Australia is banking on China’s economy to take off but headwinds are looming

If you want a hint at the pace of China's economic rebound and how it might lift Australia's economy, look to the skies, says one seasoned Chinese-Australian businessman.

Watch in particular for the expansion of flights between the two nations, especially those run by China Eastern Airlines from Shanghai, China's financial powerhouse.

"Of China's 'gold collar' people - or high net worth individuals - 80% are from Shanghai," said the businessman, who requested anonymity given his extensive links to Chinese firms in Australia. "That's a signal. If China Eastern is not operating many flights, that means trouble."

The early signs are promising. China Eastern had cut its pre-Covid schedule of 10 weekly flights from Shanghai to Sydney to as few as one, while its 10 runs to Melbourne were suspended entirely - but from 1 February, the Sydney to Shanghai route will be daily, a spokesperson said.

China's economy, the world's second largest, is critical for Australia's fortunes and those of many of its neighbours. China buys about a third of Australia's exports, equal to those shipped to Japan, South Korea, the US and India combined.

When China reported this week annual GDP growth had slowed to 3% in 2022, its second-worst result since the mid-1970s, the treasurer, Jim Chalmers, declared the slowdown "one of the major economic challenges facing Australia at the start of 2023".

"The global economy is a volatile place right now and developments in China are a big part of that," Chalmers said.

Much of that volatility stems from Chinese president Xi Jinping's abrupt dumping of harsh rolling lockdowns aimed at curbing the spread of Covid. Earlier this month, the government reported 60,000 people had died of Covid in the previous five weeks, although the true figure is likely to be higher.

The Albanese government remains wary that an immediate burst of Chinese economic activity may prove short-lived. A slumping property sector and a shrinking population lurk as speed bumps to anything like the 10% growth rate China generated just over a decade ago.

Global banks such as Morgan Stanley are more optimistic, since recent developments had "far exceeded our expectations". "The reopening [of China's borders] happened earlier and faster," it said in a briefing note on Thursday. "Housing rescue measures [have] turned more coordinated and forceful."

Besa Deda, the chief economist for Westpac's business bank, is waiting to see proof of increased activity. The Christmas lull extends to the lunar new year festivities now under way in China, masking activity.

"Uncertainty is really elevated at this point," Deda says, adding "the dial is turning to nurturing growth". China's relatively low inflation rate - 1.8% at 2022's end - "gives Chinese authorities more room for stimulus if they need to".

Mike Henry, the chief executive of mining giant BHP, said this week China would be "a stabilising force when it comes to commodity demand" in 2023 at a time when OECD nations were "experiencing economic headwinds". The country will notch its fifth consecutive year of more than 1bn tonnes of steel, he predicted.

Australian iron ore company Fortescue is similarly "optimistic" about 2023. It's confident China will continue to pump money into infrastructure and property, justifying the recent run-up in iron ore prices.

Chinese students and property investors are also expected to bolster Australia's economy.

The University of Melbourne says applications from international students are running 25% higher than 2019's pre-Covid levels.

"The number of applicants located in China has increased 50% compared to last year, reflecting the easing of the pandemic-related restrictions around the world," the university's provost, Nicola Phillips, said.

For the University of Western Australia, applications from overseas students are up 40% on last year's levels and are a third higher than pre-pandemic times. About 35% come from China, with applications up 47% from a year ago, a spokesperson said.

"We're looking at a huge wave of Chinese international students coming back on shore," said Yu Tao, the chair of Asian studies at the University of WA. Spinoff benefits for the Australian economy will extend to retailing, restaurants and real estate.

Monika Tu, the founder of Black Diamondz, a real estate firm, handles clients not shy about splurging $50m on a property.

Tu reckons about 85% of those securing significant investor visas are from mainland China, collectively bringing billions of dollars when they settle. "Obviously, this investment is really important for the economy," she said.

Also helpful, though not at all popular, are hefty fees charged by the foreign investment review board on certain property purchases.

One client's recent purchase of The Abbey estate in Sydney's inner west for $12.5m attracted $340,000 in foreign investment review board fees and another $1.3m in stamp duty. "A lot of people think it's a rip-off," Tu said.

The business flow is, of course, not just one way. China is at the cutting edge of products Australians are increasingly keen to buy. More than 80% of the components of solar panels, for instance, are Chinese made.

Cars are perhaps the next the industry to be shaken up by China. Australia's imports rose 61% last year, making China the fourth-largest supplier.

Sydney airport - where many of those "gold collar" arrivals will be landing - has operated six electric buses built by China's BYD since 2013, says Luke Todd, the head of EVDirect which distributes BYD vehicles in Australia and New Zealand.

BYD, backed by the US billionaire Warren Buffett, began selling its Atto 3 EV car towards the end of last year and has already delivered almost 2,500, with orders for 7,000 more.

Boasting a price tag below $50,000, Todd says EVs are now close to parity with conventional petrol-powered cars when savings over the vehicle's life are calculated.

With the country accounting for about 60% of global EVs sales, China has become the international hub for technology. All of the EVs sold in Australia from Tesla and Volvo's Polestar are made in China.

"The speed of the transition will be quicker than people expect," Todd says, predicting "a very dynamic couple of years ahead".