Australia-China relations are at a nadir and China has been gradually culling domestic demand for Australia’s main exports. China is Australia’s largest market for a number of export sectors. China is the world’s factory but with Australia it is one of the only few countries whereby it has a trade deficit.
China’s insatiable demand for commodity to fuel its growth ensured the 3 decade record of no recessions. Covid has put an end to that run along with our relationship with China.
Australia’s Biggest Export List
CBA has put together a list of Australia’s main exports and highlighted the products in which it has been mentioned in the news. In almost all instances the mentions were negative.
Why is China Targeting Australia?
A common thread running through the list of Australia’s biggest export targeted by China is that these are areas where China makes up a disproportionate share of the total export market such as wool, wood chips, cotton, crustaceans etc.
I am pretty confident that China’s Ministry of Foreign Affairs knows this and is why they have been focused on sectors where China make up a large segment of Australia’s exports and at the same time the commodity can be easily replaced and sourced from elsewhere.
It is interesting Australia’s 2 largest export sectors, iron ore and liquefied natural gas has not been targeted. We think the main reason is that alternative supply for these commodities cannot be easily brought online to replace Australia’s export market share. Any disruption to these commodities will ratch up the commodity prices and will be a self inflicted speed bump as at the end of they day it will raise the price on China it self.
The negative trade and relationship sentiment has weighed on ASX listed shares with exposure to China. Even the blue chip ASX Shares are not as Treasury Wines and A2M have not dodge the bullet while the likes of BHP vs Rio has performed relatively well.
How Should Australia Respond?
We agree to the thread running in foreign policy circles that the relationship has deteriorated to stage it will never be the same. The government however should take the public spats offline and in turn will neuter China’s leverage on Australia will dissipate.
The goal for China is not shutting Australia out of China’s for these commodities. It is the public flex of its geopolitical strength and sending Australia the message of they are the rising hegemon and we should know our place. It is very much a message to Australia as to other countries that look to take a confrontational tone with China.
If we play down the public spats then that message will also die. Like a well managed portfolio which is diversified, the Australian exports will need to learn to diversify their market to ensure that the single market risk can be reduced.
China will be the ultimate loser as it spent the last decade to ensure that it has access to supplies to meet its domestic demand. The message so far shows the opposite where they are an unreliable customer and ultimately we should not dependent on them, and in turn they will have to compete with everyone else for the same commodity at the next boom.