How China’s Slowdown Will Hit Australian Businesses

“The Chinese government will not allow a big, sharp increase in coal consumption, but its decarbonization rhetoric is becoming less perspicacious and it is promoting the use of clean coal,” he says.

“More than two-thirds of China’s energy consumption comes from coal, so the entire energy structure is heavily dependent on it, especially for heating. During the winter of the fourth quarter of this year, the gradual increase in demand will be quite dramatic over a very short period of two to three months.”

China recently lifted several unofficial restrictions on Australian coal imports as part of the thawing of diplomatic ties between the two countries. This month, China’s Setate Planer allowed three government-backed utilities and its biggest steelmaker to resume imports to Australia.

Zhang says there is almost no chance China will enter a recession this year, despite negative growth prospects for several regions around the world.

“The probability of a recession in China is almost zero,” he says. “There is still some ongoing headwind from the major COVID wave from December, but we believe growth in China will be around 5 percent this year. China was first in, first out in the initial COVID shock with very little issues in terms of production and capacity.”

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Meanwhile, Kapteyn forecasts a mild recession from the second to fourth quarters in the US and from the fourth quarter of last year to the first quarter of this year for Europe.

“The recession will be mild in that these areas will experience a peak-to-trough decline in GDP of about a percentage point,” he said. “That would mean a growth rate of minus 2 or 3 percent, along with an unemployment rate of 3 to 5 percent before the recovery.”

Zhang says the bulk of China’s economic growth from around the second quarter will come from consumption — most of it in domestic goods.

“Growth this year could be fueled by a consumption rebound on excessive savings, rather than investment, which tends to be more correlated with Australia. Later in the year there will be some spending on travel and overseas spending on education and luxury goods, but this year it will be mostly domestic consumption.”

Meanwhile, a slowdown in Chinese investment and infrastructure means demand for Australia’s top export is unlikely to pick up significantly.

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“In terms of iron ore, we think aggregate demand is not that sexy,” Zhang says. “Private sector demand will remain flat at best and infrastructure growth is slowing. Taken together, iron ore demand should be slightly better than last year, but not like previous recovery super cycles in 2009 and 2016. Iron ore prices should broadly stabilize around the current $120 level.”

Kapteyn says overall imports to China will improve but not increase significantly.

“Our estimate of import volume for China in 2022 was around minus three, and this year we expect it to be maybe plus one,” he says. “So you get a four percentage point improvement in volume in imports, which isn’t a big change.”

Overall, China’s reopening signals a return to normal business and some benefits for Australia’s energy exporters, but Kapteyn says the benefits are less clear internationally as energy prices rise.

“China is just getting back to normal,” he says. “Its opening up is good for China, not necessarily for the rest of the world.”

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