Why Bad News for China Is Good News for Australia

(Bloomberg Opinion) -- Bad news in China might just be good news for Australia.

That may sound counterintuitive, given the two economies are so closely intertwined. But Beijing's efforts to stimulate its slackening economy are boosting the price of iron ore, among Australia's biggest exports. Steel mills in China are humming. Tax cuts and steps to boost consumption stand to shore up Australia in other ways.

For policymakers in Sydney, this is a welcome, if surprising, byproduct of China's leaner times. Since the world's second-biggest economy started cooling more dramatically in the second half of last year, analysts and investors worried about the end of the dream 28-year growth run Australia has enjoyed. Live by the China boom, die by the China boom, or so the argument went.

Perversely, a China-induced slump may be just what Australia needs to shake itself out of complacency. Skeptics – this columnist has been one of them – may have to wait a little longer.

To get ahead of a slowdown, the Reserve Bank of Australia on Tuesday cut its benchmark interest rate to a record low of 1%. The reduction was the second quarter-point clip in as many months. Prior to June's move, the rate had been steady for a few years. 

This feels like fine-tuning, more than an all-out monetary assault on a sagging economy. Inflation has been below the central bank's 2% to 3% target for too long, and an okay labor market has failed to help get there. A lower jobless rate, which cheaper money might help achieve, could do the trick.

The RBA might nip and tuck a little more. There isn't much appetite for quantitative easing, though a live audience poll at a Bloomberg event in Sydney last month showed about one-third of attendees anticipated bond buying next year. Still, anything that dramatic may need to wait for a proper downturn, along with a spike in unemployment. RBA Governor Philip Lowe has referred to letters he receives from savers complaining about low returns on their deposits. 

Tuesday's statement from the RBA didn't address China's economy or its prospects in any meaningful way beyond acknowledging China has taken steps to support activity. Minutes of the board's June decision, when rates were also cut, hint at Beijing's stimulus and how it might buoy the local scene. “The increase in iron ore prices had been underpinned by supply constraints, strong demand from China and an increase in steel production,” the minutes said.

Of course, there's more than China going on here. Population growth, largely a product of immigration, keeps economic activity ticking over. (There's a lesson there for other developed economies wrestling with declining birth rates.) The government has pledged infrastructure spending and tax cuts. There are also signs a housing bust is abating.

China is arguably the key economic relationship for Australia. China buys about 30% of Australia's exports, many of them related to resources and commodities. Chinese tourists flock to the country's shores and Australian universities fret about their dependence on Chinese students. (Fees for foreign students exceed those charged to locals.)

And there's more to commodity prices than China. While China's steel output expands, a dam disaster at Brazil's Vale SA has played an important role in pushing iron-ore prices to a five-year high. The Australian Department of Industry, Innovation and Science recently trimmed its forecast for the country's exports, while acknowledging the prospect of further efforts by China to spur activity.

Ties that bind Australia to China haven't undone the former just yet. That's luck for you.

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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