China and the West Decoupling: Impact of US-China Relations on Australia

US China Tensions: Impact of US-China Relations on Australia

Today’s Profit Watch can’t help but turn its eyes to China.

One can’t help but feel Winston Churchill would describe it in the same way as he did Russia: a riddle, wrapped in a mystery, inside an enigma.

That’s certainly the way investors should feel about it. For example, I often see scary charts and statistics trotted out showing China’s enormous debt to GDP.

A glance at last week’s Economist magazine shows us why. The editors there point out the conventional metric had Chinese GDP at US$14 trillion in 2019.

But the men and women at the Economist applied their own measure — their Big Mac Index — to infer that Chinese output could be as high as US$26 trillion.

Hello! There’s US$12 trillion dollars difference here. That’s the equivalent of the Australian economy, multiplied by six.

Any investing decisions based around a Chinese GDP figure might as well use tea leaves and witch burning at the same time.

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Perhaps we can at least agree that the Chinese economy is getting bigger. The latest data gave it 3.2% growth in the second quarter of the year.

Chinese statistics aren’t so hot when it comes to reliability, but there are certain things that don’t lie.

One is the rising coal consumption as factories return to work and use energy again. And here in Australia we can see iron ore going out the door at US$100 a tonne.

The price is so good, in fact, that iron ore miners are falling over themselves to dig more up. The Australian reported on the weekend that the Pilbara players have applied for permission to export 90 million tonnes.

Presumably the Aussie government won’t do anything but cheer. More iron ore exports means more revenues via taxes and royalties, plus the capital spending is a boost to growth.

But how much iron ore can China absorb remains the question. Actually, there’s another one. Would China hit Australia where it hurts — stalling iron ore imports — for geopolitical reasons?

It’s not unreasonable to assume China will become more aggressive than it already is.

One reason is that China, after 30 years, now has its own navigation system operational. It’s called BeiDou and means that China is now no longer dependant on the US and the original GPS network.

The US government owns the GPS network. The previous Chinese reliance on this made this a strategic vulnerability. With this gone, China can project more power than it could previously.

Just how potent that power is will be clear once Germany makes a decision on whether or not to allow Chinese firm Huawei to bid for work as part of its 5G rollout.

We know the US and Australia have banned Huawei completely. The UK has minimised its involvement. But Germany is the last big test. Blocking Huawei here means the rest of Europe will follow too.

The catch is that China is Germany’s biggest trading partner. Blocking Huawei invites a Chinese response to lay tariffs on German cars selling into the biggest auto market in the world.

That’s not a decision that can come easily when the auto industry is on the verge of vast upheaval thanks to the electric disruption coming.

And yet US diplomatic pressure will be intense here, as the US still weaves powerful influence in Germany. Thus Germany will feel like she always has: trapped in the middle with threats on both sides.

My friend and colleague Greg Canavan says Australia finds itself in a similar position, if not one that’s worse. The conclusion leads to what he calls his ‘trade of the decade’.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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