China is Australia’s biggest trading partner. Chinese demand for Australian commodities has been the biggest contributor to the Australian economy for some time. However, the relationship between the two countries is now strained like never before.
Australia has publicly criticised China over the origins of the coronavirus and it is abundantly clear that Australia has chosen to stand alongside the USA when it comes to geopolitical competition. That being said, the question on everyone’s mind is – Did Australia pick the wrong bed to sleep in?
Australia-China Trade Relations
Bi-lateral trade relations between Australia and China is extremely important to Australia. Two broad sectors – Energy and Consumer Products are facing challenges as China looks to be devising plans to boycott Australian goods. Of course, the go-to tactic China turns to when dealing with any situation of late has been bullying. So there is a lot of dirt that both countries have kicked up here. But if China follows through on its threats, Australia will be the one most impacted.
Australia produces a lot of commodities and most of it is imported. As investors, we need to have a look at our portfolios and determine how exposed our assets are to the export threat.
China has effectively banned Australian coal and is now looking at Mongolia as an alternative as China’s top supplier of coal. While threats have existed now for over a year, it is difficult to determine if China will follow through this time around. Have a look at our previous blog post on China banning Australian coal from October.
With global pressure mounting on China, it may choose to go into its shell and reduce its reliance on the rest of the world. China’s growing middle class population has surged demand for quite a few foreign products and a number of Australian firms have benefitted from it. The growth potential of these firms can be put under threat if trade relations continue to persist.
Food and wine exports to China have received threats as well recently. Beef, barley, wine and cotton exports have all suffered this year. Lobster exports are also believed to have faced challenges as Chinese customs are to have changed inspection procedures resulting in 21 tonnes of lobsters being held up in Shanghai. Chinese customs are rumoured to have banned timber and barley coming into the country from Australia. The Chinese government has remained silent on all of this and hence investors are firms with exposure to the Chinese market are now in limbo. There is a lot of produce for all of these commodities in Australia and their future is now at risk.
It is now more important than ever for investors to consider the risks of one of their stock’s exposure to China. The search for growth can come at a massive price. While we cannot go over how all the stock we hold in our portfolios are positioned to handle the mounting political pressure, we do however want to tell investors to re-evaluate the business models and financial flexibilities of these stocks.