand the capital stock through investment in residential housing, non-residential buildings, machinery and equipment and so forth.
“At the same time, lower population growth implies that there are fewer individuals available to be employed in producing goods and providing services.”
As China battles the threat of decreasing local consumption, the world has responded to economic headwinds by decreasing their imports from China. In fact, Chinese exports have dropped over four consecutive months.
In response, analysts believe that Chinese policymakers, at least implicitly, are supporting a weaker yuan to salvage their export industry.
So why does this threaten Australia, and why is economic diversification so important for national security?
A weaker yuan and weaker Chinese economy threaten Australia’s economic wellbeing on two fronts: it makes Australian exports to China more expensive and China will look to import less of it as the demand for products decreases.
Unsurprisingly, Australia’s economic prosperity is inextricably linked to China. Not only are we both members of the Indo-Pacific neighbourhood, but Australia boasts a remarkably undiversified economy, leaving the nation’s finances susceptible to the whims of foreign leaders and demand fluctuations.
Research from the University of Western Australia noted that Australia would be one of the hardest hit countries in the event that the world was split into two trading and financial blocs as a result of geopolitical competition; 20 per cent of Australians becoming unemployed while export income would drop by 55 per cent.
Australia must come to the realisation that other nations might not always want what we dig out of the ground. Yet unlike other nations, we have failed to build a diversified industrial base through which we can navigate the ebbs and flows of global crises.
And, like many strategic thinkers have posited before, Australia's policymakers must grapple with the inconsistent notion that Australian economic growth hinges on a single regional entity with whom we are also in a strategic competition - a frightening paradox.
