• Will we see any special dividends from the banks as bad debt loan provisions are unwound? Watch here.

Don’t poke the China bear

16122020_Don't poke the China bear

Don’t poke the China bear

The Reserve Bank of Australia is taking us down the Japanese and European path, obsessed with record low interest rates whilst spending little time on productivity growth. Following “emergency low interest rates” of 3.0 per cent during the Global Financial Crisis, the current 0.1 per cent cash rate is causing havoc amongst the retired generation, which number 4 million people or 15 per cent of our population. This generation unfortunately face Hobsons choice of going up the risk curve, often speculating on risk assets, or eating into their capital.

Meanwhile, our children and young adult’s generation are facing an enormous boom in the property market, spurred on by record low interest rates. Unless they receive assistance from their parents or grandparents, they are going to have a lot of debt for many years.

My 26-year-old son attended two auctions last night. One apartment went for 23 per cent above the initial “price guide” and the other sold for 13 per cent above what I had thought was a reasonably inflated “price guide.” Post strata fees and council rates, both properties would be on a rental yield of 2 per cent. It felt like bedlam at the auction house where many potential buyers were jumping over each other, paying up on the expectation record low interest rates will be with us for a very long time. And the Sydney property bubble will likely inflate further in 2021.

One cloud on the horizon, however, is the deteriorating relationship Australia is having with China.  After enjoying an enormous “pull-up effect” over the past three decades, China represents one third of Australia’s exports. On the other hand, Australia represents less than two per cent of China’s exports. Poking the China bear is not a smart idea given this overwhelming dependence.

Only with iron-ore (70 per cent of China’s imports) and LNG (50 per cent of China’s imports), does Australia have a position of strength.

China’s National Development Reform and Commission has just issued an edict banning Australian coal and this follows the imposition of punitive tariffs or unofficial bans on Australian wine, lobsters, timber, cotton and barley.

The following table lists China’s share of Australia’s exports.

Product Percentage
Nickel ore 100
Timber   95
Iron ore   83
Wool   77
Lobster   76
Cotton   64
Wood chips   57
Barley   54
Pharmaceuticals   47
ALL EXPORTS   33

One industry going through a lot of soul-searching is Education ($13 billion of exports).  China accounts for 31 per cent of Australia’s education exports, more than our next four largest markets combined. As they have become increasingly dependent on foreign students, Australian Universities have developed a lazy business model, charging double for foreign students, whilst promoting “on-line” lectures, group assignments and take-home exams.

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Chief Executive Officer of Montgomery Investment Management, David has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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10 Comments

  1. david mcgilvray
    :

    David. The most salient word you used was lazy.
    It applies to all our export industries.
    It is time for western democracies to create a new order. It will take time and pain.

    Australia, Europe, Us, Canada, India, ASEAN nations need to grab the dragon “China ” by the tail.
    India is a huge “poor ‘ Democracy.
    Let us subsidise their population in the medium term to create jobs and reduce poverty and show China the “door”.
    Same with Vietnam, Thailand, the Phillipines, Malaysia, Indonesia.

    Sit the bully boys on their tail.

    Yes there will be pain but it will be worth it in the long run.

    Signed,

    Dinosaur

    • Thanks David. The pull-up effect from China over the past three decades has meant some sub-optimal and lazy approaches. We are now over-reliant on one customer (China) and must diversify away or else Australia will remain in a very weak position from a trade perspective. It reminds me of a colleague at HBS, whose family were the biggest makers of brassiers in the US. When they won the Walmart account in the 1980s they thought they had struck gold. However, over time, the power shifted entirely to Walmart, who had started their own manufacturing in China, and my friend’s Company had to reinvent itself to survive the competition from its biggest customer.

    • Actually, I’m advocating diplomacy. At least ensure all countries on the same side speak “simultaneously with the same message” and then we are less likely to be “picked off” (as is currently the case). Exporting 33% of our product to China and importing sub 2 per cent of their exports puts Australia in a weak position when it comes to throwing our weight around. I don’t think bringing a knife to a gun fight is the smartest tactical move.

  2. Thanks David,
    I feel the RBA’s latest machinations are just another step in a series of kicking the proverbial can down the road – part of a government and institutional mindset that’s been in place for the last 20 years. Rather than dealing with contemporary realities, Australia’s grand strategy appears to be hoping for conditions to ‘return to normal’ within a mythical ‘rules-based global order’.
    Cheers, David.

    • Agreed David. I just wish the “leadership” focused on GDP per capita and productivity growth. These are the real economic drivers, and that track record is fairly unimpressive!

  3. The reserve bank lowered unrest rates to combat the rising Aussie dollar.

    My best guess is they saw this coming .
    As the joint is going ok.
    China may well be in trouble economically,and that’s the reason for all for he noise .
    The way the China runs their currency can only really end in in disaster for the Chinese people.
    This has happened before in history
    Peoples needs and wants don’t change it’s just as exchange rate mechanisms go awry.

  4. Ah, I see why my comment on a previous post is still ‘awaiting moderation’. Fear will cloud the most logical persons vision.

  5. You guys financial advisors and many more are forever pushing the need for diversification so what happened to Australian industries it’s all been to easy for many years .don’t blame the government for what is happening China is being what they are to many countries bullies and expect those countries to bow or jump if that doesn’t happen they spit the dummy .so all those companies that are doing it tough should start marketing those Aussie products and diversify that’s what we are all told to do and that’s what your companies should have been doing many years ago

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