A general rule in trading is that what’s good for China is also good for Australia. So, Chinese growth will boost Australia’s economy (ASX200) and strong Chinese data will support the AUD higher. Why is this the case?
The reason is simple. Around 30% of Australia’s economy is made up from Chinese trade. As a result, the Australian economy itself is oftentimes traded as a proxy (alternative) for China’s economy. The AUD is also traded as a proxy for the yuan. This ‘piggybacking’ benefits Australia’s economy. It is a straightforward trade. However, that trade may be under threat if current tensions between China and Australia keep building.
The recent departure of Australia’s last 2 foreign correspondents in China is the latest episode in a series flare-ups that have emerged after Australia’s Prime Minister Scott Morrison called for an independent inquiry into the origins of COVID-19. This triggered a retaliatory response from China and Beijing has since suspended shipments of barley, stopped some beef imports, and launched an anti-dumping investigation into the wine industry.
According to Jeffries analysts, China’s actions may impact sectors which in fact are covering more than half the weight of the ASX 200. A Bloomberg opinion piece yesterday highlights that banks may also suffer if a slowdown in Chinese immigration weighs on the housing market. Tourism itself that is linked to stocks like Qantas, Crown Resorts, and Star Entertainment could also suffer from a dramatic drop in overseas visitors. If indeed tensions between China become more significant that is one key area to watch.
China has a considerable ability to significantly hurt the smaller Australian economy. The major concern here is that investors might stop looking at Aussie as a proxy for China. If this was the case the ASX would be vulnerable to very large falls. This is not the case right now, but one geopolitical development to have on your radar.