Subscribe to our Economics Update here.

China Tightens Hold Over Prices for Gasoline, Diesel

With global crude oil prices plummeting to $27 per barrel (as at 21 January 2016) due to oversupply, the National Development and Reform Commission (NDRC), China’s top economic planner has imposed a price floor of $40 per barrel. Under this mechanism, China fuel prices will be adjusted every 10 working days if fluctuations in oil prices exceed 50 yuan a metric tonne. The floor will be suspended when crude prices reach $130 per barrel. Savings made by businesses as a result of this policy will contribute to improving fuel quality and promote energy conservation. 

How does this relate to the HSC syllabus?

  • The Chinese government has imposed a price floor on oil to protect domestic oil company profits which have been suffering as a result of falling oil prices. Lower oil prices means that companies generate less revenue (price × quantity) and therefore less profit (Preliminary Topic Three – Markets). 
  • Since the demand for oil is relatively price inelastic, increasing the price of oil would have a less than proportional decrease on the quantity of oil demanded therefore protecting revenues (Preliminary Topic Three – Markets; total outlay method).
  • Using the savings generated from the floor towards improving fuel quality, the Chinese government reduces the negative externalities of oil consumption such as carbon emissions (Preliminary Topic Six – Government and the Economy, HSC Topic Three – Economic Issues; Environmental Sustainability). 
  • In the context of China’s poor environmental sustainability after years of rapid growth, increasing spending on reducing carbon emissions will slow climate change and atmospheric pollution. This will enable for the conservation of China’s natural resources, therefore supporting economic growth in the long term (HSC Topic Three – Economic Issues).

Further reading 

Sinopec, PetroChina Fall After Government Sets $40 Oil Floor: http://www.bloomberg.com/news/articles/2016-01-13/china-won-t-cut-fuel-prices-when-crude-trades-below-40-a-barrel

Turning Australia around to meet the new China economy

Australia’s economic growth in the past has been driven mostly by industrialisation of China which fuelled demand for commodities. With China’s slowing growth and transition to a consumption model, Australia’s future growth is being put in question. With less demand for Australia resource exports, other sectors in the economy such as property, retail and higher education and tourism exports have been improving under lower interest rates and depreciated currency. Despite this, indicators such as Australia’s financial markets, business and consumer confidence remain fragile. To support future economic growth, economic reform including investment in infrastructure and education is required. 

How does this relate to the HSC syllabus?

  • The high growth period Australia experienced during the ‘mining boom’ was due to demand for its resource exports, increasing the export component of aggregate demand. With this demand waning due to the slowing of the Chinese economy and in turn, demand for exports, Australia is turning to an increase in consumption via the retail sector and exporting of other goods such as education and tourism to boost aggregate demand and economic growth (HSC Topic 1 – The Global Economy; HSC Topic 3 – Economic Issues)
  • With tentative growth in the present, it is commonly suggested that Australia requires microeconomic reform in terms of improving its infrastructure and shifting away from a resource export focused economy to drive productivity as observed during the 1980 reforms. In doing so, Australia will generate growth by increasing aggregate supply (HSC Topic 3 – Economic Issues). However, since microeconomic policy commonly has negative impacts in the short term on businesses, in this case, the mining sector, the government is generally reluctant to implement these policies for political purposes (Preliminary Topic 6 – Government and the Economy; HSC Topic 4 – Economic Policies and Management). 

Further reading

Structural reform in Australia (1980’s): http://www.oecd.org/australia/39218531.pdf


Australian dollar climbs above US 70 cents as ECB hints at more stimulus

After depreciating to a 7 year low of $US0.6831, the Australian dollar (AUD) has appreciated 3% to $US0.7010 due to the prospect of more monetary stimulus in Europe, an increase in investor confidence in regards to China’s economic performance and an overnight bounce in oil prices. 

How does this relate to the HSC syllabus?

  • Loosening monetary policy in Europe would mean that investing in Australian interest rates would be a more attractive investment. Since investors require Australian dollars (AUD) to invest in Australian financial institutions, they would buy AUD and sell their domestic currency, therefore increasing demand for AUD and causing an appreciation (HSC Topic Two – Australia’s Place in the Global Economy). 
  • Since China is one of Australia’s most significant trading partners, the growth of the Australian economy and the fluctuations of the AUD are dependent on China’s economic indicators. With China’s economy slowing down, investors have scrutinised Australia’s future prospects and therefore sold the AUD, causing a depreciation. However, news that China is planning to address its economic growth and currency issues suggests that the positive effects of these policies would also impact Australia through demand for its exports. This increased confidence in Australia’s future economic growth has increased demand for the currency and therefore caused an appreciation (HSC Topic Two – Australia’s Place in the Global Economy; HSC Topic Three – Economic Issues). 
    • Note: The AUD appreciates or depreciates in response to Chinese economic data because Australia is closely tied to China as a result of its significant trade relationship. This makes the AUD a suitable proxy for the Chinese Yuan (CNY). Since China has a fixed exchange rate, investors avoid holding the currency since it is subject to changes (these rates released by the government are called reference rates). The AUD, on the other hand operates under a floating exchange rate after being floated in 1983. As the fifth most traded currency in the world, it is a very liquid (easily tradeable) and provides an accurate reflection on the health of the Chinese economy due to Australia’s strong trade ties with China.
  • As a resource exporting economy, Australia’s export revenues are dependent on the prices of commodities (Revenue = Price × Quantity). Due to falling commodity prices, in particular, crude oil prices, Australia’s export revenues were suffering. A 6% increase in the price of crude oil caused an increase in confidence Australia’s economic growth. Therefore, investors have increased their demand in AUD, causing it to appreciate. Furthermore, importers of Australian resources need to convert more of their domestic currency to buy a barrel of oil, which also increases demand for the AUD leading to appreciation. 

Theresa Dang THERESA DANG

Theresa Dang is an economics mentor at Keystone Education. She attended Sydney Girls High and achieved an ATAR of 99.70 in 2012. She is now studying Commerce and Law at the University of Sydney. She has experience in a global technology firm and a mutual fund.

Gary Liang GARY LIANG

Gary Liang is the founder and director of Keystone Education. He attended Sydney Boys High and achieved an ATAR of 99.95 in 2012. He achieved 5 state ranks in Mathematics, Mathematics Ext 1, Mathematics Ext 2, Chemistry and Economics. He is now studying Economics and Science (Advanced Mathematics) at the UNSW Australia, where he is the recipient of four scholarships.

1 Comment