China’s sudden economic slowdown is worrying. But it doesn’t have to be all bad news for Australia | John Quiggin

Following twenty years of remarkable economic expansion, indications of a deceleration in China understandably raise apprehension.

A surge in unemployment among young people is yet another indication of a decline in economic activity, as companies opt to retain their current workforce rather than recruit new employees. This situation undermines the unspoken agreement put forth by the governing party, in which compliance with authoritarian rule is compensated with a continuously improving quality of life. Such circumstances pose a significant challenge to the government's stability as it endeavors to sustain economic growth, even if it means facing a more severe downturn in the future.

Throughout many years of fast economic expansion, China has undergone a remarkable shift from a impoverished, predominantly agrarian nation to one that is urbanized and industrialized, with average income per individual slightly surpassing the global average.

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This procedure has demanded significant financial commitments in the production, facilities, and naturally, building. The main components in this operation consist of steel, which is made from iron ore in blast furnaces powered by metallurgical coal, and electricity, mostly generated through burning thermal coal. Australia deeply contributes to the production of these three resources. Even if Australian miners do not directly supply China, they still gain indirect advantages from the global price surge due to the high demand by China.

However, China is rapidly approaching the maximum capacity of industrialization and urbanization, just like most advanced nations have already reached. In a similar manner to how the agricultural sector was overtaken by the industrial economy, the service sector, and specifically information services, are now taking over from industry as the main driver of economic activity.

China is witnessing a decline in its manufacturing sector as rival countries such as Vietnam gain an edge. Concurrently, with the elevation of education standards, younger individuals are becoming less inclined to opt for manual labor roles in assembly lines that do not require advanced skills.

This change is unavoidable and ultimately advantageous, but it signifies the conclusion of one of the largest building surges ever. The recently declared financial deficit of $81 billion by the struggling company Evergrande is merely the initial stage. Two years after severe issues surfaced in the industry, the government has made no progress in effectively resolving the situation.

Local and provincial governments are facing significant challenges as they heavily depend on construction projects to generate income and employment opportunities. They have been authorizing permits for fresh coal-fired power initiatives at a staggering frequency of up to two per week. However, the existing coal plants are operating well below their full potential and cannot compete with the newer solar and wind projects. This has led to a substantial debt burden, reaching levels as high as $US20tn, which jeopardizes the financial stability of many governments, possibly leading them to default.

All of these developments are unfavorable for Australia's exports of coal and iron ore. The sales of iron ore to China have greatly contributed to generating revenue. Additionally, despite the fact that our coal exports to China are not significant (as China's informal boycott being lifted did not have much impact), a decline in China's import demand will inevitably lower global prices.

There's no reason to be alarmed though. Only a small number of Australians are personally affected by the decrease in prices. For the majority of us, the consequences are reflected in lower company taxes and royalties, which contribute a noteworthy yet not overwhelming portion of the government's income.

Furthermore, a significant amount of the effect has already occurred. The costs of coal and iron ore are considerably lower than their highest points witnessed in 2022, following the invasion of Ukraine by Russia. To illustrate, the value of thermal coal shipped from Newcastle, which exceeded $US300 per metric ton just twelve months ago, has now plummeted to $US131 per metric ton and continues to decline.

Above all, the change in the Chinese economy is an essential component of the shift towards reducing carbon emissions in the electricity and steel industries, something that Australia will eventually have to acknowledge. Although there will be some economic drawbacks, there are also significant advantages for Australia in terms of being a producer and supplier of clean energy and important minerals. Our country not only possesses abundant and easily accessible lithium reserves, but we also have the potential to switch our iron ore production from hematite to magnetite, which is of superior quality and is necessary for the production of environmentally-friendly steel.

In conclusion, the mineral sector is not the sole export industry that heavily relies on China. The revamped Chinese economy will require a continuously growing pool of well-educated individuals. To ensure its sustainability, Australia heavily relies on international students, especially those from China, within its education system.

The remarkable Chinese construction frenzy has persisted for a duration that surpassed expectations. However, every good thing eventually comes to an end, and it is our wish that the deceleration will not inflict severe distress.