The stocks set to benefit from thawing relations with China

The last time Australia had a full formal meeting with the Chinese President was in 2016. A more hopeful time when we'd signed an extensive free trade agreement only two years prior and the idea of global lockdowns and a pandemic was unimaginable. 

It's pretty extraordinary when you consider that China represented 42% of our export market in 2020. It had dropped to 29.5% as recently as August 2022. There's been a lot of water under the bridge since 2016.

Since then, we've watched a distinct deterioration in our relationship with China, culminating in China's decision to place sanctions on $20bn worth of Australian exports in late 2020, including barley, beef, timber, cotton, lobsters and coal. It's worth noting that a ban wasn't placed on certain products critical to China like iron ore, wool and natural gas.

So that makes news of today's meeting between Prime Minister Anthony Albanese and Chinese President Xi Jinping all the more significant. 

Could it signify the start of the lifting of trade bans? 

Some hope that the Chinese President will offer some changes to support continued dialogues, though others are less convinced given Australia and China have vastly different priorities and political stances going forward. 

But all things going well, what would it mean should we start to see a repair in Australia and China's trade relationship? After all, the bans were nearly catastrophic for some Australian industries.

Readers might have some (albeit) fond memories of lobster being not only temporarily affordable but downright cheap for the average consumer in December 2020 when ships carrying shellfish were blocked from Chinese ports and we ended up with a surplus.

Similarly, the wine industry was forced into a dramatic reset. China was a $1.2bn market for Australian winemakers and now stands at $24.2million as of March this year. 

Industries have been forced to diversify and this is not necessarily a bad thing for Australia on the whole. The war in Ukraine ironically offered a buffer for a range of Australian industries. You can read more here. 

Could we eventually see a return to the trade relationship we once had?

The short answer, according to Henry Jennings, Senior Market Analyst and Media Commentator at Marcus Today, is no, but any resumption in trade will be a good thing.

"Situations like the war in Ukraine or China's ban on certain Australian exports have given companies pause for thought when it comes to diversification. It's not good to be dependent on one country. We can see Germany suffering from its cosiness to Russia for gas supply. We're unlikely to return to a situation where we're dependent on one major country for exports, even more so given political challenges," he said.

He pointed out that the market is hardly "popping the sparkling wine" when it comes to the news of the meeting as any thawing will take time. It's also worth highlighting some industries will benefit more than others.

The winners for trade with China

Normally when you think of exports to China, energy commodities are a standout. From that perspective, you might expect coal, gas and iron ore to be the immediate beneficiaries. Jennings doesn't expect to see a huge boost.

"China has been pragmatic about the exports it needs, so it has been soft on the coal ban. We're seeing coal prices ease a bit. Europe has been the epicentre for coal and gas prices but the winter is looking milder than expected. I don't think we'll see a huge jump in prices," he said.

On the flip side though, Jennings predicts that the food and drinks sector would be amongst the biggest beneficiaries of a change. In particular, crops and meat (including seafood). 

The ABARES forecast for the coming year predicts a bumper crop year. While companies have done significant work in diversifying exports to India and other parts of Asia, renewed trade with China could offer a boost and remove any chance of surplus.

Some of the names he sees as beneficiaries in the agriculture space include: 

• Graincorp (ASX: GNC) 
• United Malt Group (ASX: UMG) 
• Australian Agricultural Company (ASX: AAC), and
• Costa Group (ASX: CGC). 

Running alongside such companies, fertiliser companies could be set for a boon. 

The names he views on this front include Ridley (ASX: RIC) and Elders (ASX: ELD) but he notes that the slow demerger from fertiliser means that Incitec Pivot (ASX: IPL) would see some gains too.

You might recall earlier I mentioned the dramatic fall in wine exports. 

While Jennings views Treasury Wine Estate (ASX: TWE) as a natural frontrunner, he also suggests it will be wary. Plus the company has already reframed its exports to China, using French-made wines as one option and also launching Chinese Penfolds wines using locally grown grapes. 

That said, one opportunity he does see is in whisky, a growing space. Lark Distilling Co (ASX: LRK) could be in an interesting position for re-opening trade. 

The unexpected beneficiaries of thawed relations

While not specific to the trade bans, Australia's education and tourism industries were heavily reliant on China in the past. The combination of souring relations causing reputational damage, closed Australian borders and China's own highly restrictive approach to managing COVID-19 have meant losses on this front.

On the education front, Chinese student enrolments in Australian universities dropped by 40% between 2019-2021. These enrolments contributed approximately $12bn in revenue, around a third of the total international education income generated in 2019. 

While looser restrictions on COVID management in China would spell the biggest boost, reputational change can't hurt. The stocks that Jennings views as likely to benefit include:

• IDP Education Ltd (ASX: IEL)
• G8 Education Ltd (ASX: GEM), and
• Janison Education (ASX: JAN) 

Tourism is a similar story to education. It will take time to recover and Jennings believes companies like Experience Co (ASX: EXP) along with the airline companies Qantas (ASX: QAN) and Regional Express Holdings (ASX: REX) will be supported by a return in tourism numbers from China.

The final takeaways

Jennings is hesitant to be too excited about the discussion between the national leaders, though he believes it is positive.

"It's a start but we're not likely to see any overnight changes. A bigger boost for Australia would be the removal of China's COVID restrictions," he says.

The world has also moved on. While the trade bans were a tremendous hit at the time, Australia has learnt from the past and worked to diversify. The thawing in relations may spell a resumption in trade, but we're unlikely to ever return to such a level of dependence on any one country. That in itself has to be a good thing.

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