Australia’s Asian ties grow closer

Published 21 February 2013 07:56, Updated 21 February 2013 08:14

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Paul Bloxham

Australia’s economy is becoming more tied to the Asian economies than ever. This is occurring through trade, population and financial linkages. These trends appear set to continue and provide Australia with many growth opportunities.

Asian links dominate Australia’s trade. Asia accounted for 50 per cent of Australia’s exports in 2000 (now 73 per cent) and this is forecast to rise to 80 per cent by 2020.

Recent investment in the resources sector, particularly LNG, should help drive this rise, in which China and Japan remain major export partners.

Rising demand for Australian goods is also set to come from south Asia, including India and Indonesia, as their middle classes expand and demand for resources rises.

These south Asian nations are largely self-sufficient in meeting demand for industrial commodities – such as iron ore and coal – but as they continue to industrialise and urbanise, demand for imported commodities should rise.

Population flows into Australia are already mainly from Asia. In 2010-11, China overtook Britain as the largest source of migrants to Australia.

India, too, is a large source of immigrants. North and south Asia account for the bulk of international student enrolments and there has been a strong rise in tourist arrivals from Asia.

Financial flows are still dominated by the West. Australia is, however, increasingly being used by investors to gain exposure to the Asian growth story. Australia’s strong Asian links, deep financial markets and strong institutional framework have supported this “buy Australia to buy Asia” trade.

Trade

Exports from Australia are dominated by China and Japan (see chart). These two countries accounted for 48 per cent of Australia’s merchandise exports in 2012. With significant recent investment in capacity to produce LNG, iron-ore and coal, we expect the share of Australia’s exports to China and Japan to rise to almost 60 per cent of the total by 2020. We expect exports to Asia to rise to 80 per cent of total exports by 2020.

Australia has a long history as a large commodity exporter, though the types of exports are shifting. Australia has gone from living off the sheep’s back, to being a big miner of industrial commodities and will soon become a huge global energy player.

Government estimates suggest that Australia will become the largest global exporter of LNG by 2017 (overtaking Qatar).

The rise in the Asian middle class is also expected to spark a rise in demand for food, supporting Australia’s agricultural exports.

Australia’s services exports, including education services and tourism, are also driven by demand from Asia. Students from both north and south Asia dominate international student arrivals, the strongest growth in recent years due to student arrivals from China.

On the other side of the ledger, Australia’s imports from Asia have risen rapidly in recent years, as the global manufacturing base has shifted to Asia. Imports from Asia have risen from 43 per cent of the total in 2000 to 54 per cent of the total in 2010 and we expect them to rise to 60 per cent by 2020.

Financial links

Australia’s financial linkages are still mainly with the West. This reflects both historical links and that Western financial markets are still the deepest and most liquid. Much of the stock of Australia’s gross financial liabilities is still accounted for by Australian financial institution borrowing from Western financial markets.

Financial links with the West dominate both foreign investment in Australia as well as Australian investment abroad.

Asia remains a small part of this story in a direct sense, though investment in and from China is rising off a very low base. Given the massive pool of savings in Asia, the shifting centre of gravity of the global economy towards Asia and rapid deepening of Asian financial markets, it seems likely that Australia’s financial ties to the region will increase, particularly given the already strong trade ties.

There is already also a clear sense that, given Australia’s strong trade links to Asia, investors are already investing in Australia to increase their exposure to Asia’s growth potential.

A clear example of this is the extent of foreign investment in Australia’s mining sector (RBA estimates suggest that the mining sector is about four-fifths foreign-owned) and foreign interest in buying Australian government bonds.

Australia offers investors strong Asian links as well as deep and liquid financial markets and a strong institutional framework.

Paul Bloxham is chief economist at HSBC Bank Australia.

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