The impact of the slowdown of the Chinese economy on Australia.
There are strong indications that the Chinese economy is slowing
The essay should focus on Australia and discuss the implications of the Chinese economy slow down on Australia.
The essay should describe, proving figures and data is necessary,
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Since the 2008/9 economic recession, China has become a backbone of the global financial growth. The concern has been, however, on its decelerated economic growth and the likely impact on the world. Before China joined the world economy, the US was the primary driver of the world GDP. However, it is by China entering the world economy that caused it to rise from 2% in 1995 to almost 15% recently (Yueh, 2015, p. 1). The Chinese economy has experienced a drop in the economic growth rate of 10% from its reformation in 1979 to 7%, and the global economy is likely to slow with it. One of the most affected nations is Australia, a country that has close trade ties with China. The purpose of this paper is to explore the impact of the slowdown of the Chinese economy on Australia highlighting its effects on export, tourism, and investment, among other aspects of economics. The figure below shows the share of the Chinese GDP on the world economy.
Figure 1: World Economic Outlook (Barnett, 2014)
Over the last two decades, the Australian economy has been experiencing a constant growth. Unlike before, the nation’s economy no longer depends on the American economy, but over the recent past, the Chinese economy has been the backbone of the Australian economy thriving. According to the report by Warner (2015, p. 1), the Australian economy has been boosted by China more than any other developed country, including the United States. It is noteworthy that the Australian economic recovery from the global financial crisis; and it recorded the swiftest and the most significant improvement, and undoubtedly the major boost came from China. This came as a result of the high demand for Australian products which reinstated the mining investment growth to gain strength (Australian Development Outlook, 2017, p. 4). Therefore, with the clear picture of the impact China has had on the Australian economy, it clear that the slowdown is greatly affecting Australia.
According to the Song, Fang, and Johnston (2017, p. 1), China has been experiencing a sluggish economic growth and so is the world. The deteriorating economic conditions have raised concerns about the commercial sector and the sustainable growth goals shortly. There have been geopolitical tensions especially among the world’s most significant economies such as the US and Britain, which has heightened the uncertainty of China navigating through the resource-intensive model of the economy to a new model of economic development. The China’s economy has experienced a consistent slower growth, commonly referred to as ‘new normal,’ at a remarkably high rate (two-digit) as compared to the last decade. However, as shown in the figure below, it continues to grow faster than most major economies in the world. The figure shows Chinese economic growth rate of 6.7% last year and demonstrates the continuous development retardation. The deceleration in growth is resulting in large overcapacity issues in some sectors.
Figure 2: GDP growth rates, 1975–2016 (NBS, Various Years, n.p)
As required by the ‘new model’ of growth, China’s tertiary industry has continued to grow in comparative size, making 52 percent if the nation’s GDP in 2016. The secondary and primary industries have experienced a relative deceleration in growth (40 percent and 8 percent respectively) (Song, et al., 2017).
Figure 3: Sector shares in total GDP, 1978–2016 (NBS, Various Years, n.p)
There have been a lesser allocation to the exports as the contributor to development. China’s has experienced more favorable trading climate for over three decades since the reform. Between 1980 and 2006, the nation recorded GDP growth contribution from export shares from about 5 percent to 37 percent, but it has been dropping from 2006 (Song, et al., 2017, p. 1).
Figure 4: China’s export share in GDP, 1978–2016 (NBS, Various Years, n.p)
It is significant that China in 2013 became the most significant business center in the world, and it has retained its position since then (Colvin, 2017, p. 1). Further, the trade surplus of the country has fallen, the condition that has eased the global imbalances. Nonetheless, the reduced export inclination of the Chinese economy has affected the global markets, with reports indicating that deceleration in the export orientation of the country’s economy has contributed significantly to the international business market, including Australia (Song, et al., 2017, p. 1). Therefore, with this analysis of the Chinese economy, it is evident that a country which depends so much on it has been dramatically impacted.
There are several sectors in Australia that have been affected by the slowdown of the Chinese economy, which are highlighted in the section below.
Currently, China is the most significant export destination for Australia, and this has been since 2009. Australia considers China the Northeast Asian important export market for its goods and services, giving Australia an income of 17.5 billion Australian dollars (Commission, 2015, p. 3). In 2013-14, Chinese market accounted for the 32.5% of all export sales, which is a third of the export revenue. According to the Australian Bureau of Statistics (2014, n.p), merchandise export information for every month shows that by April 2014 the export market to China reached to 37 percent, although it had decreased back to 33% by January 2015. This is a reflection of the drop in the cost of the commodities, particularly that of iron ore.
Figure 5: Australia’s Export to China (Australian Bureau of Statistics, 2014)
Over the recent past, the Australian travel has been lean, with the stable Australian currency diminishing inbound global tourism and improving outbound global tourism, which has consequently reduced domestic tourism (Warner, 2015, p. 2). In spite of this restricted condition, inbound Chinese travel has contributed significantly to the growth of the economy. The growth of Chinese incoming international tourism has become the incoming market across the border for Australia by quality, with Chinese tourists spending over five billion dollars over the year in 2014.
Figure 6: Australian Tourism Expenditure ( Tourism Research Australia, 2014, n.p)
With the dropping of the Australia’s Dollar, other countries have influenced the country’s tourism sector, but as seen in the figure above, China spending still dominates.
The Chinese economy is shifting from being export-oriented to consumer-oriented. The middle-class nationals are getting more disposable income more than before. This shift has affected the level of investment of investment in Australia. Chinese investment in Australia, especially in agriculture, resources, and estates has garnered more interest over the recent past. Foreign investment is dynamic and can change position, but China has always been one of the large sources of international investments into the Australian soil, with the US leading in the least. According to the Foreign Investment Review Board, of all the 13% foreign investments made in Australia in financial year 2012/13, Chinese interests put 15.8 billion dollars. While the proportion of investment to some sectors such as insurance, tourism, services, and mineral production was minimal, some sectors attracted large proportions of Chinese foreign investment. Mineral exploration attracted 19%, agriculture 14%, production 15%, and real estate 15%.
Figure 7: Chinese Investment in Australia (Foreign Investment Review Board, 2014)
As identified, the Chinese economy has been continuously decelerating, and the recent fall affects the Australian products. It is important to note that the sped if the Australian capital exports to China were at some point going to diminish because sustaining the post-GFC of 2008/09 could not last for long and the country had always focused on shifting the economy to consumerism. The problem has always been if this change is slow or fast, or if the historical imbalances could be lengthening the rapid shifting time (Warner, 2015, p. 3). The dynamism in this shift could be influenced by the reduction in the Chinese commodity cost, increased borrowing, and the undergoing financial difficulties in the OECD countries.
The Oxford Economics has rated the likelihood of Chinese economic recession to be only 10% (Stein, 2014, p. 7). However, in spite the possibility being low, the Chinese economy deceleration would cause harm to the Australian market economies and thus likely to cause the financial crisis in the short-range future (Warner, 2015, p. 3). As identified earlier in the slower economic growth rate in China has affected the prices of bulk products such as iron ore in Australia. This has adversely affected the investor perspective of the country, consequently causing depreciation of the Australian currency. However, this shrinkage has presented some benefits according to the Reserve Bank of Australia (RBA), which has asserted that lower currency value would help other industries of the national economy and help set the economic growth on equilibrium (RBA, 2015).
Overall, the Chinese economy is the backbone for most of the countries in the Asia, and notably Australia. Australia owes its sizeable economic growth to the high Chinese economy, and therefore increase of China implies growth for Australia. However, with the slowdown of Chinese economy experienced recently due to its shift to the ‘New Normal’ of consumption as opposed to the previous export-oriented economy, the Australian economy has received a blow. The main sectors affected, as identified in this paper are tourism, exports, and foreign investments. Therefore, this trend is likely to continue if no intervention is taken faster, as the depreciation in the Australian currency is already depreciating.