China declares economic war on Australia – MacroBusiness

For fifteen years it lay low. A peaceful rise it said. Benefits to all it said. Open and fair trade for all it said. One economy and two systems it said.

Either it was lies all along or something has gone horribly wrong because China’s mask of friendliness has now dropped off. In its place is a snarling and angry beast, openly happy to violate sovereignty, undermine democracy and use economic blackmail to achieve its ends.

This pressure is not new. We’ve seen it for several years as China became more assertive via political bribery channels and strategic land-grabs. But as that tactic was pushed back, China has not backed down, on the contrary. Flushed into the open, China appears now happy to pursue its interests openly, aggressively and punitively.

Witness today as Canada reels from incarcerated nationals, New Zealand’s education trade buckles and even Britain feels the sting. As Australia has leglislated against policy influencers, blocked takeovers of national security firms by state owned enterprises, turned Huawei away and lobbied for a Pacific militarised in favour of the US alliance network, China is now openly warring with Australian interests:

  • our coal is being left idle outside of Chinese ports which will do material damage to GDP;
  • Chinese property investment is gone, bursting a housing values bubble that grew over the 2013-16 period, jeopardising financial stability and precipitating recession;
  • cyber attacks on our parliament have transpired with impunity.

Australia has no intention of backing away from any of its Cold War 2.0 commitments so next up is surely the student and tourism trade.

One wonders about the wisdom of this move to open hostility by China. Certainly it has been caught with its hand in the trade cookie jar by the Trump Administration. But why turn that into hostilities with the entire US hegemony? Surely it would have served China better to take a little pain now then lay low again. A generous trade deal with Donald Trump might have bought it another decade of policy quiescence. It is not ready for open confrontation. It is totally outmatched militarily and has not yet even recaptured influence over Taiwan or Korea. Its economy is vulnerable to the vagaries of the impossible trinity. It has not escaped the middle income trap and with mounting demographic headwinds is getting further from doing so.

I can surmise three possibilities for this premature shift in Chinese power projection.

The first is that after nearly two decades of success, Chinese leaders and people have fallen for their own balderdash. They see manifest destiny for China now, hubris plus those in their way be damned.

Second, the ascension of Xi Jinping to God King status means he now no longer cares whether China continues to develop. The new incentive in Chinese policy is to keep him in charge and creating external enemies serves that end via the channel of roused nationalism at home, even if it comes at the price of economic power abroad.

Third, the calling out of Chinese trade cheating, especially in technology, has genuinely blocked its passage to higher value growth and it now sees no alternatives to a richer economy so has nothing to lose. Trapped in its dying economic model of debt-charged building, it will flog the horse to death while turning its hostility towards rebels within and enemies without to keep tyrannical powers in charge.

No doubt it is some mix of all three and more.

It should be noted as well that not all of this is deliberate. China’s development model has simply run out of puff. For it to continue, it will need lower interest rates and a much cheaper yuan. But this combination will also unleash such a tsunami of deflation upon the world that it can only do so gradually. That requires draconian monetary management of the capital account, meaning much less Chinese capital abroad and a much more closed economy than we are used to seeing.

Nor is all of it China’s fault. Until a year or two ago, Australia happily bought China’s friendly line and took its money, even to the detriment of its own people. We were perilously close to choosing a disastrous path for a while, with very high profile Australians bought and paid for by Chinese dictatorial powers and the economy slipping fatally from the strategic imperatives that our children ought to have taken for granted. Yet our institutions have held.

In my view, China has nonetheless revealed its hegemonic ambitions too early. Now it will only succeed in galvanising Western resistance, centered in the United States but throughout its alliance network, and its soft power will decline even as it turns to hard power for advancement. Trump is just the spearhead. Next will come equally hostile Democrats. The net result will be China at and passed its apogee of influence but all the more dangerous for it.

For the first time in eighty years Australia will have to pay the price for its freedoms as a full unwind of its immigration and urbanisation model steadily transpires.

So be it.

Autralia economy news

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