Australia’s economy stands to benefit from a landmark stimulus package unveiled by Chinese authorities.
The People’s Bank of China this week slashed interest rates in a bid to remedy anaemic economic growth and flagged further fiscal stimulus in a move celebrated by markets globally, including in Australia.
Australia’s largest trading partner has struggled to recover from COVID-19, weighing down commodity prices crucial to the strength of the federal budget.
Treasurer Jim Chalmers, who has been in Beijing since Thursday meeting with his Chinese counterparts, said the steps taken to boost China’s economy were a “very, very good development for Australia”.
“This can only be a good thing for Australia, subject to those details, because we know that weakness in the Chinese economy does flow through to our own economic conditions,” he said.
“Some of the key reasons why our own economy is slowing considerably are global economic uncertainty, of which China is a part, combined with inflationary pressures at home, and the impact of higher interest rates.
“Those three things are combining to slow our economy considerably.”
Falling Chinese demand for iron ore has caused the price of the ferrous metal to plummet this year.
That’s bad news for Dr Chalmers’ budget surplus, given the Australian economy’s reliance on iron ore export revenues.
“Ultimately, it all comes down to the iron ore price, along with broader commodities,” AMP chief economist Shane Oliver told AAP.
Iron ore has shed more than a third of its price since the start of the year but jumped back over $100 a tonne following the Chinese central bank announcement.
“The key for the iron ore price, though, is that it continues to stabilise at levels above the trajectory in the medium term assumptions in the budget,” Dr Oliver said.
“The budget assumes an iron ore price of $US65 over the medium term. And right now we’re still above treasury assumptions, so if the iron ore price sort of stabilises around here, then it will continue to provide upside to the budget.”
ANZ Bank senior China strategist Zhaopeng Xing said the measures were good news for the Chinese economy, but will likely be too little, too late for the country’s ailing property sector.
Given the property industry’s influence on steel demand, the upwards impact on the price of iron ore could be limited, he said.
Before embarking on his visit, Dr Chalmers spoke with major commodities exporters, including BHP, Rio Tinto, Fortescue and Woodside, to understand the implications of a softer Chinese economy, he said.
“We’ve seen the iron ore price, for example, really quite low by recent historical standards,” he told reporters in Beijing.
“Similarly when it comes to thermal coal, and so that has implications for us. It has implications for the budget, but more importantly, it has implications for the economy.”
In its half-yearly financial stability review on Thursday, the Reserve Bank of Australia warned weakness in the Chinese economy was one of three main vulnerabilities facing the Australian financial sector.
The analysis, which was conducted before the stimulus package was announced, found Chinese banks were under pressure amid a deterioration in the property market.
Concerns remain the already-announced monetary policy measures won’t be enough to fix China’s economic woes on their own, given the country appears to have fallen into a liquidity trap, where consumers prefer to hoard cash even when interest rates are low.
“The worry would have been that it’s pushing on a string,” said Dr Oliver.
“But the combination of easy monetary conditions and as much fiscal stimulus – in the language of the politburo – as necessary to meet growth targets and support the property market – that’s quite a big move.
“This is sort of what economists have been saying is needed for some time.”
