China slow-down creates local headwinds

Australian Ethical Investments’ decision to downgrade their macroeconomic assessment of Australia’s largest trading partner, China, from positive to neutral has implications for local commodity exporters and the wider economy, claims the fund manager. 

Aggregated economic data showed the Chinese economy had decelerated and settled into historically lower growth levels as its government attempts to rebalance the economy away from purely fixed asset investment towards services and self-consumption. 

Investors should be alert to this risk and position themselves accordingly, the fund manager cautioned, as Australia’s long, uninterrupted economic expansion is increasingly facing headwinds that are largely out of its control. 

The firm’s research stated China-bound exports as a percentage of Australia’s GDP increased from 3.4 per cent in 2009 to 6.1 percent last year. 

Furthermore, the value of exports to China increased by $21 billion last year, as many expansion projects in the Pilbara and Queensland came on-line to mostly satisfy Chinese demand which effectively boosted local economic growth up to the most recent March quarter, the research said. 

In the March quarter, the research noted 80 per cent of Australia’s 1.1 per cent GDP growth came from the mining sector, where a sizeable share can be attributed to Chinese consumption. 

It may be too early to say Australia is headed for a downturn but investors should consider the wider economic risks posed by the Chinese commodities consumption decline, said Australian Ethical international equities trust portfolio manager, Nathan Lim. 

“Consider the miners’ economic contribution in terms of state royalty payments and good paying jobs - we have to ask ourselves which other sectors in this country are going to pick up the economic slack left behind by these retreating forces,” he said.