On Friday bionic ear company Cochlear will release its results, with investors expecting some update on its sales in China.
As companies release their annual results over the next two weeks, more will be revealed about the state of Australia’s relationship with its largest trading partner.
Heightened political tensions, which have increased in the wake of the Russian invasion of Ukraine, and US House Speaker Nancy Pelosi’s visit to Taiwan, have dashed hopes for any medium term reset of the relationship under a Labor government.
They will also continue to add caution to comments made by those doing business with China despite – as BHP’s results showed this week – the significant economic gains Australia already enjoys from business ties with the world’s second largest economy.
TWE’s reinvention in the wake of the imposition of 170 per cent- plus tariffs on Australian wine to China, then one of the its largest single sources of profits, in November 2020, and its long term commitment to the Chinese market in the face of many political headwinds, would make a Harvard MBA case study.
More of CEO Tim Ford’s strategy of selling Penfolds wine made in California’s Napa Valley and pushing ahead with making Penfolds in China will be outlined in the company’s results.
Cochlear has been selling its implants to China for more than 25 years and first announced plans for a $50m investment in China with the construction of a factory in the city of Chengdu in 2017.
It will be interesting to hear chief executive Dig Howitt’s news on how the company has been going in China in the wake of continued Covid shutdowns and how well its big investment in its Chinese factory is progressing.
A wide range of listed companies have exposure to China including Lendlease, Bubs, Blackmores, Costa, Goodman and Worley, as well as resource giants BHP, Rio, Fortescue and Woodside.
Others such as fund managers Magellan and Platinum are exposed through their investments in Chinese stocks.
With China remaining closed to most Western journalists and visits from foreign business people, politicians, analysts and world leaders for more than two years now, the latest batch of results provide a rare insight into what is actually going on in China through the prisms of the individual companies – in as much as the companies themselves provide the information.
In many cases companies investing in China include the results in a broader category of “Asia”. But with the size of the China market and events of the past few years severely slowing its economic growth, analysts should be prepared to probe deeper into some of the China-related results from the companies they cover.
There are two arms to Australia’s economic exposure to China – companies selling directly into the China market and the overall global impact of Chinese economic growth on Australia, particularly its impact on commodity prices.
BHP’s operations span both of these aspects.
CEO Mike Henry, whose company has done well out of its sales of coal and iron ore this year thanks to demand from China, was taking an optimistic view of the outlook for its economy in his comments on the release of his company’s results.
While commodity prices have been falling because of continued bad news about the Chinese economy in recent months, Henry was confident that there would be a pick up as it came out of its Covid lockdowns, bolstered by ongoing government policy support.
“We expect China to emerge as a source of stability in the commodity market in the year ahead, with policy support gradually taking hold,” he said.
One has to hope he is right, but all evidence is that the continued lockdowns in China and its physical closure to the rest of the world, its crackdown on entrepreneurs and the overborrowed property market are becoming a serious drag on its economy.
Once seen as temporary factors, the question is what kind of China will we see in 2023 as a result of these forces.
In the minutes of its latest board meeting the Reserve Bank said it was expecting the Chinese economy to grow at 3.25 per cent – well short of the authorities’ target of 5.5 per cent.
“Members noted that the Chinese economy had contracted by 2½ per cent in the June quarter, which was much more than anticipated, with Covid-19 restrictions reducing activity significantly,” it said, adding that the “Chinese real estate sector remained weak, despite some recent policy support” but like Henry, the RBA board is looking to government stimulus policies to provide the country’s growth engine.
The difficulty of assessing whether the economy will open up – by moving away from lockdowns and opening it up to travel – is that China is having its own version of an election this year. The event is the 20th party Congress, expected to be in November but with no date announced as yet. In the past, these Congresses were part of an orderly transition of leaders, each having two five-year terms.
In another era, that would mean President Xi would step down in November having served 10 years in the top job. But with his determination to stay on indefinitely, Xi wants to get through the Congress with no doubt over his leadership and his ability to deliver for the Chinese people. Hence his determination to show his economically damaging zero-Covid strategy is working and his high profile rhetoric on Taiwan.
It will take until after the Congress, and possibly after the Chinese new year holidays in early 2023, (which are seen as potential Covid spreaders), for anyone to make a judgment about whether the economy and it citizens can return to some form of normalcy, like the rest of the world post Covid, or whether Xi is using Covid to permanently close doors to the rest of the world.
China’s central bank this week cut its official rate by 10 basis points in response to slower than expected growth figures.
Another unquantifiable factor is the serious decline in morale in gateway cities like Shanghai and Hong Kong, which have traditionally played key roles in connecting China with the rest of the world.
In Shanghai, citizens are increasingly angry – indeed on edge – with the continued resort to lockdowns at the drop of a hat. This week saw the scenes of angry people pushing their way out of Shanghai’s Ikea store as security guards sought to close shoppers inside because a person who had Covid had visited the store.
In Hong Kong, expats are leaving and its own onerous Covid quarantine requirements, in addition to the increasing controls by the Chinese government on ordinary freedoms, are deterring business visitors and tourists.
Henry may be right and China’s policy stimulus may help hold up its economic growth over the next year. But China is a country built on global trade which is closing its doors and using heavy- handed approach to its own citizens, dampening what has been a key engine of its growth.
The annual profit results season is a time when more detail emerges of Australia’s ties with its largest trading partner.
But politics aside, the structural factors within China are also showing that the world – and Australia – will have to become less dependent on the Chinese economic growth engine.
Albanese’s woolly pricing signals on critical minerals
Just like the great wool stockpile of the 1990s, a mountain of government-owned rare earths can do more damage to a fragile market.
Mortgage stress drops to lowest level in two years – but 1.4m still at risk
Australia’s most indebted households are beginning to feel the effects of monetary easing, as mortgage stress falls to its lowest level in nearly two years - but 1.4m people are still at risk.
On Thursday Australia’s largest wine company, Treasury Wine Estates, will release its annual results giving an insight into its ambitious China strategy.