In 2017, Australia registered the longest uninterrupted stretch of economic growth in modern history surpassing 103 consecutive quarters. A key driver of this growth has been China’s insatiable demand for resource exports. It is in this context that recent press suggesting a political chill in Australia and China relations is worth investigating. While frosty international relations are troubling, Australia remains in the fortuitous position of having:

  1. Geographic proximity to China and;
  2. Accessibility to much needed iron ore and coal, with the latest monthly trade report showing near record levels.

China has been Australia’s largest export destination for some time now, and despite political tensions we expect this divergence from peers to continue widening in the foreseeable future. Relevant company exposures held across Milford’s Australian Funds include infant formula and health companies A2 Milk, Blackmores and Bellamy’s, allergen-free specialist and UHT dairy company Freedom Foods, adventure travel company Experience Co, wine distributor Treasury Wines, English language testing and student placement provider IDP Education and various resource exposed companies.

You can’t overestimate the profound importance China has had on the Australian economy over the past 15 years. While exports to China are resource-dominated, recent data released by the Australian Bureau of Statistics highlights the growing relevance of Australia’s Services sector – especially tourism and education – as the wealth affect in China infiltrates their second tier cities.

Source: RBA, ABS

Back in 2006-07 China accounted for just 12% of Australia’s exports. Today it accounts for nearly one-third and around one-fifth of Australia’s imports. We expect this to grow. To put this in perspective, China’s population is roughly four times that of the United States. So, the Chinese economy will be roughly twice the size of the US economy when average per capita incomes in China reach just half those in the US.

Sources: RBA, ABS

While Australia’s trade relationship with China is still heavily reliant on resources (iron ore and coal accounted for around two-thirds of exports to China), Services have grown at a 15% compound annual growth rate over the past decade. With Education and Tourism being two key attractions. Currently, there are around 200,000 Chinese students studying in Australia, and last year 1.4 million tourists visited from China (vs 400,000 a decade ago).

Beyond Services, China has also rapidly become the largest single export market for range of food items. Segments like baby, wine, other food and health-related products have all experienced exponential growth.

Sources: Tourism Research Australia (TRA), RBA, ABS

Political tensions between countries are always present and must be managed carefully through position size in a portfolio. But, the prosperity created from trade between China and Australia is undeniable, and likely to outweigh any short-term political tensions.