Economic and trade relations between Australia and China continue to expand, offering investors new and exciting opportunities to tap into the one of the world’s most exciting regions. The recent signing of the China-Australia Free Trade Agreement (CHAFTA) will only strengthen ties between the two countries by enabling increased trade and foreign direct investment. For investors in the region, understanding this dynamic relationship might be instrumental in unlocking trading opportunities that intersect the stock, commodity, currency and CFD markets.
To help you get started, the following article looks at the performance of the Australian markets and the influential role China plays in those markets.
Australia’s Stock Market
The ASX 200 – Australia’s main equities gauge tracking the performance of 200 top companies listed on the Australian Securities Exchange – has rebounded in recent months following a sharp selloff at the start of the year. The index is trading well off its recent bull market highs, having suffered several setbacks over the past 12 months. A slowing Chinese economy has been one of the most influential factors precipitating the decline. That’s because China’s growth since the 1970s has provided Aussie companies with a massive end-market in which to sell their products and services. With the world’s fastest growth engine slowing, Australian companies are beginning to feel the pinch. In its wake, a two-way trade relationship is developing, giving Australian companies the opportunity to tap into the next phase of China’s development.[1]
However, China’s transition away from investment and exports toward consumption will take time, which could create added volatility in the Australian stock market. To get a sense of China’s direction, recall that its economy expanded 6.9% in all of 2015, a 25-year low.[2] Growth in the world’s second largest economy is forecast to slow over the foreseeable future as Beijing adjusts its development goals.
As it turns out, more and more Chinese companies are vying for a listing on the ASX. Some of the most recent Chinese stocks to get listed on the Australian Securities Exchange include Global Fortune Investment, WONHE Multimedia Commerce, OneAll International, Enice, Dongang Modern Agriculture, Traditional Therapies Clinics and XPD Soccer. All of these companies have joined the Australian Securities Exchange in the past year alone.[3]
Many investors expect China’s slowdown to be painful, but it doesn’t have to be if you prepare accordingly. Despite a slowing Chinese growth engine, Australia’s stock market still offers tremendous opportunity for gain. The easyMarkets trading platform provides real-time access to Australia’s ASX index, allowing traders to lock-in at fixed spreads for greater price transparency.
The Australian Dollar
The Australian dollar, or Aussie for short, is one of the world’s foremost commodity currencies. It’s considered a “commodity currency” because Australia is a major producer and exporter of mining and agricultural commodities. Nations, companies and investors wishing to trade with Australia must do so in the Australian currency. As such, the Aussie is heavily influenced by the price of commodities. For this reason, it has faced a massive decline over the past two years as oil and iron ore prices have plummeted. Over that period, the AUD/USD exchange rate has declined by about 20%.
You might be asking, what does China have to do with any of this? It turns out that China is the world’s largest consumer of most commodities. Bank of America Merrill Lynch summarized this succinctly in a 2015 report.
“China is both the largest producer and largest consumer of aluminum and iron ore, and the largest consumer of most other commodities. In the past 10 years, commodity demand growth in China represented between 50% and 100% of global consumption increases across most major commodity markets.”[4]
As you’ve no doubt guessed, China buys a lot of its commodities from Australia, making the Aussie particularly sensitive to swings in Chinese demand. By almost all accounts, Chinese demand for commodities has declined in recent years due to China’s slowing economic growth.
“The Aussie is one of those interesting currencies,” says James Humpherson, senior currency dealer at easyMarkets. “Australia is only the 12th largest economy in the world, but its currency is one of the top-five most commonly traded. That’s because it has the ‘3 Gs’ that many traders look for – geology, geography and government policy.”
Geology has given Australia abundant natural resources that it can sell on the global market. Geography has positioned the country close to the world’s second largest economy. Government policy has led to a stable economy and stable high inflation.[5] All of these factors make trading the Aussie especially exciting.
easyMarkets offers one of the biggest forex platforms in the world, allowing traders to access the major Australian currency pairs, including the AUD/USD, GBP/AUD and EUR/AUD.
All About Commodities
By now, you should know that Australia is an export-driven economy whose currency and trade relations depend on commodities. Now you’ll learn a little bit about the country’s top commodity exports.
Australia produces just about everything, from iron ore to gold all the way up to beef and dairy. In 2014, Australia’s top-ten goods ands services exports were ranked as follows (% share):
- Iron ore and concentrates (20.2%)
- Coal (11.6%)
- Natural gas (5.4%)
- Education-related travel services (5.2%)
- Personal travel (excluding education) services (4.4%)
- Gold (4.1%)
- Crude petroleum (3.2%)
- Beef (2.4%)
- Aluminum ores and concentrates (including alumina) (1.9%)
- Wheat (1.8%)[6]
As you can see, eight of Australia’s top-ten goods and services exports are commodities.
Investors interested in commodities trading might consider contracts for difference (CFDs), which are essentially cash settlements for commodities bought and sold on the open market. This ensures that the next bushel of wheat or barrel of oil you buy doesn’t get delivered to your front door. Most investors find that settling the contract difference in cash payments as opposed to the physical delivery of product is much easier. We think you’ll feel the same.
easyMarkets offers one of the largest CFD commodities trading platforms in the market, giving investors direct access to precious metals, energy and agricultural commodities.
A Final Word on CHAFTA
Unless you’ve been living under a rock, you’ve probably heard of the CHAFTA agreement referenced at the beginning of the article. The China-Australia Free Trade Agreement officially came into force on December 20, 2015 after more than a decade of negotiations. The deal essentially eliminates several tariffs and labour mobility barriers between China and Australia, which means both countries will be getting a lot more of each other over the next 13 years (when the agreement is fully implemented).[7]
The Aussies have expressed a great deal of optimism about the agreement, with Prime Minister Malcolm Turnbull describing it as a “historic trade deal” that is “absolutely critical for Australian jobs in the future.”[8]
Australia’s Minister for Trade and Investment Andrew Robb had this to add:
“This historic agreement with our biggest trading partner will support future economic growth, job creation and higher living standards through increased goods and services trade, and investment. China, with its population of 1.4 billion people and rapidly rising middle class, presents enormous opportunities for Australian businesses well into the future.”[9]
Whether you’re excited about the agreement or hold some reservations, increased bilateral trade between Australia and China will have significant implications on both economies.
Essential Resources
To keep track of latest developments and commentary regarding Australia, China and other regional economies, visit forex.info. easyMarkets recently released a short video on China that may help traders navigate the latest developments in the world’s second largest economy.
For an overview of the Australian economy, including a complete breakdown of trade activity, employment, current account deficit, monetary policy and 2016 economic outlook, visit the Australia Country Profile page.
[1] Parliament of Australia. Australia’s economic relationships with China.
[2] Mark Magnier (January 19, 2016). “China’s Economic Growth in 2015 Is Slowest in 25 Years.” The Wall Street Journal.
[3] Jonathan Shapiro and Matthew Smith (March 8, 2016). “Chinese companies vie for ASX listings at any cost.” Australian Financial Review.
[4] Sam Ro (August 11, 2015). “China is the world’s largest consumer of most commodities.” Business Insider.
[5] Stephen D. Simpson. “The Australian Dollar: What Every Forex Trader Needs To Know.” Investopedia.
[6] Australian Government, Department of Foreign Affairs and Trade. Australia’s Trade at a Glance.
[7] China-Australia Free Trade Agreement: Outcomes at a glance. Australian Government, Department of Foreign Affairs and Trade.
[8] James Massola (October 21, 2015). “Labor finally approves China-Australia free trade agreement.” The Sydney Morning Herald.
[9] China-Australia Free Trade Agreement (ChAFTA). Australian Government, Australian Trade Commission.
