2021: Risks

The Reserve Bank of Australia cautions that the recovery will be uneven and drawn out and GDP is not expected to return to pre-pandemic levels until the end of 2021.

However, the risks are not limited to the pandemic.

COVID-19 rules and regulations

Despite feeling like we are emerging from the pandemic, the promise of a widely available vaccine is still over the horizon and the risk of another wave remains very real. For business, it will be essential to ensure that COVID-19 safe conditions are maintained. Aside from the obvious health risks of not maintaining a safe environment, a lockdown risks your business’s survival and the fines for breaching public health orders are hefty. The ABC reports that “more than $5.2 million has been raked in nationwide since pandemic laws came into effect in March this year.” In most regions, fines of around $1,000 apply to individuals and $5,000 for businesses and in Queensland, fines of up to $13,345 and prison might apply to individuals and business operators flagrantly defying the heath order. 

Australia’s relationship with China

There is a scene in the movie Love Actually where the British Prime Minister (played by Hugh Grant) is asked about his views on the Britain-US relationship following a particularly disappointing trade negotiation:

“I love that word relationship; covers all manners of sins, doesn’t it? I fear this has become a bad relationship. A relationship based on the President taking exactly what he wants, and casually ignoring all those things that really matter to Britain.

“We may be a small country, but we’re a great one too. A country of Shakespeare, Churchill, The Beatles, Sean Connery, Harry Potter, David Beckham’s right foot, David Beckham’s left foot.

“A friend who bullies us is no longer a friend. And since bullies only respond to strength, from now onward I will be prepared to be much stronger. And the President should be prepared for that.” 

In the movie, the only reaction from the US was a stern look from the President (played by Billy Bob Thornton). However, the reality of megaphone diplomacy is very different.

Non-compliance with China’s political will comes at a cost. In response to Australia’s public positioning, China has flexed its economic muscle through the disruption of Australian exports. 

  • April – Australia pushes for a formal WHO inquiry into the origins of COVID-19.
  • May – 80.5% tariff on Australian barley on the basis that barley is undervalued and subsidised. China imports approximately 70% of Australia’s barley crop.
  • May – Suspension of beef exports from four Australian processing plants relating to a 2019 investigation regarding inconsistencies with labelling and consignment certificates for some frozen and chilled beef products. China is the largest importer of Australian beef at 24%. Japan is second at 23% and the USA at 20%. 
  • September – China states that Australian exports of wheat will face “enhanced inspection.” At the same time, wheat imports from the US to China have increased.
  • October – Chinese importers unofficially instructed to stop buying seven types of Australian exports – coal, barley, copper ore and concentrate, sugar, timber, wine and lobster. Goods in transit at the time the ban was imposed have been in limbo – $2m of rock lobsters were left on the tarmac unable to clear customs at Shanghai airport.
  • November – 107% to 212% “provisional” tariff imposed on Australian wine on the accusation that Australian wine is being dumped on the Chinese market causing “substantial” damage to Chinese wine manufacturers. Treasury Wine Estate, that make Penfolds, and represent an estimated 40% of the total annual wine export market to China, went into a trading halt after China’s announcement.

China is Australia’s largest trading partner by a margin that dwarfs trade with any other single nation (Europe $118bn, ASEAN $110bn and Japan $77bn). The value of exports to China has doubled in the five years since the signing of the China-Australia Free Trade Agreement from $75b in 2014-15 to $150b in 2019-20; imports have also grown significantly up 42% over the same period. 

Iron ore remains Australia’s top export to China (in 2019-20, exports of iron ore accounted for 56% of all Australian goods exported to China) and a high demand resource to fuel the expansion of China’s economy – China is the world’s largest steel producer. The South China Morning Post reports that Australian iron ore makes up 60% of China’s supply.

It is not the first time China has undertaken a concerted campaign to use its economic might to secure its policy goals. Canada, India, the UK and New Zealand have all faced some form of retribution in the past. When Sweden banned Huawei from its 5G network the foreign ministry spokesman Zhao Lijian reportedly called on Sweden to correct its “wrong decision” and avoid a “…negative impact on China-Sweden economic and trade cooperation, and on the operations of Swedish companies in China.” Economic threats and oppressive rhetoric are commonplace. 

During a speech to the Press Club in August, Minister Wang Xining stated that any long term relationship is based on “mutual respect”. Australia’s perceived lack of respect was highlighted by the 14 grievances leaked by a Chinese diplomat to Channel 9. The grievances are wide ranging from the banning of Huawei from Australia’s 5G networks on “unfounded” national security concerns (as have all members of the 5 eyes intelligence alliance except Canada – US, UK, and New Zealand, and France and Sweden), foreign interference laws (initiated with the establishment of the Counter Foreign Interference Taskforce focussed on democratic institutions, education and research, media and communications, diverse communities, and infrastructure), calls for an inquiry into COVID-19 and siding with the US anti-China campaign, speaking out on the contested South China sea territories (and supporting US gunboat diplomacy), and “thinly veiled” allegations against Chinese cyberattacks.

So, what does 2021 hold? There is conciliatory language from the Australian Government with both the Prime Minister and the Defence Minister acknowledging China’s economic success lifting millions out of poverty and our strong ‘people to people’ relationship. But Australia has not publicly backed down or been any less vocal with the announcement of a new defence pact with Japan and a continued pro-democracy stance on Hong Kong. There is likely to be more pain to come for Australian exports to China and no short-term resolution or conciliation. 

Cashflow crunch

Australian economists are fairly united that there are a number of “zombie businesses” that are being kept alive by JobKeeper. These are the businesses that are only surviving because salary and wages are propped up by the subsidy. The danger with these businesses is that they are continuing to take on debt. JobKeeper ends in March 2021, which coincides with one of the traditionally worst cashflow months of the year. It will be important to ensure that your business stays on top of its debtors and doesn’t become a bank for your customers. It will also be important to understand your cashflow position, don’t over commit, and stay on top of labour costs.