Can Australia Hold the Line with China?

In 2009, China displaced Japan as Australia’s largest trading partner. Australia exported some AUS$42.4 billion worth of merchandise to China, about half of which, AUS$21.7 billion worth, was in iron ore shipments.

As China has taken steps to cool of its economy in light of an unexpected inflation increase to 4.4%, the Australian Stock Exchange has weakened on the prospect that China will stop buying Australian goods. The Australian government has also followed the lead of the US in calling on China to stop undervaluing the yuan in an effort to maintain a trade advantage.

The Australian currency has also been following swings in the euro related to negotiations over Ireland’s debt. Now that the Irish government has signed on for some help, the euro first rose to more than $1.42 before falling equally quickly back below $1.36. The AUDUSD pair followed a nearly identical path.

But a significant slowdown in the Chinese economy seems more worrisome for the Australians. A cutback in Chinese steel production could depress Australia’s big mining companies, which are the engines that have been driving growth in the country. In the first six months of 2010, Australia ran a trade surplus with China, having exported $11.1 billion more in goods to China than it imported in return, according to Switzer.

How heavily does Australia rely on Chinese growth? China accounts for nearly 21% of Australia’s trade, compared with the US, which accounts for less than 8%. The steps that China takes to cool inflation will also cool the country’s economy. That may not be good news for the Australians.