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Just how reliant on China are we?

When President Trump started his trade wars with China in 2018, Australia's trade relations also took a series of hits from China, as Australia is essentially America's sheriff in the South Pacific. Relations have worsened dramatically in recent weeks, widening the range of exports under threat, from crops, food, wine, coal, to education and tourism (once borders are open).

Heavy reliance on another country

Australia has not been as reliant on one country for export revenues (and tax receipts) since 1953 when the largest buyer was Mother England. China overtook Japan as our largest buyer in 2010, and now accounts for more than 40% of export revenues.

Hundreds of ASX-listed companies rely on Chinese demand, directly or indirectly, across many industries. Iron ore is our largest export to China, and the three main producers BHP, RIO and FMG together make up more than 11% of the total value of the 2,200 ASX-listed companies. These three companies are worth more than the smallest 2,000 listed companies combined. In the latest reporting season to June 2020, BHP, RIO and FMG contributed 41% of all profits reported ($15.8 billion dollars out of $40 billion in total profits).

This chart of Australia's export buyers since 1788 shows the global power shifts over the period, from the UK, Europe, via the US, to Asia. It also highlights Australia's central role in helping to build industrial and economic capacity in a string of Asian nations as they ‘emerged’ one by one along the way – first Japan, then the Asian Tigers, then ASEAN, and now China.

Brief history of trade relations

Trade relations have always been closely intertwined with strategic and military relations. From 1788, Australia started out as a string of British prison colonies that turned into suppliers of oil, wool, grains, food, gold and other metals to Britain as part of the British trade bloc, protected by the British Navy.

After Federation, Australia rapidly increased its exports to Germany, helping build its industrial and war machine for WWI. When war broke out, our exports to Germany ceased and the US took over. In the post-war reconstruction, Australia again increased exports to Germany, Italy and Japan, assisting in their industrial and military build-ups to WWII. When war broke out again, exports ceased and America again came to the rescue to win the war, and it again filled the gap in taking Australia's exports. Likewise in the Korean War.

In the 1950s and 1960s, Australian exports boomed in the reconstruction of Western Europe as a US ally against communist USSR. Meanwhile, in the Pacific, Australian coal, iron ore and other metals helped build the rebirth of Japan, as a US ally against rising Communist China following Mao's revolution in 1949.

After Japan's growth ended in the early 1990s, Australia's mineral exports helped to build the next breed of rapidly expanding ‘emerging markets’ – first the ‘Asian tigers’ (Hong Kong, Singapore, South Korea, Taiwan), and then the ASEAN countries including Malaysia, Taiwan, Philippines and Indonesia.

China is the latest ‘emerging’ nation built with the help of Australia's exports. Before China joined the World Trade Organisation in 2001 it bought just 5% of our exports, but the WTO entry kicked off its incredible urbanisation and industrialisation boom. The key ingredient was, and still is, steel made mainly from Australian iron ore and coking coal. Our rocks and dirt are building not only the gleaming new Chinese cities and railways, but also the war machine it may use against us one day, just as we supplied Germany, Italy and Japan in their military build-ups to the two World Wars in the 20th century.

China's extending ambitions

We are not at war yet of course nor are we even close. What we do know is that President Xi Jinping has extended China's national ambitions well beyond Mao and Deng’s vision of China to simply regain its pride and standing in the world after two centuries of foreign domination and impoverishment. China has achieved that and is now flexing its economic, political and military muscles to extend its power across the region and also into Central Asia, Africa and Latin America in search of markets for its products, sources of raw materials, and strategic alliances.

What is also evident, is that there is a global military build-up brewing, not only in China and the US, but also involving key allies like Japan, and also other players like Russia and a strategically resurgent Europe. This will be good for Australia's miners.

Hopefully, there will not be a major military conflict for many years or perhaps even decades, but as tensions build, China has slapped tariffs and restrictions on several non-critical imports from Australia. This is partly to punish Australia (for supporting the US on Huawei, etc.) but also partly as a show of power, and partly to genuinely help its local suppliers that have been hurt by the coronavirus restrictions and recession.

The industries affected so far are non-critical to China. However, in the case of economically and strategically critical iron ore and coking coal (for steel), China knows that it is still heavily reliant on Australia. China has been actively trying to develop alternate suppliers for several years, both internal and external, but with little success to date.

Hypothetically, in the event of war (e.g. China-US), if we were still a US ally at the time, our exports to China would cease immediately. In practice, China would probably move to act much earlier and restrict supplies to weaken Australia's resolve and test its alliance with the US.

China has been buying up Australian companies outright for several years, and also buying up stakes in many listed Australian companies. It is already the largest shareholder in RIO, FMG and numerous other miners and exporters. This trend is now being countered by more assertive government restrictions on Chinese investments, on the grounds of ‘national interest’.

Would the US fill the resultant export revenue gap if China were to stop buying from Australia? It depends on the importance of the export. It would be an ideal bargaining chip for Australia as a condition of our military support in a conflict (as Menzies was able to achieve in the Korean War).

Trade tensions strike home

All of this is well into the future of course, but we can see the wheels turning. This latest escalation in trade tensions appears to have finally struck home to CEOs and boards of Australian companies that they urgently need to diversify their revenue sources away from the heavy reliance on China. Developing new markets is expensive and time-consuming, especially with the current global travel restrictions.

It will probably mean companies retain more of their earnings for reinvestment in developing new markets. This would require a major reversal of the current shareholder demand for high dividends and minimal reinvestment for the future.

What is the relevance to investors? Aside from the further likely disruptions to hostile trade actions (which are outside the control of companies), we should also expect (and like) to see more companies reinvest more of their profits to develop new markets. This would mean lower dividends in the short term but potentially greater growth in profits and dividends, and diversification of revenue sources, in the medium to long term. It would also probably mean fewer windfall gains to investors from Chinese takeovers of local companies.

It is also a reminder of the importance of investing in international share markets, where the risks and potential rewards are more diversified than on the local Australian market.

 

Ashley Owen is Chief Investment Officer at advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is for general information purposes only and does not consider the circumstances of any individual.

 

15 Comments
Rudolf Ruyter
December 17, 2020

The only way to resolve the issues is to rebuild manufacturing in Australia (and of course find more/other markets for our exports & services)....
However....currently we can not compete with the world as our Australian payroll is way way too high....
So...lets lower our payroll....by creating a wage partnership between government and employers.
Ie..a gov't funded social basic wage to eliminate poverty (paid for by our royalty income from the resources each and every Australian already owns), of say $20k/year.....which discounts all award wages, as employers will no longer need to pay wages from starvation level up, but from the basic social wage up.
Production and services costs in Australia will plummet....and goods & services prices in Australia will drop.
Expand the definition of "Resources" to include eg, water, electricity, workforce, education...etc etc, so exported goods & services return royalties on the social wage component......
Australia can then compete internally with imports from most of the world.. and we would be able to build a brilliant manufacturing & agricultural base for more employees than we have now.
Everyone should stop complaining and start thinking of solutions......!!!!!!!

Peter Stanley
January 04, 2021

Sounds plausible
All I know is that we should quickly extricate ourselves from an over- reliance on China. The commodities sector is stupidly over-reliant On China applauded by a government that benefits disproportionally from these Australian assets. We should mark Every piece of Military hardware in China with “Made from Australian iron ore” that way we might slowly get the all important message.
Time to find new markets rather than just accept the easy option.
Cheers

Kshatriya
December 16, 2020

With 40% of Australia's exports (formerly) reliant on China the observation that "trade relations have always been closely intertwined with strategic and military relations" should not be lost on Australia's strategic and military planners. China is currently the primary market for about 25 exporting countries. The Chinese Communist Party is thus able to exercise influence beneficial to the CCP using trading partners and Belt & Road Initiative partners such as Victoria and over 100 countries. The CCP's treatment of Australia's exports should serve as a useful reminder to other exporters and BRI partners what to expect should they fall short of CCP expectations. Years ago the CCP Politburo selected Australia as the testing ground for unconventional warfare methods for use in their undeclared stealth war on the USA and uncooperative allies. Once China has achieved total economic and military supremacy then the international rules-based order will likely be replaced by the Chinese rules-based order and WTO, UN, World Court or other rulings will be largely irrelevant. As for the Covid-19 origins investigation, China's role is now reasonably clear. Ref: https://jamiemetzl.com/origins-of-sars-cov-2/ "Ye shall know them by their fruits" - Matthew 7:16

JanH
December 15, 2020

Australian governments and businesses have been woefully lazy. Whatever happened to the adage: "Don't put all your eggs in one basket"? Now , the chickens have come home to roost. What I cannot understand is why everyone is so surprised that China is now punishing us. To think that a vicious totalitarian regime with ambitions to rule the world would be kind to a resource-rich nation like Australia shows just how stupid our "leaders" are. Puts one in mind of the poem:
First they came for the Tibetans and we did not speak out because we were not Tibetans
Then they came for the Uighurs and we did not speak out because we were not . Uighurs
They they came for the Hong Kong citizens and we did not speak out because were was not Hong Kong citizens
And then they came for Australia...

The irony, however, is that Xi is turning ordinary Australians against China. We should simply stop buying cheap and nasty Chinese goods, which we know are made by slave labour, often children. But, hey, no can do because in the interests of buying stuff for as cheap as possible, we have killed off our own manufacturing and the skills that went along with it. Poor fool Australia!

AlanB
December 13, 2020

China has 14 Grievances with Australia. Here are 14 Australian Grievances with China:

Imposition of trade tariffs on Australian products.
Illegal control on movement and land acquisition in the South China Sea.
Insulting cartoons and anti-Australian articles in Chinese government media.
Failure to cooperate with the independent inquiry on the source of the COVID virus.
Pressuring Australian academic institutions to conform to Chinese views.
Detention of Australian citizens in China on spurious grounds.
Cyber attacks on Australian organisations and intellectual property theft.
Bribing of Australian politicians in NSW.
Signing Victoria into the PRC Belt & Road debt trap.
Infiltration of Chinese-Australian organisations to monitor the diaspora.
Interference with and corruption of Pacific Island nations.
Human rights abuses and arbitrary detention of Uyghurs and Tibetans
Attempts to prevent Australian official contact with the Dalai Lama
The Tiananmen Square Massacre of 1989 – an estimated 10,000 deaths.

Recommended reading: ‘Silent Invasion’ by Clive Hamilton.

Dudley.
December 12, 2020

Demography and Debt are Destiny.

China has the world's worst demographics ( rapidly aging, massively over populated ) combined with extreme debt accumulated while building the economic bridge out over the demographic cliff.

'Peak China' - 'Peak bellicosity'.

David
December 10, 2020

How about everyone shut up about China, and don't utter another word unless you are completely versed in Sun Tzu, "the art of war", which the Chinese understand intimately. Remember also the two rules about the customer. Rule one: the customer is always right; Rule two: If ever the customer is wrong, see rule one. All effort should be directed to finding more reliable customers. Never mind the WTO. That is a waste of time.

Ruth from Brisbane
December 19, 2020

David, I have just finished this book. There is a major cultural difference. 1. There must be some trust in trade relationships which is just not there and we should move to undo these relationships; they regard contracts as optional (the CCP has ultimate say). 2. I don't believe we should allow anyone from China into the country, because the risk of CCP infiltration and our physical safety (health-wise etc.) is now a real risk, given their foreign ministry statement that they are not obliged to report disease to the world (every other country does).

Chris
December 21, 2020

Well David, I am, and the 36 Strategies too. You might want to read that one as well.

Deadline '49
December 09, 2020

China now processes over 1 billion tonnes of steel annually. Over 36,000 km of high speed rail lines have been laid and 64 million excess apartments have been constructed in ghost cities thanks in large part to finance from American and western banks using GFC bailout money and various unwitting western pension funds. Xi Xinping has now turned his attention to accelerating a military buildup which is unprecedented in scale and depth, and as with previous conflicts, Australia's high grade iron ore is greatly appreciated in this process. Submarines and smaller vessels such as corvettes and frigates as well as some destroyers are being built in preference to aircraft carriers which can be overwhelmed by hypersonic missiles. Xi's deadline to liberate Taiwan is 2049 but we are likely to see things warming up before then, one prize being Taiwan's leading micro-processor industry. Kinetic war is to be avoided in the short term as this may provoke an unwelcome response from the US military which still has superiority in several key arenas. In the meantime soft power is being employed on many fronts including financing a brain drain of thousands of Taiwanese engineers to Shenzen, and enticing young Taiwanese women away to glittering cities like Shanghai for China's 30 million excess males. Invoking Sun Tzu's philosophy of war by stealth and Deng Xiaopeng's strategy of hiding their strength and biding their time the Chinese Communist Party has been involved in a multi-generational effort by millions of highly motivated cadres, overseas sympathisers and western useful idiots in politics, academia, finance and industry to weaken the American economy in a death by a thousand cuts before Xi's hawks sort out the US military and satellite systems with possible assistance from nuclear allies Russia, North Korea and Pakistan as well as Iran. The only way that Australia can remain in the CCP's good graces will be to comply with the 14 point grievance document and continue handing over the nation's finite resources such as iron ore, coal and gold. Anything less than full compliance will be sure to invoke further ire from the CCP. There is much more to this story but the following introduction should help:
The background: https://www.youtube.com/watch?v=hhMAt3BluAU
The strategy: https://www.youtube.com/watch?v=7HnNEIkxzCc
The method: https://www.youtube.com/watch?v=h8IEtlOVzq4
The victims: https://www.youtube.com/watch?v=iouJsHmBDcc
This website is monitored by the CCP. Have a nice day.

Ruth from Brisbane
December 19, 2020

Deadline, this is one of the best posts I have seen on Livewire and Firstlinks.
I think something the public is not understanding, unless they read Master Sun's book, is that the CCP has now declared war on Australia. I don't know who will win, but I would rather be dead than red. Super powers may be inevitable but this regime is not the way forward for the world. Actions speak louder than words. Just look at what they have done to us and the rest of the world, without any apology.

LEATH HUNT
December 09, 2020

Read Terry McCrann's article "iron ore is nation's a bomb in trade war" and following week "it's time we made our our china play". Yes, we’d have china where we want them if our government got smart with iron ore exports.

B martin
December 10, 2020

We should use our Iron as a bargaining chip with China the only thing China understands is strength

George
December 11, 2020

85% of our iron ore exports go to China and 60% of China's iron ore imports come from Australia. Who'll blink first?

Lucy
December 04, 2022

Bargaining chip? To Australia, China accounts for 40% of its exports. To China, Australia accounts for only 2% of its imports. Who has the bargaining power?

 

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