(Bloomberg) -- Australian Treasurer Jim Chalmers will kick off a visit to China on Thursday, the first by the nation’s top economic decision-maker in seven years, as concerns in Canberra grow over the potential impact from a far-reaching slowdown in its top trading partner.
Chalmers will meet with his counterparts during the two-day trip, including with the chair of the National Development and Reform Commission Zheng Shanjie. The treasurer will co-chair the Australia China Strategic Economic Dialogue in the latest sign of improved ties after several years of diplomatic tensions.
As a small open economy, Australia walks a tightrope balancing tensions between its biggest trading partner — China — and its security partner and largest source of foreign direct investment, the US. Trade flows with China have surged, with shipments accounting for more than 35% of Australian export receipts.
The relationship underwent a period of tumult beginning in late 2017, with Beijing taking punitive trade actions against some Australian exports, though the massive iron-ore trade was left untouched. The election of Australia’s current Labor government in May 2022 heralded a steady turnaround in ties and most of the trade barriers have now been removed.
The visit is a “really important step toward stabilizing our economic relationship with China,” Chalmers said in Brisbane ahead of his departure. “Our relationship with China is full of complexity and it’s full of opportunity.”
It comes as a three-year slump in China’s housing market and a weak recovery from the pandemic have weighed on growth in the world’s second-largest economy. That has significant fallout potential for Australia, given it is heavily exposed to the Chinese property market’s demand for steel.
While China’s central bank acted in recent days to try and support the property market, it’s unclear whether the cuts in mortgage rates and other stimulus announced will boost the economy.
“Chalmers is going to want to get a reading on conditions on the ground in China and understand what policymakers are doing beyond rate cuts to reignite demand and stimulate the housing market,” said James McIntyre, who covers the Australian economy for Bloomberg Economics.
Ahead of his departure, Chalmers said he consulted with executives from major China-facing Australian companies, including Rio Tinto PLC, BHP Group Ltd, and Fortescue Ltd.
Read: China’s Bulging Commodity Stockpiles Show Depth of Economic Woes
Iron ore has been among the worst performing commodities in 2024 as China’s slowdown hurt demand and sent the price tumbling below $90 for the first time since 2022. The steelmaking ingredient has risen in response to the stimulus announcement and is back near $100 a ton, though it’s still down by almost a fifth since late May.
Such large fluctuations can have a significant impact on Australia’s budget.
According to Treasury estimates, every $10 fall in the iron ore price costs A$500 million ($344 million) a year in budget revenue for the first three years and then A$1.9 billion in the fourth year.
It is possible to overplay the influence on Australia’s economy from China, according to AMP Deputy Chief Economist Diana Mousina who added that most of the risk from the slowdown was already priced in.
“Now, if the economy in China was to start growing by one or two percent, well that would be a big shift for Australia,” Mousina said. “But there is still upside to go for the Chinese economy.”
Experts said it was unclear what outcomes could be expected from Chalmers’ meetings in Beijing, with the majority of trade restrictions already lifted and Canberra reluctant to move on Beijing’s demands for more business access to the sensitive critical minerals sector.
At a minimum, Chinese officials may seek assurances from Chalmers that Australia won’t join Western partners such as the US and European Union in imposing a growing number of economic sanctions on the Asia power.
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--With assistance from James Mayger.
©2024 Bloomberg L.P.
