Australia Braces for Fallout of Trump-China Trade War

The US election could drive the Chinese Government to increase its economic stimulus measures as it works to recover from the 2021 financial crisis. In the wake of that election, China’s National People’s Congress (NPC) Standing Committee on November 8 announced new stimulus policies—a 10 trillion yuan ($A2.11 trillion) stimulus package with 6 trillion yuan ($A1.26 trillion) of it allocated to support local governments tackling hidden debts. The state and future of the economy of our largest trading partner will have a significant effect here, with our iron exports to China, and its investment in projects here, top of the list. What’s in the stimulus package China’s local governments have long relied on revenue from residential land auctioned off to developers but the 2021 developer collapse cut that. Local governments have since reduced staff and racked up debts with private sector companies, creating hidden debts, shadow credits, loans and bonds. The quota for local special bonds will be increased by 6 trillion yuan ($A1.26 trillion) over the next three years with 2 trillion yuan ($A422 billion) a year from 2024 to 2026 as local governments slowly pay off their debts. “That’s the Government issuing more bonds which would be used to make money, which would be used to buy up unsold property, to take it off the market,” AMP chief economist Shane Oliver told The Urban Developer. The NPC Standing Committee expects the hidden debts for local governments to drop from 2023’s 14.3 trillion yuan ($A3.021 trillion) to 2.3 trillion yuan ($A486 billion) by the end of 2028. “This suggests China’s authorities only recognise part of the implicit debt as local governments’ responsibility, while leaving the rest for LGFVs (local government financing vehicles) themselves,” Oxford Economics lead economist Betty Wang says. China’s total government debt is 85 trillion yuan ($A17.9 trillion) with a debt ratio of 67.5 per cent. In 2022-23, all Australian general government net debt was 30.6 per cent of GDP. ▲ In September this year the People’s Bank of China slashed mortgage rates to help stimulate the economy and the property market. The Ministry of Finance says there will be zero tolerance for any new hidden debts, referring to it as an “iron rule”. This latest announcement is one in a series since September, 2024. The People’s Bank of China, its central bank, slashed mortgage rates and lowered the minimum down payment amount for home buyers in September. It also cut 0.2 percentage points from the seven-day policy rate and 0.5 percentage points from the reserve requirement ratio. China’s economic planning agency, the National Development and Reform Commission, then released in advance 100 billion yuan ($A21 billion) from the 2025 Budget to fund a list of projects. The Ministry of Finance increased the debt ceiling for local governments with the housing ministry promising an additional 2 trillion yuan ($A422 billion) in credit for qualified projects prior to the end of 2024. NAB senior economist Gerard Burg says that local governments in China have a huge impact on public spending. “Local governments have long been responsible for bulk of total public spending (particularly on infrastructure)—with this share at around 86 per cent in 2023—while their share of revenue was just 54 per cent last year,” Burg says. “Local governments were prohibited from issuing their own debt following the 1994 Budget Law until reforms implemented by the Ministry of Finance in 2014, which allowed issuance under a strict quota. “The Budget Law also barred direct borrowing from banks.” ▲ Chinese company COSCO Shipping is building the Chancay Seaport in Peru, the latest project in the Belt and Road Initiative. But as Burg and others have pointed out, people expected more from China’s stimulus efforts and feel the measures won’t immediately boost the economy. China’s main development and property focus is currently on the construction of Chancay Port in Peru as part of its Belt and Road Initiative, first started in the mid-1990s in a bid to have control over freight and shipping routes bringing necessary goods more cheaply into China for its growing population. It has allowed China to step in with development aid to several Global South nations in exchange for 99-year port leases, legislated initiatives such as teaching Mandarin in schools above native languages and access to cheaper goods. Across China, a trend in building data centres in partnership with major global organisations is also under way. China’s economic crisis China’s 2021 crisis started with its second-largest developer defaulting with 1200 projects under way creating a domino effect for the property industry, which is a huge part of China’s economy. The industry contributed 25 to 30 per cent of the country’s gross domestic product (GDP) and the crisis revealed the practice of securing deposits to get bank loans not for completing the projects sold to buyers but to start new ones. This left many waiting for homes that were halfway or never built. Evergrande was ordered to liquidate in February of this year after shareholders dropped a $23-billion debt revamp plan when its founder was investigated in September, 2023. After the Hong Kong High Court ruling, China rolled out fiscal measures to protect the economy, including suspending securities lending of restricted shares. It’s not the first time China’s Government has intervened with the stockmarket, having proposed a “circuit breaker” mechanism in September, 2015 that would halt trading if indexes fell by more than 5 per cent, to curb volatility. ▲ A Chinese underwater data centre being installed. Image: Tang Fei/China Daily Anticipating the Trump factor Oxford Economics head of macroeconomic forecasting Sean Langcake says his main concern is that China may have to expand its stimulus package to address any adverse effects of US President-Elect Donald Trump’s tariff policies. “In our full-blown Trump scenario we assume a 60 per cent tariff on all imports from China, which lowers China’s GDP by 2 per cent,” Langcake says. Chinese companies could end up without markets for products and looking to the Chinese Government for fiscal support. It would also mean that the Chinese Government would need to act before Trump’s inauguration in January with many companies already raising prices to proactively account for the proposed tariff increases. Tariff increases imposed on goods imported into the US would create higher costs for US importers who would then need to raise prices, hurting the US consumer. But the tariffs could also mean US businesses would find themselves without the necessary capital to import goods, meaning a mammoth drop in sales for Chinese companies exporting products to the US. For Australia, Langcake says, it might mean less demand for our raw materials exported to China with demand having already dropped over the past few years for iron ore—as China struggles with its financial crisis and less development happens, it needs less steel and therefore less iron ore. “Iron ore is by far Australia’s largest export to China, and Australia is a relatively low-cost producer of iron ore,” Langcake says. “If Chinese steel production were to meaningfully decline, China would likely reduce imports of steel-making inputs from other, higher-cost sources first. “Even so, the hit to the iron ore price would reduce the terms of trade, mining company profits and government revenue.” Langcake says the financial market may feel the effects as well. “A stronger US economy in the near term will put downward pressure on the Australian dollar; we now expect an even slower return to our ‘fair value’ estimate of the Australian dollar (which is unchanged at $US0.74),” Langcake says. But in terms of investment in Australia, Oliver points out that these are very different groups of people. “I think that lots of people buying here would ultimately be thinking about staying here,” Oliver says. “And if they’ve got children studying here, they’ll still be studying here. “There may be some marginal impact in China, but I think it’s marginal because people who are buying here probably wouldn’t be looking to buy an investment in China—they are different groups.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

Australia Braces for Fallout of Trump-China Trade War

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