Why is China so important to Australia?

Why is China so important to Australia?

Australia and China, are their equity markets “decoupling” after becoming highly correlated? Their FinTech connection is immensely strong. With many FinTech connections between the two countries.

Australia finds itself as China’s sixth largest trading partner. Furthermore, it is China’s fifth biggest supplier of imports and its tenth biggest customer for exports. Lastly, twenty-five per cent of Australia’s manufactured imports come from China

Prior to 2020, China had been Australia’s largest trading partner for many years. 

With Australia providing many of the commodities that China’s industries rely on, Australia and China have become increasingly intertwined.  

However, Australia-China relations have deteriorated since Australia announced its decoupling from  China in 2020.

Despite such change in stance, it is unlikely that Australia and China’s equity markets are decoupling.   

First, the trade dependence between the two countries is increasing. Even though the Australia-China trade spat  shows no signs of abating, the trade connection between China and Australia remains strong, so the equity  market correlation between them will not diminish.  

Some people may argue that Australia’s two-way trade with China declined by 3% in 2020. However, this fails to consider that Australia’s global two-way trade declined 13% during this period. China is still Australia’s  largest two-way trading partner in goods and services. Accounting for nearly one-third of Australia’s trade  with the world. 

In 2021, China-Australia trade in goods showed a growth trend. According to data released by the General  Administration of Customs of China in January 2022 [1], the total import and export of goods trade between China and Australia for the year 2021 reached $231.212 billion, an increase of 35.1%. The amount of imports  from Australia increased by 40.64%, while the amount of exports to Australia increased by 24.16%. At the same  time, the Australian Government released a report in the Resources and Energy Quarterly in March 2022 [2],  reflecting the strong momentum of Australian exports to China. Let’s take the iron ore export as an example. 

Australia’s iron ore exports to China reached close to $126 billion in 2021.

Representing 82% of Australia’s  total iron ore export earnings. By value, Australia’s exports to China in 2021 were 33% higher year-on-year,  while volume was around 2.8% higher. As trade flows between Australia and China become more frequent  and larger. The stock market volatility of both countries will tend to be similar. 

Moreover, the financial capital penetration remains high. As the financial institutions of the two countries become closer, there will be more transnational investors. With increased cross-border investment, stock  market movements in one country will be more likely to affect the stock market in another. 

In the report on Chinese investment in Australia for 2021[3], KPMG and the University of Sydney compile a  dataset that tracks Australia-China investment in detail. According to the dataset, Chinese investment in  Australia declined by 69.8% in 2021, from USD 1.9 billion in 2020 to USD 0.6 billion. There were eleven  completed transactions in 2021, compared with 20 transactions in 2020. 

Australia-China  investment suffered a huge decline.

But Australia overall remains the second largest recipient country behind  the United States for accumulated Chinese investment during the period from 2005 to 2021 [4]. In this case,  the dependence on the equity market between those two countries cannot be underestimated.  

In conclusion, with the trade and investment cooperation remaining at a high level, it is too early to conclude  that the equity market relationship between Australia and China is decoupling. 

Written by Yiwen Song, Edited by Ally Tutay

[1] December 2021 Import and Export Commodities Country (Region) Total Value Table (US$ Value) http://www.customs.gov.cn//customs/302249/zfxxgk/2799825/302274/302277/302276/4127455/index.html [2] Iron ore | Resources and Energy Quarterly March 2022 

https://publications.industry.gov.au/publications/resourcesandenergyquarterlymarch2022/index.html [3] Demystifying Chinese Investment in Australia 2022 

https://assets.kpmg/content/dam/kpmg/au/pdf/2022/demystifying-chinese-investment-in-Australia 2021.pdf 

[4] Global ranking based on AEI https://chinapower.csis.org/china-foreign-direct-investment/