While apocalyptic headlines last year indicated Australia and China’s trade relationship was withering away to nothing, when the bill finally arrived, it was a pleasant surprise.

Against all expectations, the total value of exports to China rose in the first quarter of 2021, despite Beijing’s decision to block the import of Australian coal, barley, lobsters, wine and timber.

While this was good news for Australia’s GDP, it laid bare a stark fact about the trade link between our two countries — it’s mostly about iron ore.

An unexpected spike in the value of iron ore more than offset any losses from other commodities and undermined the message Beijing was intending to send.

But that may not be the case for long, according to Dinny McMahon, an expert in China’s financial system.

“As far as they’re concerned, they probably see that [reliance on Australian iron ore] as a strategic weakness,” he told the ABC’s China, If You’re Listening podcast.

“They can’t see their program of sanctions through to its logical conclusion, because they’re so dependent on certain resources from Australia, they’re certainly aware of the weakness of their position.

“And ultimately, that’s not a position they want to be in, in the long term.”

China’s addiction

For almost the entire 72-year history of the People’s Republic of China, leaders in Beijing have been obsessed with steel production.

Chairman Mao Zedong was determined to push China, an agriculture-based economy, forward into the ranks of great nations by becoming the world’s largest steel producer by the early 1970s.

His attempts to achieve that led to widespread suffering and death, but after he himself died in 1976, his successors took up the mantle, with much more success.

By 1995 they had achieved what Mao could not — and they did it in part by using Australian iron ore exports.

The Australian iron ore industry had been built to primarily supply Japanese steel mills, but when China arrived on the scene in the 1980s, it expanded quickly to meet the new, enormous demand.

The Chinese economy became highly reliant on the process of turning iron ore into new buildings and infrastructure.

Building new cities, new roads, railways, bridges and dams became a vital source of growth for the country’s GDP, considered the most important part of the Chinese Communist Party’s appeal to the Chinese people.

The need to continually boost GDP through construction has led to incredible waste.

Virtually empty cities, airports, apartment buildings and highways are dotted across China — built on the back of tremendous debt accrued by local governments.

“The single easiest way to be able to stimulate economic growth is to borrow money and to build something,” McMahon said.

“Beijing has known for quite some time this is unsustainable, which is why in 2016, they started to rein in the pace at which debt accumulates.

“So Xi Jinping has really been developing new visions of what growth should look like in China.”

Beyond construction

The rapid change in strategy from China has led analysts like Dinny McMahon to change their predictions for the future of the country’s economy.

In 2018, McMahon published a book titled China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans and the End of the Chinese Miracle, which raised concerns of a ticking “debt bomb” which could one day explode and cause catastrophic damage to China’s economy.

But only three years later, his views have slightly changed.

“I think what they’ve done over the last few years in the financial system suggests that the potential for a major crisis or a blow-up isn’t that prominent anymore,” he said.

“I think the chances are not as significant as they were a few years ago.”

Xi Jinping, wary of the threat of economic collapse, made changes to China’s economic priorities.

“It’s about developing new companies that are producing high tech goods,” McMahon said.

But Beijing is also looking at trying to engage Chinese consumers more in the economy.

“The vision is putting more money in the pockets of Chinese households so that they consume,” McMahon said.

“Whether it will happen is still an open question.

“The point of what China is trying to do in terms of reforming its financial system, reforming its capital markets, reforming its economy, investing so much in research and development, is to become an economy that is less dependent on iron ore.

“But as was pretty clear from last year, with the response to COVID, there is still a heavy reliance on construction and investment for the time being.”

Hence China’s inability to completely cut off imports from Australia.

Still, two-thirds of the world’s iron ore exports are going to China. Most of that comes from Australia, for now.

China looks to Brazil and Africa

While Western Australia is home to the largest iron ore deposits in the world, it is not the only place the ore can be found.

Iron ore mining companies have been working for years to exploit large deposits in Brazil, though it has been a fraught process.

In 2015 and 2019, dams built to store waste products from the iron ore mining process collapsed near the Brazilian city of Belo Horizonte, leading to hundreds of deaths and the destruction of multiple villages.

The dams belonged to the mining giant Vale, and their collapse has led to huge delays for the development of mining projects in Brazil.

While Vale hopes to be able to get back on track, it’s also hampered by a lack of high-capacity railway lines and port infrastructure to export the ore it is able to dig up.

Meanwhile China has been looking to Africa — in particular the impoverished West African nation of Guinea — as a potential new source of large quantities of iron ore.

But development there lags behind even Brazil.

The iron ore fields are 650 kilometres from the coast, and there is no port or rail infrastructure in place at all.

Of course, fast construction of infrastructure is one of China’s biggest strengths.

But even ignoring the impediment of Guinea and Brazil being on the opposite side of the globe from Beijing, developing these resources to the capacity where they would be able to replace the enormous output from Australia will take several years.

For now, the iron chain between Australia and China is strong. But Australia needs to figure out what we’ll do if it breaks.
Source: ABC