Siamese Twins: The Australian Dollar’s Mandarin Connection

Australia – culturally, economically and politically, has a Mandarin connection. In the economic sphere, this connection means that the Australian Dollar remains influenced by China. Recent data showing a deceleration in factory activity in mainland China for April hurt market sentiment and sent the AUD tumbling to around 1.0250. Now is a good time to buy AUD and take advantage of its Mandarin Connection.

Growing bilateral trade

China is Australia’s largest trading partner as a result of China’s voracious appetite for iron ore, liquefied natural gas, and coal. Exports to China facilitated Australia’s strong economic performance despite a global economic recession since 2007. Conversely, Australia’s technological advantages have been sourced by China to aid in their economic development. 

In 2011, total trade with China (imports plus exports) totalled AUD$121.1 billion. When compared with the size of Australia’s economy at AUD$853 billion, trade with China was 13.5% of its GDP. Notably, Australian exports (22.5% growth) are growing faster than imports (7.5% growth), pointing to a widening trade surplus that is getting bigger and bigger as China’s burgeoning economy requires more hard commodity inputs. In fact, the largest Australian export products to China were iron ore (AUD$44 billion), coal (AUD$4.5 billion), crude oil (AUD$2.9 billion) and wool (AUD$2 billion).

Siamese Twins: Attached at the Hip

In 1990 just 4.6% of Australia’s exports were bound for China; Last year the figure was 27%. The strong growth in bilateral trade between China and Australia is engendering an economic Siamese twin relationship akin to that of Canada and the USA. Yet it is still some ways off the Canadian-US relationship where 74% of Canadian exports go to the USA and 50% of Canadian imports derive from the USA. Given the growth in trade between China and Australia they could be heading to a level similar to that of Canada and the USA, which will re-define the political and economic relationship between both countries. This is already evident in the Australian Central Bank’s announcement last year of plans to invest 5% of its foreign reserves in Chinese government bonds, which followed swiftly a previous announcement that Australia was becoming the third country after the USA and Japan to establish a direct currency trading link with China.

Recently there have been concerns that Australia’s blissful growth during the world economic crisis could be set for a ‘hard landing’. This has been compounded by a sizeable fall of around 20% in the prices of iron ore and coal since the middle of 2012 amid concerns of slowing economic growth in China. The world and investors need to adjust to a paradigm shift of China as a country with strong economic growth, yet from a larger base this will necessarily begin to slow. Over time, investor sentiment will set correct expectations and this will provide support for the AUD as Chinese data is seen as positive signs of world economic recovery.