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  • Writer's pictureShaun Brien

China's appreciation of Australia.

Updated: May 28, 2021

At the time of writing my class is wrapping up learning all of Unit 3, Area of Study 3 - Australia and the World Economy.

Amazingly, compared to last year there has been significant changes in many of the indicators we use to evaluate our international position. One thing that's seemingly hard to explain clearly by students in the current economic climate is why the Australian exchange rate has been appreciating when our largest trading partner has been placing trade barriers such as tariffs on many of our major exports (eg. Barley, Wine and Seafood).

Based purely on your theoretical knowledge you would understand that these tariffs (which have been up to 300% increase in the price of products) would decrease the demand for Australian exports, leading to a decrease in demand for the Australian dollar on the foreign exchange market and therefore a depreciation of the Australian dollar.

This would however ignore the overall impact of Australia's exports of iron ore to China to help facilitate steel production. In their recovery from the COVID-19 pandemic, the Chinese government financed significant expansion of infrastructure and industry which greatly increased the demand for Australian commodities such as iron ore. This increased demand also drove up iron ore prices significantly. This then led to an increase in the overall trade surplus for Australia and led our Current Account to be in Surplus. This also increased the demand for Australian dollars on the foreign exchange market and led to our dollar appreciating to the 0.77USD which it is currently at (as of writing this post).

This value for the AUD would usually be seen as unfavourable for the Australian economy due to the negative impact it would have on our exports as well as the increases to imports a higher exchange rate tends to create. However, until the demand for our iron ore subsides (which it potentially is beginning to do) we are enjoying the benefits of this increase in trade. As a bonus, here's this all explained in video form with a little bit extra bout our Terms of Trade, Current Account and Net Foreign Debt.

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