The Australian dollar is under threat from crumbling China relations and further monetary easing

Name: Australia and China cooperation too valuable for 'nonsensical' decoupling
Uploaded: 2020-10-20T07:30:05.000Z
Duration: 7 min 34 s
Description: Australia and China cooperation too valuable for 'nonsensical' decoupling

China’s pledge to be carbon neutral by 2060 and political tensions between Beijing and Canberra are exposing vulnerabilities in Australia’s economic model

The Australian dollar’s popularity as a source of yield could fade as the central bank pursues looser monetary policy in response to the pandemic

3-MIN READ3-MIN

A bucket-wheel reclaimer sits next to a pile of coal at the port in Newcastle, Australia, on October 12. President Xi Jinping’s pledge to make China carbon neutral by 2060 and continued tensions between Beijing and Canberra have clouded the outlook for the Australian dollar. Photo: Bloomberg

Neal Kimberley

Published: 3:30pm, 20 Oct 2020Updated: 10:22pm, 20 Oct 2020

All is not well down under and the Australian dollar looks vulnerable. A deterioration in Beijing-Canberra relations has hurt the Australia-China trade relationship while the Reserve Bank of Australia’s monetary response to Covid-19 is eroding the Australian dollar’s attractiveness as a relatively high-yielding currency.

No one should assume that any Beijing-Canberra diplomatic rapprochement – even if one occurs – would automatically mean a return to business as usual. This is true especially in areas where prior arrangements no longer sit comfortably with China’s newly announced commitments to reducing its carbon emissions over time.

With President Xi Jinping having committed China to being carbon neutral by 2060, there will have to be gradual but profound alterations to the composition of China’s energy mix, given that coal accounted for about 58 per cent of the country’s primary energy consumption in 2019. As the percentage of coal gradually declines, Beijing is likely to prioritise Chinese coal production and jobs over other suppliers wherever possible.

Regardless of the present or future state of relations, Xi’s commitment on carbon emissions is not good news for Australia, whose mines have long been among the largest suppliers of thermal and metallurgical coal to China.

There are also major political differences between Beijing and Canberra that are playing a role in the recent deterioration in Australia-China trade, though. For example, Beijing was unimpressed by Australian Prime Minister Scott Morrison’s decision in April to call for an independent investigation into the origins of Covid-19 that was first detected in Wuhan.

07:34

Australia and China cooperation too valuable for 'nonsensical' decoupling

It seems highly unlikely that China’s recent targeting of certain Australian exports – whether barley, beef, coal, cotton or wine – is unrelated to diplomatic differences that have arisen. At the very least, though, the turn of events has exposed a vulnerability in an Australian economic model that is materially reliant on harmonious trade relations with China.