The change of government in Canberra could not have come at a better time for Beijing. It allows China some wiggle room to drop the ban on Australian coal exports, which it appears set to do after growing speculation amid an economic downturn.
Four years of deteriorating relations have affected Australia’s trade with China, with serial informal bans on major exports including barley, wine and coal (Australia’s number-two export to China after iron ore). But in imposing those restrictions, China also hurt itself — and this is most especially so with coal.
Australia produces high-grade, better-value, less dirty thermal coal (for heating and coal-generated power plants) than most other countries that China buys from — and that it can mine internally from increasingly expensive mines. More critically, Australia produces a reliable, easy-to-ship high grade of coking, or metallurgical, coal, a key ingredient in steel-making.
Chinese bureaucrats are set to recommend to senior leaders that Beijing should restart coal imports as relations thaw, and as Western sanctions on Russian energy threaten to create a global shortfall, according to a recent Bloomberg report.
“China seeks to secure imports to build stockpiles and ensure provinces won’t need to implement curbs on electricity supply that hampered some industries last year,” the report said. Last northern autumn, following energy rationing at the end of 2020, the country experienced an energy crisis that Australian coal could have helped relieve — and it is clear that the government is keen to avoid a repeat.
In 2019-2020 China imported 102.1 million tonnes of Australian coal, representing 26% of Australia’s total coal exports for 2019-2020, making it our second largest export market behind Japan, with 106 mT. Coal exports to China collapsed in the second half of 2020, and in the first quarter of 2021 under 0.2 million tonnes were exported.
In truth, it’s pretty much about the time China would look at loosening its trade sanctions. It has long wielded its power against Western nations that piss it off, as the previous government did so particularly by demanding an inquiry into the origins of the COVID-19 virus, which compounded tension over the ban of Chinese firms Huawei Technology from Australian telecoms networks.
A few high-profile examples of its actions include Britain being put in the freezer in 2012 after then PM David Cameron met with the Dalai Lama, and the Norwegians being put on the blacklist after the country handed the 2010 Nobel Peace Prize to dissident writer Liu Xiaobo.
Only last week, Treasurer Jim Chalmers said that dropping the two-year ban on Australian coal would be a key first step to a continuing warming of relations. The move on coal comes in the wake of the first ministerial contact in three years when Defence Minister Richard Marles met his counterpart in Singapore in June and Penny Wong met her counterpart Wang Yi at a G20 Summit in Bali in early July.
The move that China watchers are now seeking as a sign that trade ties are improving is an invitation by Beijing for Australian Trade Minister Don Farrell to net his opposite number. And if the relaxation on coal comes, other disputes for barley and wine will be harder to unwind as they now sit with the World Trade Organization. So let’s see.
As it is, Beijing makes its displeasure felt for a few years then likes to move on. But the Albanese government should take the win. After all, while the world — including Australia — tends to focus on the real and imagined threats of China’s military build-up and incessant war of words with Western nations and their allies in North Asia, the problems for the Chinese leadership as it approaches its five-yearly Congress are increasingly internal.
The Chinese economy is under enormous stress and flirting with recession after a 2.6% drop in GDP last quarter compared to a year earlier, as its leadership pushes ahead with its problematic zero-COVID approach that has seen mass market consumption retreat as major cities, including Shanghai and parts of Beijing, continue to be in serial lockdown.
“Second quarter GDP growth was the worst outcome since the start of the pandemic, as lockdowns, notably in Shanghai, severely impacted activity at the start of the quarter,” Tommy Wu, lead economist at Oxford Economics, told the BBC.
Even more worrying for Beijing is the mortgage strike now spreading across the country that is exacerbating an already problematic property sector and seeping into, inevitably, the country’s banking system.
The sting in the tail is that China’s coal demand may well be close to peaking. A recent study by academics at the Australian National University forecasts that China’s thermal imports could fall by at least 26%, from 210 mT to 155 mT per year, between 2019 and 2025. It noted that if China follows through on ambitious climate policies, thermal coal imports could fall as low as 115 mT per year in 2025 — a decline of 45%.
The modeling shows major coal exporters like Australia would feel the biggest losses from the changes. China is also closing down coal power plants in coastal regions that rely on imported coal, increasing its use of domestic coal production and power in the west of the country as well as increasing the use of renewable energy.
“Our findings are clear: Beijing’s plans for rapid decarbonisation and energy security signal the end for Australia’s current coal export boom,” lead author of the study and energy economist Dr Jorrit Gosens said.
Trade aside, there is the ongoing security issue of China’s continuing expansion of its military, and of economic and security interest in the Indo-Pacific — with Taiwan remaining a potential flashpoint.
Ramping up nationalism and focusing on external events to distract Chinese citizens is a well-worn tactic that concerns many China watchers.
Just this week, the Chinese government said it would take “forceful measures” if US House of Representatives Speaker Nancy Pelosi makes her planned visit to Taiwan, a trip many see as unnecessarily provocative.
A bigger test of Australia’s medium-term relationship with China is expected when its top diplomats Wang and Yang Jiechi are swapped out at the end-of-year Communist Party Congress as part of a bigger overhaul of leaders.
