The Australia-China trade relationship will make a quick recovery in 2023 and these companies will benefit

Nick Sundich Nick Sundich, March 21, 2023

The Australia-China trade relationship is gradually defrosting after a difficult couple of years.

This is good news for a number of ASX companies that are reliant on China and have consequently struggled with investor sentiment in the past few years.

But will it be back to business as usual straight away?

 

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What’s the big deal about the Australia-China relationship anyway?

China is important to Australia economically for a variety of reasons.

Firstly, the two countries have a significant trade relationship with one another.

In 2018, Australia-China two way trade was valued at over $200 billion AUD, making China the largest source of imports for Australia and accounting for nearly 30% of all imports and around 25% of all exports.

This strong economic relationship has been driven by geographic proximity, cultural affinity and other factors such as China’s large population and rapidly expanding middle class with significant purchasing power.

This makes China an attractive destination for Australian businesses who are looking to expand their operations or increase their export potential by taking advantage of the opportunities that exist in China.

Additionally, Chinese investment in Australia has increased substantially in recent years as companies have looked to take advantage of the country’s robust economic environment and reliable legal system.

 

The sectors and companies most exposed to the Australia-China relationship

According to Bloomberg, the one ASX company reliant most the Australia-China relationship is iron ore miner Fortescue (ASX:FMG).

With iron ore an important element in steel and steel such an important industry and contributor to economic growth in China, Fortescue’s iron ore is in hot demand.

Nonetheless, this company has arguably less upside to a normalisation of Australia-China ties than others.

This is because trade never seriously slowed down in the way it did in other sectors and also because of weak iron ore prices at the moment.

Another sector with a lot to gain is the travel and higher education sector, given how important China was to both of them.

However, there are few (if any) ways to play these thematics on the ASX.

And you could argue normalisation of Australia-China relations might not be a good thing for the travel, given it will force margin contraction due to downward pressure on airfares.

 

So how can you play the normalisation of Australia-China trade?

The companies with the most upside to normalisation of Australia-China trade are food and beverage stocks because trade actually did decrease due to diplomatic spats.

Examples include Treasury Wines (ASX:TWE) and infant formula stocks such as A2 Milk (ASX:A2M) and Bubs (ASX:BUB).

The wine industry was one of the worst hit by the freeze in Australia-China relations, given the imposition of tariffs by the Chinese government.

TWE was Australia’s biggest exporter of wine to China and its earnings slumped from $78.2m to just $2m in just 12 months.

The company has been trying to pivot to other markets into Asia as well as North America but none could replace China. At this stage, TWE is not banking on tariffs being lifted, although it could well pursue the market again if tariffs are lifted.

As for infant formula stocks, they were never the victim of tariffs but sales were reduced due to lockdowns. With lockdowns now a thing of the past, we can expect to see direct sales recover as well as a resumption in the so-called daigou trade.

The daigou trade involved Chinese people or businesses buying products outside China to sell to those living in China.

It was an important sales channel for infant formula companies amongst other Australian firms targeting Chinese consumers.

Now that travel is back, it will resume and companies like AuMake (ASX:AUK) that ran shops for the daigou trade can expect to see a recovery.

 

Australia-China trade resumption is an opportunity, but investors must be selective

Not all companies with exposure to China will automatically benefit from the nation’s re-opening.

Some never saw a decline in trade in the first place and so have been and will continue to be in a state of ‘business as usual’.

Others have other barriers to their recovery that cannot be resolved just by China’s re-opening.

But companies heavily reliant on China and that suffered just because of lockdowns are set to benefit as Australia-China trade recovers to pre-COVID levels. .

 

 

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