Solutions to tutorial questions - Tutorial 9/topic 6 PDF

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Tutorial 9 Problem set Questions & SolutionsTopic 6: The Panda and the Kangaroo: Sino-Australia economicrelations (i., Australia-China relations) Short-answer Question 1 (SAQ1) Short-answer Question 2 (SAQ2) Short-answer Question 3 (SAQ3) Long-answer Question 1 (LAQ1) SAQAccording to all informa...

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Tutorial 9 Problem set Questions & Solutions Topic 6: The Panda and the Kangaroo: Sino-Australia economic relations (i.e., Australia-China relations) -

Short-answer Question 1 (SAQ1) Short-answer Question 2 (SAQ2) Short-answer Question 3 (SAQ3) Long-answer Question 1 (LAQ1)

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SAQ1 According to all information shown in the tables below, answer the following:

a)

Discuss Australia’s TRADE relationship with China in 2018 ▻ In late 2007, China overtook Japan to become Australia's largest trading partner, and in 2009 became Australia's largest export market. Australia is China's seventh largest trading partner. ▻ Forty years ago, two-way trade was less than $100 million. Now it is more than $100 billion - 1,000 times in 40 years, CAGR=18.85% ▻ In 2018-19, Australia’s two-way trading with China accounted for 26 per cent of our trade with the world. Two-way trade reached a record $235 billion in 2018–19 (up 20.5 per cent year on year). ▻ Australia’s exports to China grew by 23.9 per cent to reach the highest level ever ($153 billion), driven by demand for Australian iron ore, coal and LNG. ▻ China remained Australia’s biggest services export market, particularly in education (over 205,000 students in 2018, an 11 per cent increase year on year) and tourism (over 1.4 million Chinese visitors in 2018–19).

b)

Discuss Australia’s INVESTMENT relationship with China in 2018-19 ▻ China is the fifth largest foreign direct investor in Australia ($40.5 billion in 2018), accounting for 4.1 per cent of total foreign direct investment (FDI). ▻ In recent years, Chinese investment has broadened from mainly mining to include sectors such as infrastructure, services and agriculture. Australia's foreign investment

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review framework is established clearly in legislation providing openness and transparency. ▻ Australian FDI in China reached $13.5 billion in 2018. Australia’s expertise in banking and wealth management services has seen financial institutions become some of the largest Australian investors in China. c)

Discuss

between China and Australia in 2020

▻ 13 July 2020 Australia initiates an anti-dumping investigation into copper tubes from China and South Korea ▻ 27 July 2020 Australia Dumping Commission assesses possible continuation of dumping duties on Chinese hot-rolled rods in coils of steel ▻ 18 August 2020 China’s Ministry of Commerce confirms it has started an anti-dumping investigation into Australian wine imports following a complaint from the China Alcoholic Drinks Association ▻ 25 August 2020 China Mengniu Dairy confirms it will not acquire Japanese drinks company Kirin Holding’s Australia-based asset Lion Dairy & Drinks after failing to get approval from the Australian government ▻ 31 August 2020 China halts barley imports from Australia’s CBH Grain, the country’s biggest grain shipping company, because harmful weeds were found in the cargoes

SAQ2 The China–Australia Free Trade Agreement (ChAFTA) is a bilateral Free Trade Agreement (FTA) between the governments of Australia and China. After 10 rounds of negotiations, ChAFTA was eventually signed by Australian trade and investment minister Andrew Robb and the Chinese minister of Commerce Gao Hucheng in Canberra on 17th June 2015. a)

Discuss

of both China and Australia to sign up

▻ Comparative advantage theory: both China and Australia gain from specialisation and trades. China should focus on labour and capital-intensive industries, such as manufacturing. Australia should specialise in resource-intensive industries, for example mining, tourism and agriculture. ▻ Both countries aim to stimulate their economies by engaging into more trades and increase aggregate demand from overseas market. b)

Using beef as an example, discuss the benefits of joining ChAFTA for Australian export ▻ Under ChAFTA, import tariff will be significantly cut by 2017, and completed removed by 2024.

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c)

Discuss two

of signing ChAFTA for either country

▻ Both China and Australia may become dependent on each other’s market (especially Australia). A decrease in trade volume (like what’s happening in 2020) may lead to economic recession and cyclical unemployment. -Low-skill workers from import-competing industries (e.g Chinese farmers and Australian manufacturers) may suffer from income loss. ▻ Australia is ranked low in Economic Complexity Index- 93rd in the world despite being the 8th wealthiest country. This indicates that Australian economy has a very simple structure. SAQ3 Read KPMG report- ‘Demystifying Chinese investment in Australia’1, and discuss: a)

Why did Chinese

to Australia fall sharply from 2019?

▻ Tightening ODI regulations by Chinese government ▻ Restrictions on capital outflow from China ▻ SOEs’ investments move away from developed markets and towards BRI projects ▻ negative Chinese perceptions accompanying a tightening of investment regulations by foreign government (including Australia) ▻ COVID-19 ▻ China-Australia trade disputes b)

What is the

in Australia?

▻ China’s biggest investment in Australia in 2019 was Mengniu Dairy Company’s acquisition of Bellamy’s Australia Limited for AUD 1.5 billion. ▻ This accounted for 43.7 percent of China’s total investment in Australia that year and made food and agribusiness the largest sector recipient with 44 percent of the annual total. As a result of this one deal, Tasmania received the largest percentage of Chinese investment across all regions for the first time. ▻ The commercial real estate sector was the second largest recipient of Chinese investment in 2019, despite an annual decline of 51 percent. ▻ Other active sectors included services and mining. ▻ No investment was registered in the healthcare sector, marking a major change from recent years. c)

What is the main pattern of Chinese ODI

in Australia?

▻ There seems to be to a strong positive relationship between Chinese ODI values and Australian state’s populations i.e. NSW and VIC combined attracted 80% of all Chinese investments to Aus. ▻ Investments to NSW and VIC are mainly into services sectors, whilst investments to other states are mainly into resource and mining sectors. Ferguson, D., Barber, V., Hendrischke, H., Dent, H. Z., & Li, W. (2017). Demystifying Chinese investment in Australia. Sydney: KPMG and Chinese Studies Centre, University of Sydney. 1

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LAQ1 There are strong indications that the Chinese economy is slowing down after three decades of rapid growth. Its rapid growth transformed not only China’s own economy but also had a huge impact on other economies in the Asia-Pacific region and around the world. China emerged as the ‘assembly centre’ of production networks and has played a major role in the deeper integration of economies in this region. Discuss how Chinese slowdown impacts on Australian economy from the following aspects: a)

Mining and resource sectors For these questions, refer to the article published by RBA: ‘Spillovers to Australia from the Chinese Economy’ ▻ Resource exports continue to play an important role in Australia’s strong trade links with China. Indeed, although iron ore export volumes to China have been relatively stable in recent years, they have remained at a high level (Graph 5). ▻ Meanwhile, exports of both coking and thermal coal have been rising. The continuing importance of resource commodities in bilateral trade between the two economies implies that Australia would be particularly susceptible to any easing in Chinese growth that led to a fall in steel production, and hence demand for imported iron ore and coking coal. ▻ Nevertheless, the fact that Australia is a low-cost supplier of iron ore and supplies a higher average quality of coking coal than can be mined domestically in China, may help to limit the impact (RBA 2014). ▻ Furthermore, Chinese demand for some other resources that Australia produces is less dominant. ▻ Overall, China accounts for around 40 per cent of Australia’s resource exports.

b)

Non-mining (service) sectors ▻ In the direct-channels scenario, growth in service trade is 4 percentage points lower over two years, relative to baseline. Page 5 of 8

▻ However, given China’s importance in the travel and education sector, the decline could be larger. This is because the discretionary nature of foreign travel and education make their demand highly sensitive to income. ▻ Tourists from China also tend to spend more than the average tourist (Rickards 2019). As such, we increase the effect of a slowdown in the travel and education services trade. ▻ Growth in services declines by an additional 2 percentage points to be around 2 per cent in the first year, roughly 6 percentage points below the baseline (Graph 12).

c)

Key Macroeconomic indicators such as trade balance, employment, GDP growth and inflation ▻ As illustrated in Graph 13, exchange rate and cash rate profile together could largely offset the effects of a decline in overseas economic activity. ▻ The lower terms of trade puts downward pressure on the real exchange rate, which responds quickly and declines by around 10 per cent in the first year (shown in Graph 13).

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▻ The substantially lower exchange rate over the three years provides considerable support to the economy. ▻ The cash rate would also be expected to decline, although the pace may be gradual because the central bank makes its decision under uncertainty in relation to the severity of the overseas shock. ▻ Furthermore, the cash rate decline is relatively small in this scenario given the already considerable support provided by the lower exchange rate. The cash rate would decline by around 25 basis points after a year; this monetary policy accommodation would then be gradually unwound. If the exchange rate did not depreciate by as much, a larger reduction in the cash rate may be warranted. ▻ We would still see an initial slowing in growth and rise in unemployment, in line with the amplified China-slowdown scenario (Graph 14).

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▻ However, the exchange rate and monetary policy movements could offset much of the negative consequences of the slowdown in China over time.

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