China is Malcolm Turnbull and Scott Morrison’s single biggest problem, but despite all the headlines and eye-catching picture of expensive naval hardware these past few weeks, it’s not security that we need fear from China but its economy.

There is little public comment on the potential abyss that Australia could be gazing into, with Canberra ignoring the fact that the Chinese economy, longstanding saviour of Australia’s economy, is looking increasingly bleak. To borrow from that TV show with the blood and dragons, winter is coming.

The potential wake-up call came from a rollicking but remarkably pinpointed attack on Australia that lays bare the endless contradictions, in the best tabloid tradition, of China’s Communist Party-run tabloid The Global Times.

The commentary effortlessly — and quite effectively — dismissed Australia’s opposition to China’s South China Sea stance with the term “paper cat” (not even big or strong enough to rate as a tiger) and warned darkly of “consequences” and in the process showed that China has Australia’s measure and knows the weak spots. But so what?

The Chinese and their forefathers have been trading since about the time of the Egyptians. Good traders don’t use emotion in their decision-making (which is why computers are so good at trading sharemarkets). China doesn’t buy or not buy from Australia because we like them, or pretend to, or because we lavish the Communist Party and its leaders with praise (and don’t mention the industrial-scale suppression, thuggery and murder that keeps it so powerful).

The Global Times called Australia out on this:

“Australia calls itself a principled country, while its utilitarianism has been sizzling. It lauds Sino-Australian relations when China’s economic support is needed, but when it needs to please Washington, it demonstrates willingness of doing anything in a show of allegiance.”

Again, spot on. In Australia we call it “economic diplomacy”, apparently.

China would actually prefer to buy from countries that do not line up against it politically, so any chance of China dumping Australian trade have been tested long ago. China only buys its basic needs from Australia — rocks, clothing (almost the entire wool clip) and food (mainly wheat and meat) — because it can’t get them from anywhere else at the same price and quality. The rest of Australia’s trade with China is a rounding error, and the taxes collected on it would be lucky to buy one barrel of pork come election time.

Even now that China has become the price-setter in commodities as the bigger buyer in almost every market in a world awash with overproduction, it still buys from Australia. It buys more than one-third of everything Australia sells. Truth is, China has made Australia even lazier than it was before the China boom and helped to lull Canberra into the lie that China would be like a lovely trust fund that kept on giving.

It will keep giving, just less for each rock whose prices, set by China, still dictate Australia’s economic fate. China sets prices depending on its demand (the strength of its own economy and available supply). Bad news on both sides of the equation. Supply will eventually sort itself out as mining investment has been all but halted. But demand is more problematic.

A bounce is not happening, folks. China has been hit by the down cycle as well as growing structural issues. Swathes of China, mainly the parts relying on heavy industry that used products made from Australian rocks, are in effective recession. There is still housing glut of up to four years of inventory and no one is sure if there will be many new buys left after that.

The mythical consumer boom hasn’t and won’t rescue China because only about 10% of its citizens have money to spend on what the West calls consumer goods but are actually luxuries in the rest of the world. The so-called services economy has exactly the same problem.

Looming over all of this is debt, a problem that has only recently moved from a niche to a popular topic. It’s been a problem since the wasteful stimulus of 2008-09. and with each secret stimulus the debt problem mounts.

As the banks move from cash funnels to self-interested survival (and remember the China banking cabal, like all of the nation’s powerful economic industry groups, are part of the government, therefore ultimately uncontrollable en masse) the money tap that has given cash to state-owned enterprises is starting, slowly, to fail. This is forcing the government to finally begin to “reform” the state-owned enterprises that still dominate major industries and policy. Do not be fooled — it’s not reform, it’s survival.

Chinese leader Xi Jinping has a laundry list of economic reforms now nearly three years old. Apart from a little low-hanging fruit, it hasn’t been touched.

Here’s what John Lipsky, former head of the International Monetary Fund, had to say to attendees at the annual mining industry love in Diggers and Dealers in Kalgoorlie yesterday:

“What are the tasks for the Chinese economy and their reform process? Slow credit growth, limit off-budget investment, fix local government finances, strengthen the social safety net, control pollution, strengthen the banking system which has non-performing loans of about 7% of GDP, enhance exchange rate flexibility, increase data availability, and improve communications. It’s a pretty big task.”

There is so much irony it’s hard to know where to start.

The party’s power now sits in its control of the military and key economic industries, its wealth. But reform means competition and less gravy. No one wants to go first, so nothing happens. Xi can’t save the economy, but he controls the guns, so as the economy gurgles down, Xi distracts the masses with bread and circuses — his nationalistic games in the South China Sea.

There is not one scintilla of good news in this for Australia. While Treasury might still be oblivious to the realities of China, the safest bet for the past 10 years has been Treasury getting China wrong. The China forecast, the real one, is starting to sink in at the Reserve Bank, so it cut interest rates yesterday, acknowledging that the Australian economy is on borrowed time and the latest iron ore price bounce is just a dead cat.

Pretty much every long-term China-based consultants and financial/legal service providers who relied on bringing Australian business into the Middle Kingdom business has fled. It’s ever harder, not easier, for foreigners to do business in China.

Surely then, now the election is over, the government, led by Turnbull with his grown-up conversations, will explain in a calm but necessarily brutal way why the economic shockwaves now starting to be felt in the Australian economy are all so much to do with China. But given the PM can rarely announce the time without having to change something before he gets it right, do not hold your breath.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey