The tensions between Australia and China are intensifying. The Australian government is pushing for an independent investigation into the origins of COVID-19. In retaliation, China accused Australia of parroting the United States in advocating an inquiry. The Chinese Ambassador, Cheng Jingye, warned Australia that Chinese consumers might  boycott Australian goods and services if they pursue the investigation.

If Chinese consumers refrain from buying Australian goods and services, how will the Australian economy suffer?

The sectors that depend on China will feel the heat. Such as the:

  1. Mining sector

  2. Education and tourism sector

Mining:

The Australian mining sector is export-oriented. The exportation of minerals and resources is forecasted to account for more than 70% Australia’s mining revenue in 2020. The spike in demand for Australia’s minerals and resources is causing domestic investment and output to surge.

In particular, iron ore is the largest revenue generator in the mining industry. China and India’s growth in steel production are driving up the demand for Iron ore. To put China’s demand into perspective, China accounts for 80%($56.63 billion) of Australia’s iron ore exports. Without China’s fast-paced industrialisation Australia would likely not generate as much money exporting iron ore.

Therefore, the current diplomatic issues with China is not a favourable scenario for the Australian mining sector.

However, Australia will not be the only country that suffers. China will also suffer through weaponising trade against Australia. Because Australia is currently supplying 61% of China’s iron ore and 53% of its coal. Meaning it’s a two way street between China and Australia.

Anyhow, the economic coercion of China will likely have a significant impact on the big players in the minning sector. If the China-Australia tensions worsen then BHP, RIO, and NCM would likely suffer a bearish decline.

Stocks to Watch:

Stocks:

Trading Price @ (1/5/2020)

Weekly Gains/ Losses

BHP (ASX: BHP) $29.84 -1.68%
Rio Tinto (ASX: RIO) $82.59 -5.61%
Newcrest Mining (ASX: NCM) $25.15 -10.53%

Education/ tourism:

Over the past couple of years, Australia was able to attract many tourists from Asia successfully. In particular from China, India, and Hong Kong.

Chinese tourists are a vital source of income for the Australian tourism industry. Tourism Research Australia reaffirms this importance as they estimate Chinese visitors have the largest tourism expenditure of any international market in Australia.

Also, Australian universities would take a massive hit if Chinese students stopped travelling to Australia to pursue higher education. COVID-19 is already causing Australia to suffer from a decline in university enrollments. However, if Chinese- Australian tensions intensified, then the Australian government would see a significant slump in university revenue.

Many Australian universities generate substantial revenue from international students. Because international students pay higher tuition fees than domestic students. Among all international students, China accounts for 38.3% of enrollments in Australian universities.1.7 million Chinese international students enrolled in the higher education sector in 2019).

If Beijing extends travel bans to Australia in 2021, then Australian universities are expected to see $12 billion +  wiped off their revenue.

Thus if the inquiry escalates China-Australia relations, then we should see stocks within the travel, education, leisure, and consumption industries fall.

Stocks to watch:

Stocks:

Trading Price @ (1/5/2020)

Weekly Gains/ Losses

Star Entertainment (ASX: SGR) $2.73 12.81%
Qantas (ASX: QAN) $3.62 6.16%
IDP Education: (ASX: IEL) $14.10 2.17%
Treasury Wine Estates (ASX: TWE) $9.45 -2.07%
A2 Milk Company (ASX: A2M) $17.95 -3.60%

Overall, if an inquiry saw China’s relationship with Australia deteriorate, then the ASX would experience a bearish trend. Because, any conflict, as seen with the US-China trade war and the US-Iran crisis, injects fear into the stock market. While an escalation in Australia-China tensions would not cause a significant slump, a decline is still possible.

 

 

 

 

Here is our free, uncomplicated, and extensive ASX portfolio

https://youth-investment-group.com/portfolio/

Here is our free, uncomplicated, and extensive breakdown of smart COVID-19 Strategies

https://youth-investment-group.com/2020/04/09/how-to-profit-off-smart-investments-during-covid-19/ 

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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

Written by Jaewon Jung, Associate of YIG.

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