Australia gets moved this way and that by the currents of the global economy like a little cork in a big ocean. When it comes to those tides, nothing has a bigger influence than the economy of China, where recent news is concerned. With each new revelation, I move closer to the edge of my seat.
Iron ore
You probably noticed iron ore prices dropped so much this week that the treasurer had to come out and confess prices were going to blow a hole in the federal budget. But the iron ore price has actually been falling for a while now. As the next chart shows, it’s at a level well below where it was at the time of the last budget.
China needs a lot less iron ore now because it is building far fewer homes. The great skyscraper boom is coming to an end. The cranes are standing still and growing moss.
The Chinese housing market began its crash in 2021 when the company Evergrande began to collapse. The crash has been a curious affair. We are used to these things happening in the West, where market forces tend to have their way with house prices and developers. Then banks wobble and at that point market forces reach their limit and governments step in. China’s decline has been a more carefully managed affair with less visible contagion.
Steel
China is so oversupplied with steel that it is exporting huge volumes. No longer are its smelters feeding its railways and car factories and skylines — instead, they’re creating gluts in global markets.
The price of spot steel has fallen to its lowest in about seven years. It is a great time to be making things out of steel, like cars, but a terrible time to be making the product itself.
House prices
The newest development on this list is that China has decided to deflate the price of new homes. New homes were price-controlled in most Chinese cities, but those controls are being relaxed in many places. This helps reverse a strange and crazy situation where second-hand homes were trading at a market price while new homes were not, creating a massive price gap.
Why now? China is opaque and hard to interpret. There are two possibilities: one, the government thinks things are sufficiently under control to make dropping house prices safe now, or two, things are reaching breaking point behind the scenes and the only way to solve them is to finally move a bit of housing stock, even if that causes problems.
Either way, the falling price of new homes in a range of Chinese cities is worth watching.
Rotten tails
Australia is not only at the mercy of China’s economic currents but also its geopolitical tides. China’s domestic situation is usually extremely solid, pinned together by a relentless surveillance state. But that has held things together while the economy was soaring. The current situation is a bit less impressive.
Indeed the big demographic phenomenon in China is the “rotten tails generation”; a cohort who have graduated into the least optimistic Chinese economic conditions in a long time.
“The jobless rate for the roughly 100 million Chinese youth aged 16-24 crept above 20% for the first time in April last year. When it hit an all-time high of 21.3% in June 2023, officials abruptly suspended the data series to reassess how numbers were compiled,” says Reuters in a new report on China’s generational economic divide.
In China, the big geopolitical question is if and when it might go after Taiwan. With the elevation of President Xi to president for life, some of the usual checks on ambitious political manoeuvres have been reduced. The 71-year-old Xi may aspire to reunite China and Taiwan before he gets too old.
Exactly if and when he takes action is the big question mark. But were domestic instability to arise in the next couple of years, well, he wouldn’t be the first major leader to use a big “national security” push to distract attention and unite the country. And if that happens, our economic worries will suddenly become background concerns.
