There is an old saying in Australian financial markets: when China sneezes, Australia catches a cold. It is a cliche, but it holds up remarkably well — especially when it comes to the Australian dollar.

China is Australia’s largest trading partner by a wide margin. In the 2023-24 financial year, two-way trade between the countries exceeded A$300 billion. Iron ore, coal, LNG, agricultural products, and education services all flow north in enormous volumes. The health of the Chinese economy is, for practical purposes, one of the most important determinants of the Australian dollar’s value.

The Trade Channel

The most direct link between China and the AUD runs through trade. When China’s economy is growing strongly, it consumes vast quantities of Australian commodities. That demand pushes up commodity prices, boosts Australia’s export revenues, and strengthens the terms of trade — all of which support the currency.

The reverse is equally true. When Chinese growth slows, commodity demand softens, prices fall, and the Aussie weakens. This relationship has been remarkably consistent over the past two decades.

Iron ore is the centrepiece. Australia supplies roughly 60 per cent of China’s iron ore imports, and iron ore is Australia’s single largest export by value. The correlation between the iron ore price and AUD/USD is not perfect, but over any meaningful time period it is strong enough that many FX traders use iron ore futures as a leading indicator for the Aussie.

The Property Connection

For years, the engine of Chinese iron ore demand was the property sector. Residential construction consumed enormous quantities of steel, which in turn required enormous quantities of iron ore. At its peak, property and related industries accounted for roughly 25-30 per cent of Chinese GDP.

The slowdown in Chinese property — triggered by Beijing’s crackdown on developer borrowing beginning in 2020 — has had profound implications for Australia. Major developers like Evergrande and Country Garden defaulted on their debts. New housing starts collapsed. Steel demand shifted from rapid growth to stagnation.

This structural change in China’s property market is one of the key reasons the Aussie dollar has struggled to regain the 0.70-0.75 range it occupied for much of the 2010s. The old growth model that fuelled commodity demand is not coming back in the same form.

Beijing’s Policy Levers

Chinese economic policy is another critical variable for AUD watchers. Unlike most Western economies, China’s central government retains significant control over credit creation, infrastructure spending, and industrial policy. When Beijing decides to stimulate, the effects can be rapid and substantial.

In 2025, the question is whether Beijing will deliver the kind of large-scale fiscal stimulus that could reignite commodity demand. So far, the approach has been measured — targeted support for specific sectors rather than the blanket credit expansion of previous cycles. Markets have been disappointed by the lack of a “bazooka” stimulus, and the Aussie has reflected that disappointment.

If Beijing does eventually open the taps, expect the AUD to respond quickly. The currency has historically rallied hard on credible Chinese stimulus announcements, sometimes gaining two or three cents against the US dollar in a matter of days.

The Sentiment Channel

Beyond trade flows and policy, China affects the Aussie dollar through a more intangible mechanism: global risk sentiment. In the minds of many international investors, the Australian dollar is a liquid proxy for exposure to China and to emerging market growth more broadly.

This means that even events with no direct trade impact on Australia — say, a regulatory crackdown on Chinese tech companies, or rising tensions in the South China Sea — can weigh on the AUD simply because traders use it as a vehicle to express a bearish view on China.

It is not entirely rational, but currency markets are as much about perception as they are about fundamentals.

What to Watch

If you are tracking the China-AUD relationship, here are the data points that matter most:

• China’s official PMI (Purchasing Managers’ Index): Released on the last day of each month. A reading above 50 signals expansion; below 50 signals contraction. The manufacturing PMI is particularly important for commodity demand.
• Iron ore and steel futures: Traded on the Dalian Commodity Exchange and the Shanghai Futures Exchange. These move in real time and often lead AUD.
• Credit data: China’s total social financing and new yuan loans figures, released monthly, indicate how much credit is flowing into the economy. More credit generally means more construction and more commodity demand.
• Property data: New home prices, housing starts, and developer financing conditions all feed into the iron ore demand outlook.

Living With the Relationship

Australia’s economic dependence on China is a structural feature, not a bug. Diversification efforts are under way — particularly in critical minerals, defence, and services exports to India and Southeast Asia — but the China link will remain dominant for years to come.

For anyone watching the Australian dollar, understanding China is not optional. It is the starting point.

James Hargreaves is a Sydney-based financial journalist covering currencies and macro markets.