Essay: Analyzing the Impact of China's Economic Slowdown on Australia

This essay delves into the significant economic relationship between China and Australia, highlighting the impact of China's economic slowdown on Australia's macroeconomic conditions. It explores the historical context of their trade, emphasizing Australia's reliance on Chinese demand for resources and the Chinese market for its exports. The essay analyzes the repercussions of the US-China trade war, China's shifting economic focus, and the resulting decline in Chinese economic growth. It examines the effects on Australia's trade, commodity prices, employment, and the Australian dollar, as well as the RBA's responses and predictions. The essay concludes that the slowdown in China's economy has detrimental effects on Australia's growth, affecting exchange rates, terms of trade, and aggregate demand. Finally, it discusses the measures taken by the RBA to stimulate domestic economy to counteract the slowdown.

Running head: ESSAY
Essay on ‘impact of a fall in the rate of growth of the Chinese economy on macroeconomic
conditions in Australia’
Name of the Student:
Name of the University:
Author note:

1ESSAY
Introduction
China and Australia have very significant economic relationship. Since the 1970s, when
the Chinese economy started to witness growth in urbanization, manufacturing, and investment
in infrastructural investment, the demand for energy, transport, electricity, manufacturing raw
materials and building materials increased considerably. Australia was able to meet a large
portion of the huge demand of the Chinese people, and at the same time, it also provided a big
market for the Chinese manufactured goods. Currently, the biggest trading partner of Australia is
China in terms of both exports and imports, while Australia is the 6th biggest trading partner of
China (Goodman, 2017). According to a publication of the Parliament of Australian (2019),
Australia holds the 5th rank among the biggest suppliers of imports to China and 10th rank in the
list of largest customer for exports. While 25% of the manufactured imports to Australia comes
from China, 13% of the exports of Australia to China consists of thermal coal. The countries are
also involved in two way investment relationship. Thus, any economic impact on any of these 2
countries has its consequences on the global economy as well as on the economy of the trade
partner nations. The economy of China is going through a turbulence since mid-2018 due to the
US-China trade war. The imposition of tariff on the Chinese goods and the retaliation by the
Chinese government have been affecting the growth of the Chinese economy. However, as the
Australian economy, especially some particular sectors are heavily dependent on the Chinese
economy for trading, thus, the slower growth of China would have a significant impact on the
Australian economy (Thomas, 2017). This essay will present a comprehensive discussion on the
impact of a fall in the rate of growth of the Chinese economy on macroeconomic conditions
in Australia.

2ESSAY
Discussion
Over the years, the Australian economy has become increasingly dependent on the
Chinese economy. Not only imports of Chinese manufactured goods, but the exports to China
also contribute a significant amount in the growth of the Australian economy. Thus, if China
reduced the level of trade with Australia, the Australian economy would face challenges in their
growth prospects. As per the report by Aph.gov.au (2019), China’s economy has been shifting
its focus towards more domestic consumption and production of more complex products and
services, and thus, the demand for resources from Australia to China will be moderate. The
exports to China is expected to grow at a slower rate and the natural gas is expected to replace
the coal exports to some extent. At the same time, the imports from China to Australia majorly
consists of engineering goods, which includes telecommunication and office equipment. The
level of investment both ways has also grown over the years. Thus, any economic shock to China
would have a consequent effect on the growth of the Australian economy (Qi & Zhang, 2018).
However, since 2018, the Chinese economy is facing a slowdown. The trade war between
America and China is having its impact felt on China as well as its trade relationships with other
partners, including Australia. According to a report by Beveridge (2019), the trade war of China
with USA has cast a negative impact on the China’s economic growth. The Chinese economic
growth has been slowest in the past 27 years. The quarterly growth of GDP was only 6.2% in the
June quarter of 2019, which is a worrying fact for Australia, being the largest trading partner of
China. Australia itself is facing the challenge of slowing growth and along with that, the Chinese
growth rate hovering around 6%, is a major concern for Australia.

3ESSAY
The trade war between the USA and China started in the mid-2018, when the US
President, Donald Trump imposed increased tariff and other type of trade barriers on the Chinese
imports on the ground of increasing trade deficit due to massive imports of Chinese goods, unfair
trade practices and intellectual property theft by China (Liu & Woo, 2018). Within a year till
mid-2019, the USA has imposed tariffs of more than $360 billion on the Chinese products, while
China also retaliated with over $110 billion on the US products (BBC News, 2019). In
September 2019, while US imposed 15% extra duty on the Chinese imports, including meat and
musical instruments, China retaliated with 5% levy on the crude oil from the USA, which hit the
fuel first time in the trade war. Thus, the net effect of the on-going trade war between 2 of the
biggest economies of the world is the increasing tariffs on the imports, which affected the
production sectors of the nations. As highlighted by Beveridge (2019), the increased tariffs on
the Chinese goods have been affecting both the imports and exports of China, with 7.3% fall in
imports recorded in June 2019. Increased tariffs are making the Chinese imports more expensive
in the USA, which is reducing the demand for Chinese goods in the biggest economy of the
world. Thus, there is a fall in the Chinese exports. On the other hand, the imposition of tariff by
China on the American goods is increasing the prices for the American goods in the Chinese
economy, resulting in fall in imports. The terms of trade and the trade volume are going
downwards for both the economies, especially for China. The domestic sectors, especially the
manufacturing, agriculture and textile industries, have been affected majorly. It is also affecting
the foreign exchange reserves. Along with that, China is facing another challenge of excessive
debts, occurred due to the stimulus efforts taken after the global financial crisis (Li, He & Lin,
2018). The stimulus boosted the economic growth, but it led to $40 million debt on the
government (He, 2019). The debt-to-GDP ratio has become 300% as of March 2019, and the

4ESSAY
total debt of China now accounts for 15% of the total global debt. To prevent further slowdown
of the economy, People’s Bank of China has reduced the reserve requirement ration by 0.5% in
September 2019 and lowered some fees and taxes. The level of customer spending has also
decreased substantially in China due to high uncertainties in the economy, increased personal
debts and increased property prices. The large consumer goods, automobiles and electronic
companies, like, Apple Inc., Ford, are feeling the fall in spending in a major way (Itakura, 2019).
The Chinese Yuan also faced devaluation, lowest in the 11.5 years due to weakening of the
exports resulting from the trade war (Farrer, 2019). Thus, it can be said that as China is
witnessing a fall in its overall economy, there is a high chance of falling trade with other trade
partners, including Australia, as they would not want to increase their debt and trade deficit with
other countries.
Farrer (2019) also writes that the Chinese economy crash would lead to a big disruption
in the Australian economy, with potential negative impact on income level, surplus of federal
budget and loss of almost half million jobs. According to a report by Deloitte, if the Chinese
economy shrinks to 3% from the current 6.5%, the Australian economy would lose $140 billion
in the total income and more than half million jobs. It has been noticed that the Chinese
slowdown would affect the commodity prices in Australia. The raw materials exports to China
give Australia a trade surplus of $8 billion. However, the demand for resources and other
consumer products, such as, beef, baby formula and wine, would decline substantially if the
Chinese economy faces slump and recession (Rumbens & Guttmann, 2019). Although the falling
value of the Australian dollar could cover up some of the damages by making the Australian
products more competitive, but if the Chinese economy slowed down faster, that would hurt the
Australian economy through mine closures, job loss in regional areas and decreased royalties.

5ESSAY
The service sectors, such as, education and tourism, would also face pain from the decline in the
numbers of Chinese visitors.
Turner (2019) reported that RBA predicted a 2.5% fall in the Australian economic growth
in the next three years, affecting the equity and commodity prices, if the Chinese economy
dropped by 5%. Three potential scenarios were predicted by the RBA that could hit the economy
of Australia. Firstly, the Australian GDP would contract due to lower demand in the international
economy and lower level of trade with China and the other trade partners having connections
with China. The level of the export volumes of non-resources is expected to decline by up to
1.5% in relation to the baseline after 2 years and that would lower the GDP by 0.3% after 3
years. The commodity prices are also expected to fall, along with a big fall in the demand for
manufacturing and services sectors.
Secondly, the equity prices fell by 10% in the first year, resulting in lower household
wealth as well as consumption. Decrease in the economic activities results in increasing rate of
unemployment by 0.9% and fall in inflation by 0.2% after 3 years (Guttmann et al., 2019).
Thirdly, RBA predicted that the cash rate and the exchange rate would also respond
according to a slowdown in the Chinese economy. As per the economic theories of aggregate
demand and supply, it is observed that any negative shock in the foreign economy that hits
Australia, reduces the exchange rate, and the terms of trade. This puts a downward pressure on
the real exchange rate. The decrease in the demand for Australian products in China and other
mutual trade partners of China and Australia reduces the competitiveness of the Australian
products in the global market (Groenewold, 2018). The level of exports and imports both
declines, resulting in increase in the domestic demand for domestic products. That could provide

6ESSAY
a boost to the domestic manufacturing and other services, but lack of investment inflow from
foreign countries and reduced real exchange rate decrease the employment and income level in
the economy and results in a drop in the consumer spending. This in turn reduces the level of
aggregate demand in the domestic economy, affecting the overall level of production.
Thus, it is evident that a fall in the Chinese economic growth would have a downward
effect on the Australian economy by affecting the exchange rate, terms of trade and the level of
aggregate demand. As highlighted by Blagrave & Vesperoni (2018), the fall in exports is
affecting the competitiveness of the Australian products and also reducing the value of
Australian dollar and that result in the lower level of GDP, that is, slower economic growth in
Australia. At the same time, the RBA has decreased the cash rate to 1% to stimulate the domestic
economy. It has loosened the tight monetary policy of the country, and increased the lending
opportunities for the people. RBA has aimed to increase the level of spending to stimulate the
aggregate demand and domestic production in the economy to counteract the slower growth.
Conclusion
From the above discussion, it can be concluded that the slowing down of the Chinese
economy has been detrimental for the economic growth of Australia. The Chinese economy has
been facing challenges due to various macroeconomic factors, such as, increased tariffs from the
trade war with the USA, reduced exports and imports in the global market, high public debt and
falling value of Chinese Yuan. These factors have affected the manufacturing and international
trade of China and resulted in slower economic growth. Being one of the biggest trade partner of
China, Australia has also been facing slower growth of the economy, as the level of trade with

7ESSAY
China has reduced due to lower demand from the Chinese economy. It has also affected the
domestic manufacturing and export sector of Australia, its employment and inflation level. The
RBA has been taking measures to stimulate growth, that is, increase the consumer spending, and
investment in the economy and encourage the domestic producers to increase the aggregate
supply in the economy. Thus, it can be inferred that Australia is facing an uncertainty regarding
the economic growth as its largest trading partner, that is, China has been experiencing slower
growth of the economy.

8ESSAY
References
Aph.gov.au. (2019). Australia’s economic relationships with China – Parliament of Australia.
Retrieved 24 September 2019, from
https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/
Parliamentary_Library/pubs/BriefingBook44p/China
BBC News. (2019). US-China trade war - BBC News. Retrieved 24 September 2019, from
https://www.bbc.com/news/business-45899310
Beveridge, J. (2019). China's economic growth slows to 27-year low, worrying signs for
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economic-growth-gdp-slows-27-year-low-worrying-signs-australia/
Blagrave, P., & Vesperoni, E. (2018). The implications of China’s slowdown for international
trade. Journal of Asian Economics, 56, 36-47. DOI:
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Goodman, D. S. (2017). Australia and the China threat: Managing ambiguity. The Pacific
Review, 30(5), 769-782. DOI: https://doi.org/10.1080/09512748.2017.1339118

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Groenewold, N. (2018). China's ‘New Normal’: How will China's Growth Slowdown Affect
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Deloitte Insights. Retrieved 24 September 2019, from

10ESSAY
https://www2.deloitte.com/us/en/insights/economy/asia-pacific/australia-economic-
outlook.html
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