China, maybe we’re just not that India

THERE’S little doubt China’s return as a buyer of Australian commodities is a welcome development for farmers and miners.

However, the sudden thaw in a frosty relationship might have more to do with China’s concern about the rise of India than a newfound respect for Australia.

China’s lifting of its bans on Australian coal, barley, wine, and seafood has not been officially announced, which is hardly a surprise as the ban itself was never officially acknowledged.

But the timing of the shift from trade antagonist to trade friend is occurring as much bigger changes in Asia slip into view, including the displacement of China by India as the country with the world’s biggest population and a faster rate of economic growth.

 The overall Chinese economy, measured as gross domestic product (GDP), is many times bigger than that of India, but the increase in India’s population to an estimated 1.43 billion while China remains stalled at 1.42 billion, thanks to the lingering effects of its one-child policy, is an example of other changes in the two Asian giants.

For Australia, the overdue emergence of India could not have come at a better time.

Undoubtedly costly as China’s bans on Australian products have been, an unexpected win from China’s belligerence is that new markets have been developed.

Take barley, for example, with once China-bound exports rerouted to Mexico, while rock lobster is being delivered to India.

The deal, under which Western Australian lobster will land in Mumbai, sent a clear message to China because it is being done under a freshly signed trade agreement that will progressively open India as a prime export destination with greater growth potential than China.

Wine is another example of shifting trade patterns, and while Australian wine remains on the unofficial (and illegal) Chinese list of banned products, it is being welcomed in India, even though alcohol consumption is tightly controlled in that country.

Under the terms of the Australia[1]India Economic Cooperation and Trade Agreement signed late last month, the tariff on premium Australian wine exported to India will fall from 150 per cent to 75 per cent, then sliding down to 25 per cent over the next decade.

Despite the tariff remaining (albeit at a declining rate) it is better than the blanket ban imposed by China, which severely affected some Australian wine exporters.

Iron ore, WA’s most valuable export, will remain heavily exposed to Chinese demand simply because China produces more than half of the world’s steel.

But iron ore could become the next flashpoint in the Australia-China trade relationship because of a newly created Chinese government commodity purchasing agency (which is expected to become the sole buyer of most imported commodities).

The primary aim of the China Mineral Resources Group is to create an organisation that can control both the flow of commodities into China and their price, with the consolidation of buying power likely to help China to play favourites with suppliers: such as giving preference to Brazilian and African iron ore over material shipped from WA.

None of this should really be a surprise because China remains a command economy with government controls over all aspects of business and private life, a structure that is starting to fray at the edges as seen in the almost farcical treatment of COVID: lockdowns one day, open slather the next.

India has its problems, of course, but they are largely those of a messy liberal democracy and not a communist dictatorship where all authority is vested in one man, and likely to stay that way for many years.

Examples of India’s rise can be measured in many ways with the most important being that it has developed confidence to chart its own course as neither an imitation of the Western world nor a follower of the Chinese-Russia form of autocracy.

The New York Times newspaper recently described India as potentially the “decisive force in a changing global system”.

Oil, the critical commodity in most economies, was cited as an example of India’s emergence as the new power player in international politics and economics.

When the Western world, led by the US and Europe, put a ban on Russian oil exports, India declined to follow because it had more to gain buying cheap Russian oil. India’s foreign minister, Subrahmanyam Jaishankar, said while India was keen on a rules-based world, it was in his country’s best interest to acquire cheap oil.

“Since February (last year) Europe has imported six times the fossil fuel energy from Russia than India has done,” Jaishankar said.

“So, if a $US60,000 per head society feels it needs to look after itself, and I accept that as legitimate, they should not expect a $US2,000 per head society to take a hit.”

India’s economy, admittedly coming off a smaller base than that of China, is expected to grow at a world-leading 7 per cent this year, whereas China is expected to grow by 4 per cent, or less, depending on the effects of its COVID policies and ongoing trade war with the US.

Australia, with historic and cultural ties closer to India than China, is perfectly placed to hitch a ride on India in much the same way it has travelled for two decades on the back of China.

WA lobster and wine heading for Mumbai is a modest but potent symbol of future trade opportunities, and that message will not be lost in China, which has started to repair the damage done by its unprovoked attacks on Australia but has a long way to go before it can be trusted.

ESG fail

AS if the Australia/China trade relationship is not sufficiently tricky for investors to negotiate there is another problem emerging: the failure of many Chinese companies to comply with environment, social and governance (ESG) ratings.

Until now, institutional investors with legal requirements to observe ESG rules have turned a blind eye to China’s blatant infringement of human rights, censorship and near-universal surveillance of everyone in the country.

That could be changing with a sustainable ratings firm, Sustainalytics, downgrading three big-name Chinese technology companies – Tencent, Baidu and Weibo – for their “non-compliance” with United Nations principles.

While the criticism is likely to be ignored over the short term inside and outside China, the seed has been sown, with one small US-based fund saying it was obliged under its investing rules to sell the stocks named for ESG shortcomings.

Watch this space.