Photographer: Ian Waldie/Bloomberg

Big-Winner Australia Shudders as China Rout Darkens Outlook

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Australia, the world’s most China-dependent developed economy, is looking on in dread at the prospect of weaker demand for its exports that threatens growth and could undermine the government’s re-election program.

Just three months ago, Treasurer Joe Hockey hailed Australians as “the big winners” of the China relationship when he released his annual budget. Hockey predicted export demand would rise further, and noted each year Australia sent enough iron ore to China to build the equivalent of Sydney Harbour bridges over the nearly 2,500 miles to Perth and back.

Yet those claims are starting to ring hollow as concerns about China’s slowdown trigger a global slump in equities, commodities and many currencies. Australia’s stocks plunged Monday by the most since 2009 and BHP Billiton Ltd. said Tuesday it had lowered its forecast of peak Chinese steel demand.

The turmoil threatens the already unpopular Australian government’s strategy to offer tax cuts ahead of an election due in about 12 months. The fallout for consumer confidence could also be hit after a decade in which political and business leaders have promoted the benefits of Australia’s unique exposure to China.

“The Chinese market slump isn’t just scaring Australian investors, but also the Treasury, who were already nervous about the plunge in commodity prices,” said Paul Williams, a political analyst at Brisbane’s Griffith University. “Hockey seems to be taking the initiative by announcing some sort of future tax cuts, but in the current environment you’ve got to wonder if we can afford it.”

Heavily Exposed

Australia’s links to China have tightened as exports to what’s now its largest trading partner almost quadrupled in five years. It sent 36 percent of its exports to China in 2014, the most of any country in the Organisation for Economic Cooperation and Development, data compiled by Bloomberg show.

“Our economic relationship with China is a double-edged sword,” said Alex Joiner, chief economist for Australia at Bank of America Merrill Lynch. “We have more than a quarter of our two-way trade with China, so when things are good that’s fantastic but when things go bad, we’re heavily exposed.”

In his May budget, Hockey relied on a projected rebound in growth to 3.5 percent in fiscal 2018 and 2019 -- a level unseen in six of the past seven years -- to compress the deficit and wind back borrowing. The document projected the government’s books would return to surplus in 2020, ending more than a decade of shortfalls.

Voter Antipathy

Six months after surviving an attempt by his own lawmakers to end his leadership, Prime Minister Tony Abbott is struggling to overcome voter antipathy. A Newspoll published in The Australian newspaper on Tuesday showed support for the coalition stuck on 46 percent with the main opposition Labor Party on 54 percent, meaning Abbott would lose an election if it were held now.

“These stock market difficulties seem to be associated with a bit of a bubble in China and fears about a slowing Chinese economy,” Abbott said Tuesday. “I think its important that people don’t hyperventilate about these things.”

Australian business confidence fell in July, led by mining and construction firms as concerns mounted about resource demand in response to China’s faltering growth outlook.

Australian stocks plunged 4.1 percent Monday and the currency slumped 2.2 percent in response to China’s turmoil. The share market rebounded 2.7 percent Tuesday and the local dollar rose 0.4 percent to trade at 71.80 U.S. cents at 4:55 p.m. in Sydney.

“People are going to see their wealth impacted,” Joiner said. “The Reserve Bank and others have put a lot of store into rising house and equity prices as a means to support retail spending in an environment where wage income growth is very weak.”

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