From iron ore to baby formula, electronic parts to fresh fruit and alcohol, China is buying everything you can think of, and that will soon make the world?s biggest exporter the world?s biggest importer within the next few years.

China already imports more compared to the U.S. from Asia, Africa, Oceania, South America and Eastern Europe. Furthermore, it is likely that China will surpass the U.S. to be the world?s number one importer within five years if the domestic economy continues to expand.

As the largest manufacturer, China has being the top importer of raw materials, parts and accessories for years. However, in terms of consumer goods, it still largely lags behind the U.S. This is changing as the country transitions from a manufacturing base to eventually the world?s largest consumer market. The Chinese middle class is becoming increasingly affluent as it displays increasing demand for consumer-related overseas products. Therefore, with the rise of the Chinese consumer, import growth will become increasingly consumer driven and will have a positive effect on the rest of the world in the coming years.

Australia is viewed as a proxy for Chinese economic growth as demand for Australian products reflect Chinese economic activity. It is the most China-reliant economy in the developed world with approximately one-third of exports going there. Previously, the yardstick was Australia?s mining boom. Now, it is demand for education services, food, wine, vitamins and tourism as China moves to consumerism. In 2013, 62% of total exports to China was for minerals. Last year, it was 56%. During the same period, consumer goods as a share of total exports has risen from 2% to 8%.

A recent demonstration showing China?s impact on Australia was in October when the Chinese government started a crackdown on high polluting factories and cities thereby reducing demand for iron ore, which had a negative impact on Australia?s Trade Balance Account and the Australian Dollar.

During the first quarter of the year, the price iron ore rose 16% and during the same period, the Australian dollar was up 6% against the U.S. dollar. Then in July/August when there were concerns of an oversupply of iron ore and falling Chinese demand, prices declined along with the Australian dollar. The Australian dollar has gone from a year-to-date high of 81.25 U.S. Cents in September to trade between 75-76 cents following the expected U.S. interest rate increase.

As China rebalances its economy towards consumerism, Australian commodity exporters will lose sales. Iron ore and coal will remain Australia?s biggest exports to China however; consumer goods are rapidly increasing including edible goods, medical treatments, alcohol and cosmetics. Moreover, when affluent Chinese are not drinking Australian wine or purchasing expensive cosmetics, they are sending their children to Australia for education and taking photos of koalas.

Chinese Consumer Confidence

Although consumer confidence is at 10-year highs due to rising incomes, the cost of education, healthcare and property continue to be a large financial burden for Chinese consumers. Debt levels are also rising with the average household using half their income to pay mortgages and consumer finance loans to support their lifestyles. This pressure is one of the reasons we expect that China?s full-year growth in 2018 will moderate to 6.5% as consumers prioritise spending.
However, Chinese consumers are more health-conscious than ever before with people wanting to live a healthier life and consume western products. If this demand continues despite rising debt burdens, then growth will be revised upwards in 2018.

HXL Partners

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