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China Essay


COVID-19 sends many signals that have led to near panic and hysterical reactions.

With a focus on the short-term daily headlines, it’s easy to forget the need for better understanding of the long-term business and trade consequences for the Northern Territory. The depth of disruption is greater than a decline in tourism, both domestic and international, would suggest. How we effectively rebuild depends on how well we understand the impact on trade and investment, on logistics and supply chains.

Post-COVID-19 will not be a return to normal as we now know it. Trade ministers talk optimistically of a return to normal as COVID-19 comes under control. Australia’s iron ore producers are equally optimistic about a repeat of the traditional infrastructure stimulus tool China used to overcome the impacts of the 2008 Global Financial Crisis. They are wrong – because the economic recovery will call for the recapitalisation of China business.

This is a financial stimulus, not a construction stimulus. The recapitalisation will impact on investment activity within China and outside of China with reduced outward flows of capital to the Territory and elsewhere. The apartment in Sydney may become much cheaper as Chinese investment capital stays at home. Let’s build the story from the ground up, starting a long way from home, in Wuhan, or Beijing, or Shanghai, because this is where Australia’s prosperity is born. Consider a typical example at an individual level.

He lives in Beijing and runs a successful small business. The business gives him an income that allows him to purchase a house in Sydney. It allows him to send his child to a university in Australia. He can also support the new love of his life, an imported American sports car. This is all discretionary expenditure, even if it’s an “investment” in property overseas. But wait. His business was at a standstill for more than eight weeks. His cash flow completely dried up, and it will be weeks before he can reach previous cash flow levels.

His bank is starting to get nervous about his loan. So, what to cut first? The everyday luxuries, such as A2 baby formula milk from Australia, the French wine, the car, university fees, the Northern Territory holiday? The first cut will be the planned investment in overseas property or business in the Territory because that relies on some borrowing.

He is going to need to generate cash flow and reduce cash expenditure rapidly so he can service existing debt required to keep his business afloat. The central government will probably offer some incentives to redeploy his capital in the domestic Chinese market.

It will become harder to get approval from the regulators to transfer funds for larger-scale investments in overseas projects and business enterprises. His story is repeated millions of times across China. The GFC called for replacement of market demand as Western markets contracted and demand fell. The China infrastructure stimulus was an appropriate answer.

COVID-19 calls for a recapitalisation of China business so they can meet established demand. The shrinking and diversion of China’s overseas capital investment will dash the hopes of many who build their recovery plans on a Chinese infrastructure stimulus. It becomes more difficult to attract Chinese investment to the Territory.

It will be more challenging to start a new China export business. Also lurking in the background are other threats to investment, which have been obscured by the COVID-19 outbreak. There is now no functioning independent WTO appeal system for international trade and that makes it difficult to NT export businesses to fight for their corner in any dispute. The United States was a long-time supporter of a rules-based system and had used their support to criticise China for supposedly ignoring the rules-based order.

The United States has now abandoned this in favour of a power-based system where the strong do as they please and the weaker are collateral damage. The second investment threat is the extension of this policy approach with the US-China phase 1 trade deal. This deal is a leading example of the replacement of a trading system based largely on agreed WTO rules with one based purely on negotiating muscle. The deal is full of measures that favour the US but disadvantage other countries, including the Territory.

Under the deal, China has committed to purchase an additional $US200 billion in imports from the United States over the next two years. To achieve these targets China must reorientate its import economy. This means buying soybeans from the US rather than Brazil and buying American beef instead of Northern Territory beef. The changed trade environment and the hobbling of investment options caused by COVID-19 are twin challenges facing the Territory. Things will not return to the normal we used to know so extra effort is required to build on existing business foundations.

Territory business will survive in China post-COVID-19 by showing they are more than just Jiu Rou Peng You (wine and meat friend). The survival of the NT engagement with China will be improved with genuine continued engagement at government level. At a time when Chinese investment into the Territory will slow it is particularly important to demonstrate Northern Territory Government leadership in support of investment attraction and confirmation of business relationships.

COVID-19 and the US-China trade deal are an earthquake splitting the path to China. How we bridge it, and how quickly we bridge it, will play a significant role in the future prosperity of the Territory. A strong bridge will attract and support investment in an increasingly competitive investment environment. TQ