A Bear on the Loose: Is Australia at Risk?

by Gabrielle Dennis

The global market held its breath on January 4 when the Chinese Stock Exchange CSI300 declined by 7% on its first day of trading in 2016. In the aftermath, experts on the Chinese economy have suggested that the stock exchange may be a poor indicator of the health of the Chinese economy; however, financial uncertainty continues to plague its economic partners, including commodities super-producer Australia.[1]

The CSI300 entered a bear market during the summer of 2015, and has not managed to regain its losses. The January 4 decline has had direct impact on the Australian economy; the ASX200, Australia’s principal stock exchange, was in a decline for over 10 days after the Chinese crash and continues to be unstable.[2] Oil, which is generally correlated with international market growth, is currently selling for under US 30 dollars a barrel. As a result of this uncertainty, the Australian dollar has reached a low of 69.19 cents to the US dollar. Australia functions as a proxy currency that is kept in reserve in order to make international trade smoother in the Asia Pacific region, thus the decline of the Chinese Yuan and oil prices has brought it to its current lows. While to the everyday Australian or those looking to invest internationally, a weak Australian dollar appears negative, it is beneficial to manufacturing and keeps interest rates low within the country as it controls inflation.[3] Despite these domestic benefits, two major areas where the Australian economy could be vulnerable to changes in the Chinese market are in the commodities and tourism sectors.

Australia, a major producer of coal, iron ore, and other natural resources for the previously burgeoning Chinese industrial sector is now facing the frightening future of overproduction, a serious danger to any economy. Australia is heavily dependent on its trading relationship with China; China is Australia’s largest trading partner, comprising a quarter of all her global exports, or numerically, $77.1 billion in 2011 (far ahead of export country number two, Japan at $52.4 billion), with an average rate of growth of 25.6 per cent per year for the previous 10 years.[4] With China shutting down some of her own state-owned mines like the Longmay Mining Group holdings as a result of market instability and the movement towards coal alternatives; it is increasingly evident that Australia’s commodities sectors may be in jeopardy.[5] This fact has not gone unnoticed by major commodities parties with interests in Australia. Global commodity superpowers BHP Billiton, Rio Tinto and Anglo-American have all seen a decline in the value of their stock, and are taking measures to protect their interests by scaling back operations. Anglo-American is cutting more than half of their staff internationally, and selling more than 30 mines.[6] If Chinese market instability continues, Australia could see a major decrease in commodities exports, which could negatively impact the country’s economy.

Outside of the commodities sector, Australia has strong tourism ties to China. China is Australia’s second largest contributor to tourism, with 18% of tourists coming from the People’s Republic.[7] A strong contributor to tourism in Australia is educational tourism. In the education sector, Chinese students make up the largest proportion of international students in Australia, with 40% of the international student body being Chinese in March 2013.[8] The Chinese market represents a huge financial foreign investment in Australia, and a precarious market could prevent tourists and potential students from coming to Australia, with potentially devastating results in the tourism sector.

As 2016 progresses the strength of the Australian economy will be affected, and unless the Chinese market improves, Australia has a difficult fiscal year ahead.

[1] Charles Riley, “Investors should focus on China’s economy, not stocks,” CNN Money (January 5, 2016): Accessed January 15, 2016. http://money.cnn.com/2016/01/05/investing/china-stock-market-economy/index.html.

[2] Vaness Desloires, “ASX plunges as oil drop fuels global growth panic,” The Sydney Morning Herald (January 14, 2016): Accessed January 17, 2016. http://www.smh.com.au/business/markets/asx-losses-accelerate-as-oil-fuels-global-growth-panic-20160114-gm5m3h.

[3] Jessica Sier,” China proxy Aussie dollar hits four-month low,” The Sydney Morning Herald (January 14, 2016): Accessed on January 15, 2016. http://www.smh.com.au/business/markets/currencies/a-slips-to-fourmonth-low-as-markets-slide-20160114-gm5ncz.html.

[4] Neil Batty and Frank Bingham, “Australia’s exports to China 2001 to 2011,” Australian Government Department of Foreign Affairs and Trade (December 2012): Accessed January 17, 2016. https://dfat.gov.au/about-us/publications/Documents/australias-exports-to-china-2001-2011.pdf.

[5] Philip Wen, “Coal mining town of Hegang on its knees as China economy shifts,” The Sydney Morning Herald (January 2, 2016): Accessed on January 6. http://www.smh.com.au/business/china/coal-mining-town-on-its-knees-as-china-economy-shifts-20151218-glr500.

[6] Peter Ryan, “Anglo American to slash jobs, close mines as commodities collapse deepens,” Australian Broadcasting Corporation News (December 09, 2015): Accessed January 15, 2016. http://www.abc.net.au/news/2015-12-09/anglo-american-to-slash-jobs,-close-mines-as/7012506.

[7] “CHINA Market Profile,” Tourism Australia: Accessed January 15, 2016. http://www.tourism.australia.com/documents/Markets/Market_Profile_2015_China.pdf.

[8] “Monthly Summary of International Student
Enrolment Data1 – Australia – YTD March 2013,” Australian Trade Commission: Accessed January 17, 2016. https://www.austrade.gov.au/Australian/Education/Education-Data/2013.

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