Australia and New Zealand have prospered for years on their growing trade with China. As the Middle Kingdom’s economy slows, can the good times last?
Australia deepened its ties with its biggest trading partner last fall when it signed a new free trade agreement with China. The deal makes it easier for Chinese to invest directly in Australia. Simultaneously, China agreed to give Australian investors the right to commit up to RMB50 billion in the mainland’s capital markets. It also raised the interbank investment quota for the Reserve Bank of Australia to RMB10 billion.
Together, this sweeping series of agreements will facilitate the flow of investment between Australia and China. They will make it easier for Australian investors to participate in the growth of an economy that has been critical to their own country’s run of economic growth, a period that corresponds with the rapid expansion of its trade with China, particularly in mining and natural resource products. The pattern also applies to New Zealand: While Australia has always been New Zealand’s largest trading partner, China is number two, in large part due to high Chinese demand for its dairy products. Last year was a banner year: 3.5% GDP growth in both New Zealand and (through September) Australia. New Zealand witnessed its fastest economic growth in eight years. Australian companies hit an all-time high for initial public offerings (IPO), raising a total of US$15.4 billion, up 147% from the previous year as the number of IPOs rose 57%. The privatization of Australian health insurer Medibank Private Ltd raised US$4.9 billion— the largest healthcare IPO on record globally and 2014’s largest Asia Pacific-listed IPO.
However, with China easing off the double-digit GDP growth figures that were typical in recent decades — the economy grew “only” 7.3% in the third quarter, its slowest pace since the 2007-08 financial crisis —Australia and New Zealand may be slowing down as well. Australian exports to China fell 4% in the second quarter of 2014, and iron ore prices fell, reflecting the less energetic pace of growth there. New Zealand continues to have one of the lowest unemployment rates among developed countries, at 5.4% at the end of November, but in Australia the rate was creeping up, from 6.1% in August to 6.3% in November.
Some investors fear the two markets may be overheating. Interest rates have been low for a long time, and in New Zealand property prices have doubled over the past 10 years, while the total value of mortgages has increased 165% since 2002. Nearly half of these are floating-rate mortgages. In Australia, similarly, housing prices have risen 150% in nominal terms since 2000, and prices in Sydney and Melbourne have accelerated rapidly since 2013. Australia and New Zealand have the fourth- and fifth-worst household debt-to-GDP ratios in the developed world, according to the International Monetary Fund, and unlike the US, households in the two countries have made little progress at paying down their debt in recent years.
These indicators hint at challenges ahead should interest rates start to rise, or the Chinese economy slow down drastically. Against the latter possibility, Australia and New Zealand are working to expand their trade with other markets. Both are participants in the Trans-Pacific Partnership negotiations, which aim to lower legal, regulatory and tariff barriers to trade in much of the Americas and the Asia-Pacific region (minus China), and New Zealand is pressing to begin long-promised free trade talks with the European Union. Free trade agreements recently went into effect between Australia and Japan — Japan’s first with a major exporting nation — and Australia and South Korea.
At the same time, Australian companies that depend heavily on trade with China are diversifying. Mining giants Rio Tinto and Fortescue Metals, for example, are moving into cattle. A weak Australian dollar, meanwhile, is making the country an attractive target for foreign capital. While economic growth in China may be slowing, Chinese tourists stepped up their travel to Australia in 2014, and an AUD8.2 billion gambling resort aimed at Chinese visitors was approved for Cairns, Queensland.
Both countries are wrestling with important vulnerabilities, however. While New Zealand has worked to make itself more attractive to business, moving up eight places on the World Economic Forum’s Global Competitiveness Index since 2008, Australia, where businesses continue to worry about a relatively restrictive labor market, slipped one place in 2014. New Zealand, meanwhile, prompts investor worries that not one but two of the country’s top trading partners — Australia as well as China — may be due for an economic slowdown. As Australia’s recent deals with Beijing suggest, trade links will only grow stronger in the long run, and both Australia and New Zealand expect to benefit. More immediately, however, a more diversified trade roster, reduced debt levels and a successful adjustment away from low interest rates will help keep these economic success stories running.
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