The focus on security and regional influence has diverted attention from economic relations with China, a key foundation of Australian prosperity.

A high proportion of China’s growth has been engineered by large, debt-fueled, government-sponsored infrastructure and real estate ownership. This supports demand for Australian products and services that boost income.

Bilateral trade data reveals the importance of the relationship with China.

Despite trade restrictions on certain products, 35-40% of Australian exports go to China and 20% of imports come from China. Chinese nationals normally make up the largest number of international students and incoming tourists.

But China is facing economic difficulties. Chinese Premier Li Keqiang recently warned of slowing growth, in part due to the zero Covid policy leading to severe closures of key hubs. With inadequate health infrastructure, modest vaccination rates among the elderly, a less effective indigenous vaccine and an unwillingness to question the infallibility of the ruling party, a quick change in strategy seems unlikely.

The problems go beyond Covid. Designed to fight inequality and monopolies, new regulations and repressive measures have hurt the vibrant private tech industry, which contributes significantly to the business. Measures to rein in China’s debt-to-GDP ratio, which has doubled since 2008 to more than 300%, have triggered slowdowns in the real estate sector, which accounts for 20-30% of GDP.

Unlike previous episodes, China’s ability to deal with these threats is limited. China’s usual magic debt reduction machine requires strong economic growth. The rise in GDP increases the value of assets, reducing the level of debt and non-performing loans in percentage terms to manageable levels. This time it may not be possible.

China’s financial flexibility is reduced. The nominally huge foreign exchange reserves of US$3 billion barely meet the requirements recommended by the International Monetary Fund, once adjustments are made for illiquid investments such as Belt and Road Initiative (BRI) commitments to emerging countries, some of which could prove irrecoverable. China holds around $1 billion in US government bonds that cannot be easily sold.

Political trade-offs are complicated. Shifting from investment to consumption to stimulate the economy will reduce growth and lead to job losses, but not rebalancing. Higher consumption requires an increase in wages, a reduction in savings, the extension of the rudimentary social protection system, or a combination. But rising costs would reduce China’s international competitiveness.

Tackling underperforming state-owned enterprises will lead to bad debts and job losses, but failing to address the sector’s problems means that capital is tied up in unproductive industries. Acknowledging and writing off bad debts could trigger a financial crisis, but not fixing the problem could create problems for the future. Devaluation of the yuan would accelerate capital flight and retaliation from trading partners, but a higher currency affects Chinese exports.

Tit for tat sanctions and protecting America from its economic dominance limit China’s ambition to venture into technologically advanced industries. Its workforce may have peaked, and an aging population will stunt growth.

Australia’s exposure to a Chinese slowdown comes against the backdrop of a strained political relationship. China prioritizes self-sufficiency and reducing dependence on Australian raw materials. While China is economically critical to Australia, the reverse is less true. Some 70% of Australian exports are resources for which there are other suppliers.

Iron ore exports, which depending on price account for up to 10% of Australian GDP, are significant. Chinese involvement in the Simandou project in Guinea, the world’s largest untapped iron ore deposit with around 2.4 billion tonnes of high-grade reserves, is designed to diversify sources.

The conflict in Ukraine could also allow China to reduce its dependence on Australian raw materials. Russia has large reserves of energy, thermal and metallurgical coal. The Donbass region has large quantities of commercial grade iron ore. With limited alternative markets for Russian products, these resources may be available on attractive terms to China, which is inclined to back Moscow, displacing Australian producers.

If the United States were to sanction threatened China for collaboration with Russia or over Taiwan, Australia’s ability to trade with its main economic partner would be severely disrupted.

In the short term, China’s need to support activity to maintain social stability could keep demand for Australian commodities going until other sources become available. However, the additional debt, continued poor investment and overcapacity only delay China’s economic reckoning, which when it happens will trickle down to Australia.

If the Middle Kingdom successfully negotiates its challenges and rebalances its economy away from investment, reducing its resource intensity, then demand for Australian commodities will decline. Services exports could offset export losses, although Australia’s competitive advantages are not as clear.

Given its size, the trade relationship with China cannot be replaced in the short term. This means that Australia, whatever its preferences, may have to share its feasts and famines.