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The currency of China's prerogatives

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COMMENTS

28 June 2012 10:33

Australia is being forced to become more sensitive to China's prerogatives in everything from currency flows to resource projects to the application of foreign investment rules.

In meshing our economy with Japan, Australia was able to retain a US dollar frame of reference that happily cohabited with a US alliance structure. A yuan frame of reference will mean that some of the questions we never had to consider with Japan will confront us. If this is the Asian Century, then we are now in the China decades.

The adjustment pains are already showing. Both sides of Oz politics, when in government, have experienced the intense discomfort of receiving Chinese burns. The daily attacks (minute by minute) China mounts on Australia in cyberspace are a constant reminder of the hurt Beijing can deliver. The decision to ban Huawei from the National Broadband Network was a significant 'no' moment, a demonstration of Australia's capacity to push back and a reminder that cyber attack can cause blowback costs on those doing the attacking.

Still, great growth tends to outrun grumbles. We are going to be a lot more worried and even more security obsessed if China comes a cropper and starts to fail, rather than continue its present glorious trajectory. A China that crashes is an even more burning question for Australia than a China that continues to rise.

Even as economic sun shines ever brighter, China has managed to achieve the difficult feat of driving Australia closer to the US alliance. The intimacy of the Howard decade suggested it would be impossible for Australia to actually tighten its embrace of the US. Julia Gillard has managed it.

The Obama visit to Australia seemed to be a fine expression of the hope/wish/determination that defence and security would be in one box while trade and economics would keep going on uninterrupted in a separate sphere altogether. That is the way we and Washington would like it to work. Beijing, though, can play the game by other rules.

You don't have to be an old Maoist Marxist to believe that the only way to think about economics is to pair it with a heavy descriptor so that it becomes a discussion of 'political economy'.

It was striking that after the Obama-Gillard Marine basing announcement in November, everyone put the focus on the military/diplomatic reaction from Beijing – it duly came and was duly negative, as rendered by various Party mouthpieces. What happened next, though, seemed to be the truly important reaction. It came just a week after Obama and Gillard had their Canberra presser on 16 November: Beijing announced that for the first time its currency would be exchanged directly for the Australian dollar. The effect was to remove the need for deals to be run via an intermediate transaction using (trumpets please) the US dollar. The Oz dollar became just the seventh currency to achieve this status as China ever-so-slowly edges towards making the yuan convertible on international markets.

Was it merely a coincidence that Beijing made the shift so shortly after the Obama-Gillard basing announcement? Currency issues are intensely political for Beijing. So mark the shift as one that had more to do with judgment and message-management than any happenstance of timing. China brought forward a change that would give Canberra a gentle elbow in the ribs and point to the shape of things to come.

At the moment, all Oz mineral contracts with China are written in US dollars. Will that still be the case a decade from now when China, in parity pricing terms, is overtaking the US to become the number one economy in the world? As of today, 23 cents of every dollar of exports goes to China and three-quarters of those are for commodities. Big integrative effects and policy implications are in view when Australia confronts the demand to cash those contracts in yuan rather than US dollars.

The mandarins of the Australian Treasury and Reserve Bank will need to do much of their thinking in Mandarin. As then-private citizen Bob Carr blogged on the eve of the Obama visit last November, Australia should not side with the US in any dispute over the value of China's currency. On the yuan, Carr advised Gillard: 'Tell the president politely we are not signing up to a mindless anti-China campaign. The alliance does not require it.'

Ah, the judgments involved in acknowledging Chinese prerogatives.

 

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