Open the Door and See the Mountain: Reflections from a Recent Trip to China

Speech

Notes

Open the Door and See the Mountain: Reflections from a Recent Trip to China Andrew Hauser * Deputy Governor Speech to the Lowy Institute Sydney – 22 May 2025 Audio 51.9MB Q&A Transcript Download 570KB Watch video: Speech by Andrew Hauser, Deputy Governor, to the Lowy Institute Sydney Introduction Of all the trends shaping the Australian economy over the past half century, one of the most profound has
been the long swing towards Asia (Graph 1) and, more specifically in recent years, China – now
our biggest single trading partner by a country mile (Table 1). 1 But China is also front and centre
in the US administration’s rapidly evolving tariff strategy. How that strategy plays out, and how
China responds, are therefore key issues for the economic outlook in Australia, and hence the RBA’s
monetary policy. Graph 1 2 Table 1: Australian Goods Trade with the United States and China (2023) Rank in Australian ... Australian exports to country as share of ... Australian exports from country as share of ... Australian trade balance (US$bn) Exports Imports Australian exports Country imports Australian imports Country exports US 5 2 4% 0.5% 11% 1.7% −18 China 1 1 37% 7% 25% 2% 71 Sources: Observatory of Economic Complexity; UN Comtrade. Given the importance of understanding the Chinese economy, the RBA has maintained a small team based at
the Australian Embassy in Beijing since 2011, to take the temperature of the economy up close. 3 Their
work, together with the work of our Australian-based staff, directly informs our Monetary Policy
Board’s deliberations – most recently earlier this week – and our broader analysis. 4 I recently joined the team to speak with a wide range of organisations drawn from right across the Chinese
economy and the Australian export community, in both Beijing and Shanghai. The trip, arranged months
earlier, turned out to be auspiciously timed, because it came in the week after so-called
‘Liberation Day’ – when US tariffs on China rose to 145 per cent, and China
retaliated in kind. Tonight, I want to discuss four key themes that we heard that week, and which – despite the further
dramatic turn of events since then – seem so far to have stood the test of time. For anyone wanting to cut to the chase, or, in the words of the Mandarin saying, ‘open the door and
see the mountain’, I’ll put it more bluntly: don’t count China out. Theme 1: People felt the economy was finally turning a corner in early 2025 Nearly everyone we spoke with felt the Chinese economy was at last turning a corner in the months leading
up to 2 April: The September 2024 Politburo announcements and subsequent policy pivot were seen as a recognition of
the need both for further stimulus and for a more determined switch in emphasis from boosting supply
to boosting demand. The DeepSeek announcement, President Xi’s meeting with business leaders in the private sector
and his well-publicised handshake with Jack Ma, triggered renewed optimism in support for the private
sector and its capacity to innovate and harness the benefits from high technology, after a period of
negative government sentiment, declining foreign investment and technology embargoes. Property markets seemed finally to be showing signs of stabilising, at least in larger cities, after
years of declining sales, investment and prices. 5 It’s important to put these points in context. For anyone visiting China, the ever-present abandoned
housing developments and stationary cranes provide a potent reminder of the challenges the Chinese
economy has been through. But an improvement in sentiment, if it persists, would itself be an important
economic development, after such a long period in the doldrums. And harder data also support the view
that domestic demand growth had begun to strengthen in the first quarter of 2025. Theme 2: ‘Liberation Day’ was a genuine shock Against this backdrop, the eye-popping tariff tit-for-tat escalation in early April came as a genuine
shock to most of those we spoke with. Significant increases were of course expected – but there was
surprise along three dimensions. On scale , the typical expectation had been for a 25–50 percentage point increase: anything over 60 was judged
to be an effective embargo. On speed , expectations of a rolling increase, or a
negotiation period, were dashed. And on scope , the huge tariffs on China’s
southeast Asian neighbours were seen as being aimed at cutting off trade and production chains that
linked China to the United States via third countries. Some also contrasted the scale and immediacy of
the Chinese retaliation with the absence of a similar reaction in Europe and elsewhere in the West,
disappointing those hoping for a common front. It is difficult to quantify the economic impact these mega-tariffs could have had on China. But
expectations in China appeared to be in the range of 1.5–2 percentage points of GDP in 2025,
before accounting for any offsetting policy stimulus. Theme 3: China feels it has a strong economic hand in responding to tariffs Those are big numbers. But for every expression of surprise, we also heard a striking confidence that
China was going into this trade war with a strong hand. 6 Judged solely in economic terms, that view
rested on four main planks: First, a deep belief in the authorities’ commitment to deliver the growth target of
‘around 5 per cent’ a year . This goal may attract scepticism in some
quarters –10-year bond yields in the 1.5–2 per cent range certainly suggest market
participants have doubts over the medium term. But the commitment to the goal had a seemingly totemic
status amongst most of those we spoke with. Second, a confidence that the Chinese authorities had the policy tools, the space and the
will to inject the domestic stimulus needed to compensate for any weaker growth in
trade . There are limits to this of course. Past efforts to boost domestic consumption
have had mixed success. Many of the authorities’ existing policy tools are best suited to
boosting supply, which diverts resources from consumption and adds further to production capacity,
bearing down on inflation. And the barriers to a more persistent rise in consumption are arguably as
much structural as cyclical, reflecting a limited social safety net, and constraints on the use of
capital markets to manage savings. 7 There are questions too about how much headroom is
left for further stimulus. Public debt is elevated, particularly at local government level; 8
nominal interest rates are already quite low, and focused on exchange rate and financial stability as
well as demand management; and the central bank has made it clear it does not favour quantitative
easing. 9 This may be one reason why the authorities bided
their time in the immediate aftermath of 2 April, spurning the ‘big bazooka’ policy
package that some in the financial markets hoped for. But a range of monetary and financial easing
measures have subsequently been announced, and the authorities have underscored their commitment to
expand fiscal policy if needed to support the growth target. 10 Third, we heard a general expectation that a large share of the economic costs of
US tariffs
would fall on the United States itself, and a determination not to cushion that
impact .
Nearly half China’s exports to the United States are products for which the United
States has
limited alternative external suppliers, including lithium batteries, computers, smartphones
and video
game consoles (Graph 2, lower right quadrant). Indeed, the massive advance in
technology use is
one of the most striking impressions to any outside visitor. 11 The pass-through of
US
tariffs to US consumer prices for such goods is likely to be high – perhaps explaining
why many
were quickly exempted. 12
Much of the rest of China’s exports
(Graph 2, lower left quadrant) are products for which the United States is not a
dominant source
of demand, so could to some degree be divertible to other markets. There are far fewer
products in
the upper part of Graph 2, where the United States is a dominant source of demand for Chinese exports, and hence is more likely to have market power. The inflationary impact of US tariffs on US consumers could, of course, be reduced if the
Chinese
currency were devalued substantially, as happened in 2018–2019 .
But we detected little expectation that this would happen, because China would want to
avoid:
insulating the United States from its own tariffs; provoking retaliation from other
countries;
triggering capital outflow of the kind seen around the 2015 devaluation; or undermining
the political
and social gains (including recognition of China’s economic and technological
advance) perceived
to flow from a stronger exchange rate. Some noted that, according to simple measures of
purchasing
power parity such as the Economist ’s ‘Big Mac Index’, the
Chinese
currency was more likely to appreciate rather than depreciate against the
dollar, if
left to its own devices. 13 Graph 2 There was of course a recognition that Chinese exporters would face real economic costs
if high tariffs persisted. It was too early to see any of that at the time of our visit. But we did
hear a determination to face into it, if it came. Fourth, we heard real doubts about how much manufacturing currently done in China would
relocate to the United States . Elevated labour costs, and a finite stock of advanced
manufacturing skills, were thought to make it impossible to produce many goods at the prices US
consumers expected to pay – as would the absence of the highly integrated, co-located supply
chains that had developed within China as well as across Asia. And there were doubts about the
viability of long-term investment in factories while the volatility of US policy settings remained so
elevated. 14 Recent weeks have walked us back from the precipice a little. The rapid reductions in US tariffs on
China’s Asian neighbours saw a pick-up in production and export via third countries, as was evident
from the April trade data. And the threat of ‘mutual assured (economic) destruction’ provided
the context for the rapid, if ostensibly temporary, reduction of United States and China tariffs. Those
tariffs still remain well above historical levels, of course – and future increases, or other trade
barriers, cannot be ruled out. But in view of the near-term de-escalation, China’s seemingly strong
negotiating position and its scope to inject further stimulus, our baseline projection for Chinese GDP
growth in the May Statement on Monetary Policy is 4.8 per cent in 2025 and
4.4 per cent in 2026 – only modestly changed on three months ago. 15 Theme 4: Australian companies see opportunities amidst the risks As part of our trip, we held a roundtable discussion, organised by Austcham Shanghai, with a large group
of Australian firms active in China, across retail, agriculture, banking, finance, law, steel, health
care, manufacturing and commercial property. What really struck me about that session was how upbeat
most, if not all, of the firms were about the outlook for their businesses. The recovery in sentiment in
early 2025, and confidence that the authorities would ‘do what it takes’ to sustain the economy
was part of it. But there was also a sense that recent developments in trade policy could enhance their
competitive position in Chinese markets. There’s always a risk of survivor and recency bias in such discussions, of course – and the
firms involved varied considerably in size (and hence macro-economic impact). But we heard something
similar in separate discussions with companies active in steel and iron ore – the latter, of
course, being Australia’s largest export to China by some distance. They saw few threats to the
scale and cost advantages of Australian ore relative to other producers in the near term (longer term
challenges from the energy transition are of course a different matter). 16 Their
central expectation was for Chinese steel output to remain relatively robust, remaining at or near one
billion tonnes a year in the near term. A large majority of Chinese steel is consumed domestically; and
demand has been sustained in recent years by a pivot from property-related uses towards manufacturing and
infrastructure. Further Chinese policy stimulus was expected to continue to involve (steel-intensive)
infrastructure investment, despite the pivot to consumption. 17 Chinese steel exports were
obviously seen as more vulnerable to a slowdown in global demand. But direct exports account for a little
more than a tenth of Chinese steel output (very little of which goes to the United States). And indirect
exports via steel-intensive products, like machinery, ships and cars) are roughly the same again. Conclusion Let me conclude. My goal this evening was deliberately narrow – to set out what I heard in China in the immediate
aftermath of ‘Liberation Day’. That narrative, at that time, was pretty positive: that the Chinese economy was seen as picking up in
early 2025; that China felt it had a strong hand in responding to the economic impact of tariffs; and
that Australian companies in China saw opportunities amidst the risks. But, just as clearly, it was also partial – in four important ways. First, it was just a moment in time – and as Jay Powell reminded us recently, life moves pretty
fast. 18
Tariff settings have already moved on dramatically, and will doubtless change further, whether up or
down. And we’ll soon start to see data on just how the existing tariffs – still high by
historical standards – are affecting the Chinese and global economies. Second, it was just one set of views, from one country with a story to tell. Some of the judgements may
prove wide of the mark – the tolerance for bearing economic costs may prove lower; domestic
stimulus may prove to be harder to deliver; and so on. Third, no in-the-moment assessment can hope to capture the ‘general equilibrium’ effects of such
dramatic changes. An example of this is the possibility that Australian firms might in time face more
intense competition, at home and overseas, from Chinese firms discounting output diverted from US
markets. It’s unclear how big an effect this would be, given the limited overlap between Chinese and
Australian outputs. 19 But it’s clearly on the minds of others in the Asia–Pacific region. 20 Last, but not least, is perhaps the elephant in the room: how purely economic factors of the kind
I’ve discussed here will interact with more strategic considerations, and where that leaves
Australia. I’ve neither the competence nor the authority to discuss such issues – but I know
that others on the panel and in the audience tonight here do! So I look forward to our discussion. Thank you. Endnotes I am particularly grateful to Samual Nightingale
and Patrick Hendy for their assistance in writing this speech. Thanks go also to Adam Baird, Sue
Black, Michele Bullock, Natasha Cassidy, Kassim Durrani, Samuel Evangelinos, Georgia Face, Sarah
Hunter, David Jacobs, Bradley Jones, Christopher Kent, Vanessa Li, Penny Smith, Morgan Spearritt
and Grace Taylor and for their comments and contributions on an earlier draft. * The economic ties between Australia and China go
beyond trade alone, as discussed in: Lowe P (2018), ‘ Australia’s Deepening Economic Relationship
with China: Opportunities and Risks ’, Address to the Australia–China Relations Institute, Sydney, 23 May; and Kent C
(2019), ‘ Remarks at the Australian Renminbi
Forum Melbourne ’, Melbourne, 12 June. As the animated chart in one of my
co-panellists’ co-authored Lowy article vividly shows, these trends are not unique to
Australia: China is now many countries’ biggest trading partner: Rajah R and A
Albayrak (2025), ‘China Versus America on Global Trade’, Lowy Institute The
Interpreter , 30 January. 1 I am once again grateful to Ashley Owen of Owen
Analytics for this chart. 2 Importantly, the team has Mandarin skills. The
importance of Chinese language skills in Australia is long debated. Mandarin is spoken at home by
nearly 700,000 people in Australia, making it the most common language other than English:
ABS (2022), ‘Snapshot of Australia, 2021’, 28 June. Yet the proportion of
non-native Australians studying Chinese language at school is tiny: Field L, R Wilson and K
Cruickshank (2024), ‘Prioritized But Declining: An Analysis of Student Participation in
Asian Languages Courses in Secondary School 2001–2021 ’, Curriculum Perspectives , 44, pp 263–277; the top level of fluency may not
reach four figures: ABC (2019), ‘Are There Only 130 Australians of Non-Chinese Heritage
Who Can Speak Mandarin Proficiently?’, ABC News , 24 June; and the public
sector faces particular challenges, as highlighted by Jiang Y (2021), ‘Chinese–Australians
in the Australian Public Service’, Lowy Institute Policy Brief, 12 April. 3 Our latest assessment of the economic outlook,
including our China assessment, is set out in RBA (2025), Statement on Monetary
Policy , May. Recent RBA publications on China include: Baird A, S Nightingale
and G Taylor (2025), ‘ Behind
the Great Wall: China’s Post-pandemic Policy Priorities ’, RBA Bulletin , January; Hendy P, E Ryan and G Taylor (2024), ‘ The
ABCs of LGFVs: China’s Local Government Financing Vehicles ’, RBA Bulletin , October; Maher W (2024), ‘ China’s
Monetary Policy Framework and Financial Market Transmission ’, RBA Bulletin , April; Baird A (2024), ‘Urban Residential Construction and Steel
Demand in China’, RBA Bulletin , April; Adams N, D Jacobs, S Kenny, S Russell
and M Sutton (2021), ‘ China’s
Evolving Financial System and Its Global Importance , RBA Bulletin ,
September; Jones B and J Bowman (2019), ‘ China’s Evolving Monetary Policy Framework in
International Context ’, RBA Research Discussion Paper No 2019-11; Day I and J Simon
(eds) (2016), Structural Change in China: Implications
for Australia and the World , Proceedings of the RBA Annual Conference, Reserve
Bank of Australia, Sydney, 17–18 March. 4 Some felt the support provided to the developer
Vanke also signalled a change in tone from the public authorities. 5 Richard McGregor, my co-panellist at Lowy here
tonight, has suggested if there were ‘a German word for being resolute and freaked out at
the same time, that would capture the mood in Beijing’: McGregor R (2025), ‘My China
Trip Made One Thing Clear About the Global Trade War’, Australian Financial
Review , 15 April. If there is, I am yet to find it! 6 China’s national savings rate remains
amongst the highest in the world: see, for instance, Wolf M (2024), ‘China’s Excess
Savings are a Danger’, Financial Times , 6 March. 7 See Hendy, Ryan and Taylor, n 4. Fitch also cited
this as one reason for its downgrade to China shortly after ‘Liberation Day’ (see
FitchRatings (2025), ‘Fitch Downgrades China to “A”; Outlook Stable’, 3 April),
although the government strongly rejected that assessment (see Huaxia (2025), ‘China Deeply
Regrets, Rejects Fitch Ratings Downgrade’, Xinhua , 3 April). 8 Gongsheng P (2024), ‘China’s Current
Monetary Policy Stance and Evolution of Monetary Policy Framework in the Future’, Keynote
Speech at the 15th Lujiazui Forum, 19 June. 9 See, for instance, the comments made by Lan
Fo’an at the IMF Spring Meetings: Xinhua (2025), ‘China’s Finance Minister Vows
More Proactive Fiscal Policy’, Xinhua , 24 March. 10 Though now de-emphasised from official Chinese
communications because of the friction it generated overseas, the 2015 ‘Made in China
2025’ program is worth a look (see PRC State Council (2015), ‘Notice of the State
Council on the Publication of “Made in China 2025”’, Center for Security and Emerging
Technology Translation, 8 May). According to the European Union Chamber of Commerce in
China, China is now a (limited or complete) global technological leader in six of the
10 sectors singled out for investment in that plan (see European Chamber (2025), ‘Made
in China 2025: The Cost of Technological Leadership’, Report, 16 April). 11 There is some evidence of this happening the
other way too: China has exempted imports of medical equipment and industrial chemicals, products
in which the United States is dominant, from its own tariffs. 12 The Big Mac index suggests that the Chinese
currency is 39 per cent undervalued against the US dollar: The Economist (2025),
‘Our Big Mac Index Shows How Burger Prices Differ Across Borders’, The
Economist , 28 January. 13 Such points are of course eerily reminiscent of
concerns cited by Western firms considering locating in China only a few decades ago. 14 The February forecast already assumed some
increase in tariffs. 15 Most Australian ore will require an
intermediating process like direct reduction to be usable in cleaner electric arc furnaces. See,
for instance, Australian Trade and Investment Commission (2024), ‘Australia Forges a Future
Made from Green Steel’, 28 August. 16 It was noted that Australian producers would be
exposed if Chinese demand fell sharply for any reason, for instance, if the government imposes
production controls. That’s because there are no alternative iron ore export markets of the
scale of China. Indian capacity is much smaller, and can use domestic ore; and there is little or
no production growth outside of southeast Asia. 17 See Powell J (2025), ‘Economic
Outlook’, Speech at the Economic Club of Chicago, Chicago, Illinois, 16 April; also
Walsh R (2020), ‘Ferris Bueller’s Day Off – “Life Moves Pretty Fast”’, ACMI,
1 October! 18 See RBA (2025), ‘ Box A:
How Might Tariffs Affect Australian Trade? ’, Statement on Monetary
Policy, May, and Fenner S (2025), ‘Net Impact of US Tariffs on Industries Limited
but Uneven’, Westpac IQ, 1 May for analyses of this issue. 19 See, for instance, The Economist (2025),
‘Why China Has the Upper Hand in Its Trade War with America’, The
Economist , 1 May. 20