(Mar 6): Trade ministers are speaking optimistically of a return to normal as Covid-19 comes under control. Australia’s iron ore producers are equally optimistic as they look forward to the traditional infrastructure stimulus tool that China used to overcome the impacts of the 2008 GFC.

They are wrong for one very important reason. The economic recovery will call for the recapitalisation of China business, big and small. This is a financial stimulus, not a construction stimulus. The recapitalisation will impact on investment activity both within China and outside of China with a reduction of outward flows of capital. The apartment in Sydney may become much cheaper as the Australian dollar falls and Chinese investment capital stays at home.

Consider a typical example at an individual level. He lives in Beijing and runs a successful SME business. The business gives him an income that allows him to purchase a house in Sydney, or Singapore. It allows him to send his child to a university in the US, Australia or Singapore. He can also support the new love of his life, an imported American sports car.

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