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Analysis: How risky is our dependence on China?

Analysis: How risky is our dependence on China?

About 73 per cent of Australia’s exports go to Asia. China is our biggest export partner. But with fresh doubts cast over US-China trade negotiations, what could a knock to China’s growth do to our own?

Most economists would agree that China’s economy needs some healthy rebalancing; it has been experiencing average annual GDP growth of around 10 per cent since initiating market reforms in 1978.

But the Chinese growth story has actually been slowing since 2010, when it last recorded double-digit GDP growth (10.6. per cent). In 2011, real growth slipped to 9.5 per cent and has since fallen below 7 per cent.

China hasn’t had the best track record of environmental upkeep, but this is starting to change, and could impact the price of Australia’s resource exports, though it is unlikely to impact volumes too much.

Fitch Ratings is forecasting the Chinese economy to slow from 6.5 per cent this year to 6.1 per cent in 2019.

“That’s still a very strong growth rate,” Fitch’s primary analyst, Asia Sovereign Ratings, Jeremy Zook said.

“We have China on a very gradual downward trend. So, in that sense, we don’t see a really significant impact on Australian exports. The bigger concern would be if there was a trade war, which lowers China’s GDP and feeds through and impacts Australia.”

But a US–China trade war has become increasingly likely in recent months. Late last week, China offered President Trump a $200 billion reduction on its annual trade surplus with the US by importing more American goods. America’s negotiations with China are ongoing, which is important for the world to know — more on that later.

During an appearance with NATO Secretary-General Jens Stoltenberg last week, Trump revealed that he isn’t so optimistic about how the negotiations will pan out.

“Will that be successful? I tend to doubt it,” Mr Trump said. “The reason I doubt it is because China has become very spoiled. The European Union has become very spoiled. Other countries have become very spoiled, because they always got 100 per cent of whatever they wanted from the United States.”

This is nationalist Trump at his best. Words like this helped him win the presidency by pandering to the sensibilities of his Rust Belt voters.

Now, coming back to the importance of the White House being seen as negotiating. This is significant because being a deal-maker is what Donald Trump is all about (his 1987 bestselling memoir was called Trump: The Art of the Deal).

If he can pull off a deal with China that pleases voters, he’ll stand a better chance at the polls come 2020. This strange blend of showmanship and nationalistic posturing, while essentially just good old-fashioned politics, unfortunately has major consequences for the rest of the world — and that means Australia.

It’s worth taking a closer look at the stuff China is buying from us and what we’re currently capable of actually selling.

“We talk a lot about the fact that Australia exports a lot of commodities to China, which is true. But increasingly, and over the last five years, a key driver of the growth story for Australia in terms of exports has been exports of services — education and tourism,” HSBC Australia chief economist Paul Bloxham said.

“Education is Australia’s third-largest export behind iron ore and coal. These student numbers have doubled over the last five years and are rising at an annual rate of 20 per cent.”

This is important because Sydney and Melbourne have replaced Gladstone and Karratha as the engine rooms of the Australian economy: construction boom helped offset the mining slowdown.

While an influx of Chinese tourists and students may seem irrelevant to Australian mortgage and property professionals, it shouldn’t be — what they should be asking is, “what are the Chinese ultimately looking for?”

According to the latest Chinese Consumer International Travel Survey by real estate portal Juwai.com, 92 per cent of Chinese consumers plan on taking an overseas trip next year.

Of these, 77 per cent had property purchase intentions, with 60 per cent saying they would buy property and 17 per cent would evaluate the possibility.

Those are some pretty convincing figures for a nation that recently cracked down on its citizens taking money out of the country.

Credit Suisse estimates that close to 25 per cent of all new property purchases in Sydney are made by Chinese buyers — a significant chunk of demand for a city in the middle of a residential building boom.

As everyone is aware, the big banks pulled out of the foreign buyer space some time ago. China is cracking down. State governments are raising taxes for foreign buyers (WA became the latest last week).

There are big questions that need to be answered about China’s impact on the Australian economy, and specifically where mortgage brokers and property professionals fit into the picture.

In October, The Adviser will take a delegation of mortgage professionals to Hong Kong to gain a unique insight into the Chinese market, what drives Chinese buyers of Australian property and what opportunities are on the horizon.

[Related: Analysis: Lessons from the Chinese mortgage market]

Analysis: How risky is our dependence on China?
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