There is an old saying that when the US sneezes Australia catches a cold, however, in recent times this has shifted as China has become increasingly important to Australia, with many companies benefiting from trading with China.
It’s no secret that China’s real estate sector has been in trouble in recent years after experiencing over 20 years of property growth following the privatisation of property in the late 1990s. This was driven by urbanisation as millions of citizens moved from the countryside to the city. As demand grew, so did the size of property developers, but the sector became overheated, which caused China’s second biggest developer, Evergrande (HK:3333) to default on their debt and seek bankruptcy protection in the US.
Australia and China share a close economic relationship, particularly with trading commodities. Given Australia's role in the China property boom, the news about the impending collapse of Evergrande sent shock waves through Australia with fears that our property market would crash, which, as we know, didn’t happen.
Australia is one of the world’s biggest exporters of iron ore, and China is the largest consumer of iron ore. A collapse in China’s real estate market leads to a fall in construction, which reduces China’s demand for steel and other resources, including coal, copper, and aluminium, which is why the downturn in the Chinese real estate market impacted Australia’s mining sector.
With Evergrande back in the news, it is running into trouble trying to avoid a collapse. So, is the worst over or is there still more to come? I believe it is the former, as China has been aware of the issues with Evergrande and the challenges in the property industry for a long time. We know that it is always darkest before dawn, so is now the time to look at the ASX-listed companies that might benefit from a resurgent China?
We know BHP (ASX:BHP) Group Ltd (LSE:BHP, ASX:BHP) and Rio Tinto Ltd (ASX:RIO) are major iron ore exporters to China, which means any volatility in China’s construction and steel industries impacts their profits. The other companies that are also impacted include Fortescue Metals Group (ASX:ASX:FMG) Ltd, South32 Ltd (LSE:S32, ASX:S32, OTC:SHTLF, JSE:S32), Evolution Mining Ltd (ASX:EVN) and Sandfire Resources Ltd.
Right now, it is important to keep a keen eye on how Evergrande’s situation unfolds, as a sharp drop in demand from China could affect our miners and lead to a weaker Australian dollar. That said, the mining sector and others who export internationally will benefit from a lower dollar.
Smart investors will be watching China closely because if the worst is almost over, this could be a time when opportunity knocks.
Dale Gillham is the Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online at www.wealthwithin.com.au