Only balance China cares for is the one in its account

As one of the world's biggest commodities exporters, Australia likes to see itself as an equal in dealings with the Middle Kingdom. It should think again.

Politicians and economic spokesmen in Australia like to talk about a balance of trade between one country and another. But what happens if that "balance" is illusory? The situation between Australia and China is not unique; it belongs to just about every resources-rich country that deals extensively with the People's Republic.

Australia will this month go to the elections lulled by the belief that whether it's the incumbent prime minister Julia Gillard or opposition leader Tony Abbott who wins, all will be well. The Chinese underwrite Australia's economic strength, a strength that not only survived the global financial crisis but rendered it little more than an uncomfortable ripple. China, Australians tend to think, needs them far more than they need China. Really?

The most important news about the Australian economy these days tends to come not from the apparatchiks in Canberra, but from the boffins of Beijing. Last month it was reported that China's growth rates for the second quarter were slowing. It's not exactly bad news, but this has far more impact on the future than a government tightening monetary supply or imposing a big tax on mining companies. China's GDP calls the real shots.

Neither of Australia's political leaders has worked on any assumption other than that the country's main trading partner will remain anything less than a huge sponge for the country's iron ore, alumina, coal and liquefied natural gas, not to mention wheat, wool and beef. Yet Australia has recently lost the only man who, quite literally, understood the Chinese. The Mandarin-speaking former prime minister Kevin Rudd, who was recently ousted as leader, took nothing for granted between the two countries.

Mr Rudd sought an "architecture" in the Asia-Pacific Rim designed to create exactly what we don't have - a balance. There is a hypothetical scenario that no one in Australia, nor any China-dependent country for that matter, wants to contemplate. Fast-forward a little and China is pulling off one of its policy-engineered slowdowns but this one is bigger than ever. Beijing decides that its domestic economy must be cooled. It's not a problem for them; they've been running a surplus for years.

But wages are rapidly rising and the growing middle class is becoming ever more strident. Speculators are rife, corruption endemic. In comes the US demanding yet again that the Chinese strengthen its currency. It threatens sanctions (as it already has done) against China to force it to rebalance its terms of trade with the rest of world. OK, says Beijing, we'll bolster the yuan if you give us BP.

The Chinese argue they will look after its open-ended cost obligations and legal liabilities since the spill. Not only is their state-run PetroChina able to absorb it whole, it is probably one of the few big oil entities that can make BP profitable again. Nobody wants a Chinese-owned BP but the price is right and a growth-oriented China is in everybody's interests. BP is sacrificed at the altar of realpolitik.

Meanwhile, commodities are tanking. Australia has overproduced and the resultant fire sale of resources assets heavily favours the Chinese buyers. They, after all, provide the market. The politics of the wallet rules again. Other countries similarly hooked to Chinese growth follow suit. With its string of acquisitions, China's dependence on imported oil and other commodities is heavily eroded, perhaps even broken forever.

Readers may laugh at the above scenario but China has not exactly been inconspicuous about its drive to secure oil and gas reserves around the world. The world has not yet experienced a resources-rich China and the chances are any scenario that distorts the past economic balance will similarly throw the diplomatic one. Taiwan and the South China Sea, both geopolitical assets that China badly desires, may yet again come into focus, this time with added vehemence.

When your employer makes demands, which way do you vote? Few companies have ever admitted to being broad-minded and inclusive democracies. It's risible to think that China Inc may be any different. [e-mail]