After two decades of stunning economic growth, evidence of a slowdown in China is naturally a cause for concern.
The evidence, unfortunately, is not hard to find. China’s estimated annual rate of GDP growth is slowing and looks to be stabilising at about 4%, only a couple of percentage points higher than that of rich countries in the OECD. At this rate it will take many decades before income per person in China catches up with that of other leading economies.
High youth unemployment is another symptom of a slowdown, where businesses retain their existing workers but stop hiring new ones. For young workers it represents a violation of the implicit social contract offered by the CCP, where acquiescence in authoritarian rule is rewarded with steadily improving living standards. This represents a threat to the stability of the government, which is doing its best to keep the growth engine running a bit longer, even at the risk of a worse crash later on.
Over decades of rapid economic growth, China has transformed itself from a poor, mostly rural and agricultural country to an urban and industrial country with income per person slightly above the world average.
This process has required huge investments in manufacturing, infrastructure and, of course, construction. The central inputs to this process are steel produced from iron ore in blastfurnaces driven by metallurgical coal and electricity generated mostly by burning thermal coal. Australia produces all three in large quantities. Even when Australian miners don’t supply China directly, they benefit indirectly from higher world prices driven by Chinese demand.
But the processes of industrialisation and urbanisation are reaching their limits in China, as they have already done in most developed countries. Just as the industrial economy replaced agriculture as the central focus of economic activity, services, and particularly information services, are replacing industry.
China is losing manufacturing industries to competitors like Vietnam. Meanwhile, as education standards improve, younger workers are increasingly unwilling to take low-skilled assembly line jobs.
This transformation is inevitable and ultimately beneficial, but it implies the end of one of the biggest construction booms in history. The recent $81bn loss announced by financially distressed firm Evergrande is only the beginning. Two years after acute problems emerged in the sector, the government is no closer to managing an orderly resolution.
There are also big problems for local and provincial governments, which have relied heavily on construction projects to generate revenue and jobs. They have been issuing permits for new coal-fired power projects at a rate of up to two a week, even though existing plants are operating way below capacity and are unable to compete with new solar and wind. The resulting pile of debt, amounting to as much as $US20tn, threatens to send many of them into default.
None of this is good news for Australia’s coal and iron ore exports. Sales of iron ore to China have been a major source of revenue. And even though we export little coal to China (the lifting of China’s unofficial boycott didn’t change much) a reduction in China’s import demand will reduce global prices.
However, there is no need to panic. Few Australians are directly exposed to losses from lower prices. For most of us, the effects flow through reductions in company tax and royalties, which are a small, though significant, share of government revenue.
Moreover, much of the impact has already happened. Prices of coal and iron ore are far below the peaks reached in 2022, after the Russian invasion of Ukraine. For example, the price of thermal coal exported from Newcastle – which was more than $US300/tonne a year ago – is now at $US131/tonne and falling.
Most importantly, the transformation of the Chinese economy is a necessary part of the transition to decarbonising electricity and steel, which Australia must accept sooner or later. While this will involve some economic costs, there are also large potential benefits for Australia as a producer and exporter of both clean energy and critical minerals. Not only do we have large and accessible lithium resources, but we have the potential to shift iron ore production from hematite to the high-quality magnetite needed for the production of “green steel”.
Finally, minerals are not the only export industry that depends heavily on China. The transformed Chinese economy will need ever increasing numbers of educated workers. Australia’s education system depends on international, and particularly Chinese, students to remain viable.
The great Chinese construction boom has lasted longer than anyone thought possible. But all things must pass, and we can only hope that the slowdown will not be too painful.
• John Quiggin is professor at the University of Queensland’s school of economics
