Across the Ditch: The world's most China-reliant economy reels from virus shockwaves

The coronavirus hit has exposed the extraordinary depth of Australia's economic dependence on China and fuelled questions over whether the nation is too reliant on the Asian behemoth.

That dependence is on display in the Western Australian coastal town of Geraldton, where an ocean "dragon" fires the incomes of local fishermen. The Longxia, literally dragon shrimp in Mandarin, is prized at celebrations in China for its rich red colour, horns and spine that remind Chinese of the mythical creature.

The coronavirus shutdown on the eve of Lunar New Year means Geraldton's fishing fleet is stuck at port during this traditionally bountiful period.

Matt Rutter, CEO of Geraldton Fishermen's Co-operative, estimates the rocklobster catch between then and the end of March would normally be close to 2 million kg, with a market value of more than A$120 million ($124.8m). But not this year — boat captains, deckhands, truck drivers, export packers and others have seen little work and even less cash.

"It's the first time there's been a stop on fishing," Rutter said.

Australia is the most China-reliant economy in the developed world, with about a third of its exports going there. Chinese nationals make up roughly 38 per cent of its foreign students and 15 per cent of its tourists.

"We're getting a test run on what many people worried might have happened as a result of political tensions, but instead it's a result of a health crisis," said Richard McGregor, author of The Party: The Secret World of China's Communist Rulers and a senior fellow at the Lowy Institute in Sydney.

"So we'll see how the Australian economy holds up and we'll get a test of the ability of various sectors like tourism and education to diversify their customer base."

A shipment of honey illustrates how quickly the scales have turned.

In December, wellness and nutrition group Eve Investments struck its first deal with a Chinese distributor for organic honey from its Meluka Australia brand. The shipping container holding that order of more than 21,000 units from its property outside Ballina on the New South Wales north coast is now being held up on the docks in Sydney, awaiting clearance from its destination port in Shanghai.

As reported cases of the coronavirus outbreak continues to spread across the globe, more and more markets and events are taking precautions against the pandemic, including numerous marquee events in the video game industry https://t.co/5nGOFVqesj

— The Hollywood Reporter (@THR) February 26, 2020

"The biggest issue at the moment is one of logistics. With some of the ports sending people home, it does complicate getting product in there in a timely manner," said managing director Bill Fry.

For now — like many Australian businesspeople — Fry remains fixed on the massive dividends a country of 25 million can reap by tapping into the demand of 1.4 billion people.

Longer term, the virus could drive demand for Meluka honey as people turn to products with medicinal value "to try and boost their immune systems," Fry said.

Ben Woodward, who along with his two brothers runs the CaPTA Group, with nature parks and jungle tours across Far North Queensland, says the cascading effect of the coronavirus' fallout is in a league of its own.

"This is uncharted territory," he said. "It doesn't just affect tourism, the spillover affects other industries like retail, transport, cafes and so forth as well."

Professor who predicted last 9 elections warns coronavirus could 'doom' Trump in 2020 https://t.co/hDLyJrZMac

— Indy World (@IndyWorld) February 26, 2020

The family — whose business started back in 1976 — has cut hours for some of the 200-odd staff across its butterfly sanctuary, wildlife reserve and other businesses.

It's smaller firms in Australia that are "working-capital dependent" that are most at risk, said Tim Toohey, a former chief economist for Australia at Goldman Sachs. He expressed surprise the Government hasn't put in place a system to cushion the blow.

"It wouldn't cost a lot, and it would probably save a lot of jobs and businesses that would be very hard to restart again," said Toohey, now at Yarra Capital Management.

The terrible timing of the hit to fishing and tourism was matched by the blow to Australia's education sector — the fourth-largest export industry.

Don’t panic. Doctors/ virologists I’m speaking to say 98% of people will be fine, even if they get Covid-19. They expect it will go around the world, but that most people who get it will be a little sick, then recover. The danger is to vulnerable people. Hospitals/ old age homes.

— Richard Engel (@RichardEngel) February 26, 2020

In Sydney, the nation's oldest university is scrambling to cope with 15,000 Chinese visa holders locked out by the travel restrictions just as the academic year begins. The danger is Chinese parents will pull their children out of Australian institutions and instead send them to the UK or Canada, where the year begins in August or September.

Officials at Sydney University are trying to be flexible and keep communication open, with a dedicated web site and videos for Chinese students. It's made clear they can catch up if needed and that there are alternative paths if the travel ban is prolonged. Chinese nationals made up just under a quarter of the university's total student population in 2019.

Students will "have the option to defer or withdraw without penalty by the final census date of 31 March 2020," said Michael Spence, vice-chancellor and principal of the University of Sydney.

The one-child policy has meant that Chinese students have the most disposable income of any international group. That produces a "ripple impact" on accommodation providers, cafes and restaurants when their spending dries up.

Australia's retail industry, already struggling for sales among frugal customers, is also in the firing line. Major outlets like Harvey Norman Holdings and JB Hi-Fi face potential shortfalls of stock. China is the key source for mobile phones, computers and televisions, and for Harvey Norman, furniture and mattresses and cushions.

EU officials are calling for countries to coordinate with each other, not close borders, to prepare for the spread of the coronavirushttps://t.co/JnYPkpPdZB

— The New York Times (@nytimes) February 26, 2020

Should a supply shortage emerge, it will be difficult to offer the sales and discounts that have been necessary to bring customers through the door. The scale of China's dominance in these sectors means there isn't another country that can easily step in to make up the shortfall. That could trigger something unseen for almost 20 years: inflation on electrical and other consumer goods.

The ripple effect across Australia's economy has rekindled the question of whether the country is too concentrated on supplying and being supplied by China — a debate that has flared before, but never with such a compelling backdrop.

Reserve Bank Governor Philip Lowe in the past has argued that Australia would find alternative markets if Chinese demand waned, but prices would probably be lower and therefore the country wouldn't be as prosperous. The central bank — which hit pause on last year's interest-rate cuts for fear of driving up home prices and debt — is clearly worried about the growth risks.

"The outbreak presented a material near-term risk to the economic outlook for China and for international trade flows, and thereby the Australian economy," the RBA said in minutes of its February 4 meeting, where it kept rates at a record-low 0.75 per cent.

S&P Global Ratings said Australia faces a "material knock to growth" from the virus, and has cut its GDP forecasts by half a percentage point. It expects the RBA to respond by easing twice more this year, taking the cash rate to its estimated lower bound of 0.25 per cent.

At the rate at which countries are closing borders & cancelling flights due to #COVID19 we will soon be in a desperately fragmented world with all travel & supply chains thoroughly disrupted. Final death knell for Globalization? https://t.co/qRGg2GhrkL

— Laurie Garrett (@Laurie_Garrett) February 26, 2020

Even before the virus, Australia's Government was trying to diversify export markets with a series of free-trade agreements. The latest was with northern neighbour Indonesia, the world's fourth most populous country; and it's still negotiating one with India, on track to overtake China as the world's most populous nation this decade.

Australia is also in talks with the European Union and UK and has inked deals with Japan and South Korea and joined the regional pact formerly known as the Trans Pacific Partnership, until President Donald Trump pulled the US out.

But it's hard to escape China. Even where Australia started off with diverse customers, such as with its vast liquefied natural gas projects, Beijing is increasing its purchases of the fuel each year.

Up in northwest Australia, site of major iron ore mines and offshore LNG projects — the No. 1 and No. 3 exports — the news is better. Iron ore ships take 14 days or so to sail to China, covering the quarantine period, and LNG is relatively well insulated by long-term contracts. But prices have slid as traders factor in the blow to demand; that impact will eventually find its way to Australians' pockets.

High iron ore, coal and natural gas prices are key to the terms of trade — the economy's income — and this filters through taxes to government coffers, underpins Australia's AAA credit rating, and makes its way to households in the form of welfare payments, tax cuts or health and education spending. In other words, a threat to commodities revenue is a threat to Australia's financial muscle.

An array of data points show that China is starting to get back to business after the long coronavirus lockdown. But they all still remain far below the levels indicative of a healthy economy. https://t.co/KjRNBRLMLU pic.twitter.com/mYRQSoGqdt

— Simon Rabinovitch (@S_Rabinovitch) February 26, 2020

Longer term, there's another side to the picture. China's top leaders have signalled they are planning to increase stimulus this year through fiscal and monetary policy. When China stimulates, it tends to build, and while observers don't expect anything on the scale of 2009 after the global financial crisis, the injection is set to translate into demand for steel-making iron ore.

Australia's currency has depreciated a bit over 3 per cent in the past month as investors — who use the Aussie as a proxy for China — pushed it to decade lows in response to the crisis. Even still, John Pearce of UniSuper worries that the financial market still isn't grasping the scale of the crisis.

"We have the world's second-largest economy, the world's engine of global growth, effectively in shutdown. It's only a matter of time before this starts impacting on short-term corporate profitability," said Pearce, CIO at the A$85 billion pension fund. "I'm astounded at how complacent the market has been."

Rutter of the Geraldton fishermen's coop says boat owners are waiting for the lobster market to re-stabilise to get skippers and deckhands out to sea, and onshore staff like truck drivers and export packers back to work.

Still, he's philosophical: "All our concerns and the issues we face just pale into insignificance compared to what the Chinese people are going through."

- Bloomberg