Australia’s relationship with China in Aftermath of COVID-19
Kim Catechis and Reece Birtles, Chief Investment Officer, MCA discuss the potential fall out for the Australian economy from the growing confrontation between US and China.
It would hurt China itself it if did anything to its iron ore relationship with Australia. It really doesn’t have many alternatives.
Mel: Hello again, welcome to another edition of the AFTERMATH. Today, we want to examine the positioning that Australia is taking in this confrontation between US and China, they are both very important to Australia in different ways. And to help me parse through this, I have Reece Birtles, who is CIO of Martin Currie Australia. Reece, really good to see you.
Reece: Morning Kim, great to see you.
Kim: So, Reece, it seems obvious that Australia has probably done the best, say for the last, I don’t know, 10, 15 years, in increasingly walking a very narrow line between keeping its relationship with China, which is important for the economy on, an even keel, whilst at the same time not getting too far from the US security alliance. Now, obviously this has all come to a head recently and Canberra seems to have opted for the US, wholeheartedly. What do you think is the fall out, potentially, going to be for the Australian economy?
Reece: Yeah, there is no doubt Kim, that Australia is always going to back the US when it comes to security. But clearly China is a really important trading partner for Australia. The most important trade relations are really about iron ore and metallurgical coal, both going into the steel making production process.
And really for Australia these two exports, Australia has extremely high-quality minerals, low cost producers, an extremely reliable supply chain. And so we really think those two commodities are going to remain strong with China, because China is going to protect its interests and it really doesn’t have many alternatives, especially for iron ore, where alternative countries such as Brazil, South Africa and Canada have had supply issues, especially during COVID, don’t have the same quality. And so it would hurt China itself it if did anything to the iron ore relationship.
On the other hand, where China can hurt Australia, and move things around, it’s quite likely and that’s more likely to be in the agricultural space where they might move to US supply, and in some consumer goods, where Australia has a really strong brand with China in terms of clean green products, strong consumer recognition, and it’s likely that most of those will be fine but some areas like wine which can be substituted with European products, might be impacted.
Kim: That sounds really good overview there, but tell me, are there any other sectors where you might expect some sort of distortion coming into the market, albeit temporarily, I’m thinking in terms of, I don’t know, tourism, students etc.?
Reece: Yeah, definitely in terms of tourism and students, we have already seen a significant impact. Clearly COVID has accelerated that, and China has made statements about travelling to Australia, which has been quite harmful, and China has been hugely growing segment for Australian tourism in recent years.
The other one that is a little bit more subtle is probably around migration. Australia has clearly benefited from strong migration over many years, and China has been about a fifth of that source of migration. And with constrained capital flows and tightening of migration, especially around COVID, the demand for Australian housing from the Chinese is likely to significantly reduce, and Australia has really got a lot of apartments to sell to that Chinese demand in recent years and it’s been a boom for parts of the construction market. And that’s really unlikely to continue given how the situation is now.
Kim: Okay so, my base case building now is that regardless of who the next US president is, the US is going to continue severing economic links and cultural links as much as far as they can with China. And I think there are kind of committed to trying to cement their areas of security footprint and influence. So, if Chinese firms are getting banned and Western investors might find it harder to invest in China over time, do you think there is an implication of higher costs in the economy as Chinese competition potentially disappears?
Reece: Yeah I think we have already seen that to some degree, clearly the ban on Huawei meant that one of the new entrants into the mobile phone market had to withdraw its proposals because Huawei was going to finance the roll out of its network, and everyone is having to move away from that existing Huawei network. So that’s clearly raised the costs for some existing players in the mobile space, removed a new entrant and clearly is therefore inflationary for the market. The other one would just be how China are likely to support other counties growth more than Australia, such as African iron ore where it can to try and move its dependence to Australia.
Kim: Reece, thank you , I enjoyed that.
And thank you all for tuning in. Rmember to send us your feedback, good or bad, we want to learn as we go along.
Please join us again next week where we have the final installment of the AFTERMATH for you.
Good bye and stay safe.
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