Vic Edwards

China could be about to witness a sharp economic contraction. Although the World Bank has played down fears of a hard landing in China, the dynamics of Australia’s relations with China are undergoing a rapid process of change, and this will reshape international and foreign policy between our two countries.

China’s growth this year is below last year’s level as weakening external demand has hurt investment and exports. Very poor Chinese manufacturing data shows it is at a 32 month low. Alas, contagion from Europe is impacting China, and that is causing pressure on Australia.

China’s economy faces growing risks from Europe’s sovereign debt crisis and from debt held by local Chinese governments but it could engineer a soft landing by easing monetary policy, according to a report yesterday by the World Bank. It expects Chinese growth will slow to 8.4 per cent in 2012.

I feel other events will also cause problems for our relations with China. There will be some reappraisal of where China stands with Australia, following the new Trans-Pacific trade-bloc know as the Trans-Pacific Partnership that includes nine nations including Australia and the USA, but China was not given an invitation to be a member nation. We should be concerned that there is now some doubt in China as to how much Australia can be trusted and relied upon.

For some years now, China has been able to rely on Australia as being a good trading partner and friendly nation no matter whether Labor or the Coalition were in power. However in just the past week President Barack Obama’s strong admonishment of China’s currency policy, the decision by Prime Minister Julia Gillard to reverse Labor’s long standing policy of banning the sale of uranium to India, and the agreement to locate a powerful 2,500-strong American marine task force near Darwin area all reshaping international and foreign policy between Australia and China. This is particularly so because China was not consulted on several of these, and Australia has been closely associated with all events. In China’s eyes, it doesn’t look good.

The World Bank has forecast that inflation will fall further, down from the 37 month high of 6.5 per cent in July, as its economy slows.

Will China react poorly to Australia by not buying iron ore, natural gas, bauxite from us?

I think not. However, it may cause them to re-evaluate their long term trading partnerships and future investments and they will most likely diversify their sources of supply – for example more iron ore from Brazil and Mozambique and less from Australia. They may also invest in developing the plant and equipment necessary to make high grade steel in these countries. However, the measures taken in the last week have also brought Australia closer to India and this may be seen as a good longer term play as India is tipped to overtake China as a production power engine in about the year 2030.

Vic Edwards is a Visiting Fellow in Banking and Finance at the Australian School of Business