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China: Australia’s greatest economic vulnerability

Australia’s dependence on China as a trading partner and as a major influence on commodity prices naturally makes China its greatest vulnerability. Yet there are reasons to be optimistic.

Robert Penaloza, Head of Australian Equities

When it comes to Australia, our view within the equities team is one of cautious optimism. What many investors don’t know is that Australia’s economy is heavily reliant on China. In fact, we believe the country’s dependence on China as a trading partner and as a major influence on commodity prices naturally makes China its greatest vulnerability.

However, policymakers in both countries seem to be aware of this and are making efforts to minimise any possible domino effects. In China, authorities have increased their concerted efforts to address risks in the financial system, according to the Reserve Bank of Australia’s (RBA’s) April Financial Stability Review.

Australia’s central bank noted in the report that the steps taken by Chinese authorities are a positive development for the Chinese economy, and subsequently, the Australian economy that is partly supported by China. This year, we see little risk of a hard landing in China dampening Australia’s prospects. Chinese policymakers have been restricting capital outflows and tightening monetary policy in efforts to spur healthier growth that is less reliant on credit expansion.

Although China does have an outsized influence on Australia’s economy, it’s important to note Australia’s reliance on other countries in general. Overall, Australia is a country that’s rather dependent on external countries when it comes to commodities and resources.

While this can be looked at as a weakness, it may also be one of the country’s strengths and a testament to a country that is well-synchronised with global growth, particularly when it comes to where the global economy is right now, and where it’s heading. The world no longer operates in a vacuum, and countries like Australia that understand these global dynamics could be better positioned for the future growth of global markets. Australia hasn’t had a recession for more than 20 years, and that can be a sign in itself of how this understanding can provide long-term benefits.

Despite uncertainty, global markets look to be rebounding. Last year, economies around the world swung towards recovery. The global outlook for economic growth is strong, and commodity prices remain firm. Together, these are positive indicators for companies that have offshore exposure.

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