It's no secret that the bilateral relationship between Australia and the People's Republic of China has been on the rocks for a while now. A few months ago, I penned a piece discussing the ASX's 'China problem'. This all started last year when Australia called for an independent inquiry into the origins of the coronavirus pandemic. Following that, the Australian government has also been criticised by China for its comments on human rights violations in Xinjiang. As well as in Hong Kong. A resulting diplomatic tit-for-tat ensued, which has escalated into a series of trade boycotts from China. Last year saw China impose import restrictions on Australian wine and barley.
Today, a number of ASX companies have been severely damaged by these actions. Treasury Wine Estates Ltd (ASX: TWE) shares have seen some pain from these Chinese import restrictions. A2 Milk Company Ltd (ASX: A2M) and Bubs Australia Ltd (ASX: BUB) shares have gone backwards over falling Chinese exports and tightening daigou channels. Other China-exposed shares like Bega Cheese Ltd (ASX: BGA), Costa Group Holdings Ltd (ASX: CGC) Blackmores Limited (ASX: BKL) are no doubt watching nervously.
Well, things certainly aren't getting better on the China front. In fact, things look to be getting worse. Much worse.
The ASX's China threat grows
A report in The Sydney Morning Herald (SMH) today outlines how one of Australia's top military generals has warned his troops that Beijing is "already engaged in grey-zone warfare" and described "a high likelihood" that armed conflict could break out between China, the United States, and, by extension, Australia.
The issue driving these tensions is the island of Taiwan. Australia's defence minister, Peter Dutton, last week made similar claims, stating that a conflict over Taiwan "could not be discounted". Taiwan is a democratic and self-governing island. But China claims it as part of its own territory. It has even promised to 'reunify' it with the mainland by force if necessary. Under the American Taiwan Relations Act, the US is obligated to assist Taiwan in its defences. And Australia, in turn, is bound to defend the United States under the ANZUS treaty.
If this awful outcome does eventuate, it will make the disputes of the past year or so look pitifully mundane by comparison. All bets would be off. And it's likely that all Australia-China trade would cease. That's a big deal for the ASX's largest companies. Especially miners like BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG).
Let's hope it doesn't come to that. But for investors, this is certainly an area to keep a close eye on going forward.
