Australia can no longer rely on the China card

Opening world markets to China’s nearly 1 billion people in 1979 brought a new era of low-inflation growth. Even now it is providing a third of global GDP growth; after the West stalled post-2008, it was more like half.

Half a trillion dollars poured into Australian mining and gas investments in the past decade, much of it for Chinese markets. For ordinary Australians, that lifted household disposable income by an estimated 13 per cent, shoring up a globally envied standard of living.

Surprising response

Now both nations may have to look elsewhere. China will get an exit bounce from its near-record growth slump as it staggers out from harsh lockdowns. But its workers may become too few and produce too little to reach even the 5 per cent growth which government plans imply, down from an annual 8 per cent over the past decade.

President Xi Jinping’s response has surprised yet again. After securing his rule at a Communist Party congress last October, he has pivoted on his rigid zero-COVID policy, called off the wolf warrior diplomats, and, as we report, sent Vice Premier Liu He to tell the world at Davos that China is still open for business and there is no retreat from market economics.

But the hard-headed pragmatists who led China’s reforms after 1979 have known for much longer that China needs a new economic model. In 2007, premier Wen Jiabao stunningly acknowledged that China’s growth was “unstable, unbalanced, unco-ordinated and unsustainable”.

Headlong export growth and excessive savings poured into a glut of nation-building investment needed to be balanced out into higher consumption and social spending in a much broader based economy. Mercantilist export policies would stop working once Western consumer markets became saturated.

China would face a middle-income trap, where the lift-off from a very large, young, low-cost labour force fails to reach sustained orbit as a developed economy of sophisticated manufacturers and consumers. Instead, the country gets old before it gets rich.

Structural reform

Mr Xi took over in 2012 bent on restoring the power of the party, not consumer freedom. He preferred the top-down economy based on state-owned giants which embody party control. The mass consumer democracy implicit in China’s online and e-commerce revolutions – where entrepreneurs like Alibaba’s Jack Ma leapfrogged the West in delivery and payment systems – scared the communist old guard even more.

But those e-commerce customers are the educated urban young who earn China’s highest incomes, and whom the government needs to get onside for any chance of booting up consumption in the face of general ageing.

The demographic reversal now makes all of Wen’s fears very real: an ageing workforce, saving rather than consuming to make up for a thin social safety net, and killing growth.

Mr Xi’s rapid easing of controls on businesses and credithoping to stir quick growth, has to turn into structural reform. His signature policy is a more statist “common prosperity”. But the biggest share of China’s growth for 30 years has been contributed by the creation of new private companies, for which he must again make room.

And the risks in China’s economic weakness also need to be hedged in reforms that Australian governments too for decades thought untouchable.