Chinese Trade Ructions
Posted 16 December 20
China Tests Its Boundaries
At the beginning of the year, we warned of the increasingly aggressive foreign policy employed by China (Further reading: China Enters Adolescence). Rather than a more penitent China in the wake of the COVID-19 pandemic, we have instead seen a more assertive approach: extending sovereignty in Hong Kong, testing boundaries in the South-China Sea and imposing trade sanctions on countries it views as obstacles to its grand plan.
The use of economic coercion through trade is a tactic that has garnered significant media attention, as the list of Australian industries impact continues to grow - to include barley, wheat, coal, lobster, wine, and timber. The trade sanctions make for sensational news headlines, as does the visual of tonnes of lobster rotting in a storage container, but the economic impact will be far less dramatic.
The bulk of the trade targeted by China is in highly commoditised goods (such as coal), where suppliers from other countries will be unable to ramp-up production to meet the Australian shortfall. As recently noted by Glencore CEO, Ivan Glasenberg, the outcome will be that Australian exports will most likely be purchased by other large importing nations (like Japan in the case of coal).
On the other hand, the impact on wine and lobster will be far more severe as they are more reliant on China as a sole importer. For the wine sector, the tariff increase to between 107% and 212%, compared to 12% for beef, will decimate the export market. Likewise, 94% of Australian lobster exports are shipped to China, and it will be very difficult to find new markets for this quantity of product... However, as shown on Figure 1 below, the total value for these goods is relatively small, circa 2-3% of total exports and does not sound the death knell for the Australian economy, despite the headlines.
China’s Demographic Own Goal
Looking past the short-term political hostilities, China has been in a race to get rich before it gets old. The demographic own goal caused by the one-child policy will begin to weigh on its growth rate over the coming decade, increasing the risk of a so-called 'hard landing'.
A key pillar of the Chinese Communist Party’s (CCP) authority has been the improving wealth and economic prospects of its middle class. As growth slows, the threat of political instability that disrupts economic activities rises. We do not believe that an uprising is imminent but, as shown by the Russian experience (shown in Figure 2 below), the impact of political instability could be sizeable. Further, given that no large country has managed to reach high-income status while maintaining an authoritarian political system, it would be unwise to ignore this possibility.
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Photo by David Todd McCarty