Australian exports to China now higher than our entire retail industry – and it’s not just iron ore
Chinese demand for Australian goods and services is now 5 per cent of Australia’s GDP – greater than our retail industry (4.6 per cent).
Eighteen per cent of exports to China (1 per cent of Australian GDP) are re-exported to other countries.
When people think of exports to China, mining springs to mind – particularly iron ore. Yes, mining is responsible for nearly two thirds of exports and iron ore specifically 43 per cent.
But, commodities are hardly the only export. And in fact, nearly 40 per cent of commodities shipped to China are re-exported (a far higher proportion than other industries).
The Commonwealth Bank declared, in a report obtained by Stockhead, “the biggest economic event this decade is the surge in Chinese domestic demand”.
And while we may think mining is just the raw materials, other industries participate.
“Australian miners are ‘compilers’ of other industries inputs in the same way Chinese phone makers compile parts made by other economies,” said CBA senior currency strategist Joseph Capurso.
“Manufacturing, construction, finance and equipment rental stand out as Australian industries that indirectly participate in Australian mining exports to Chinese domestic demand.”
When one takes such exports out of the “mining” tally, mining falls to 47 per cent of exports to China.
One notable export to China is the infant formula industry. This industry has particularly heavy consumer demand with perceptions foreign formula is of higher quality.
It has undoubtedly helped that one vehemently heavy obstacle to demand growth (namely China’s ‘one child policy’) is no more.
In recent weeks, regulation in China has been rumoured to be on the verge of being hardened or enforced. While this will effect retail sales in China, that will do little to stop the daigou buyers.
Daigou is a specifically Chinese term which means to buy on behalf of, referring to people outside China who shop on behalf of a China resident.
However these will count as Australian sales for accounting purposes. Bloomberg Intelligence has estimated 20-30 per cent of A2 Milk (ASX:A2M), which is 70 per cent of total sales, ends up in China because of this practice.
Fintech is another example. One ASX fintech targeting China is FinTech Chain (ASX:FTC), which has soared several times this year after securing deals for Chinese banks to use its technology.
Other economies are using China’s trade war with the US to enhance their relationship. One such nation extending an olive branch is France.
In March, presidents Emanuel Macron and Xi Jinping signed a deal to build 300 Airbus aircraft for China. (In China the government buys the aircraft then allocates them to state airlines once built.)
Several months into the trade war, Australia’s trade with China has been unaffected.
Nevertheless, one concern is that the US is one the biggest destinations for re-exported goods. For instance, a car exported to the US using Chinese steel that utilises Australian commodities.
Capurso said such exports are only 0.2 per cent of GDP, although a further frosting of relations will hurt.
Investors are hopeful that a long-anticipated ‘deal’ can be reached between the US and China that will end the dispute.