6 months ago

The Australian economy just got a whole lot closer to China

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GettyImages 472723818GETTY IMAGESAustralias close ties to China have underpinned 25 consecutive years of economic growth in the island nation. And the recently signed China-Australia Free Trade Agreement (ChAFTA) will bring the two even closer.

Under the agreement, which went into effect at the end of 2015, more than 86% of Australian exports worth almost AUD $90 billion now enter China duty free. This will rise to 93% in 2019 and 98% in 2029.

Given 32% of Australian exports ship to China, this trade deal represents a critical milestone in the relationship with its largest trading partner.

More than just commodities

Chinas rapid industrialization over the last decade has led to unprecedented demand for commodities. Australia, blessed with the worlds largest mineral resources of iron ore and significant reserves of coal, has been well placed to satisfy this demand.

However, the importance of China to Australian trade goes far beyond commodities, with services the next big opportunity.

australia chart 2

Source: Australian Trade and Investment Commission

The Chinese middle class is now estimated to number more than 100 million people, according to Credit Suisse research, significantly outnumbering the American middle class. This group is expected to make upone-third of China's population by 2030, according to The Economist Intelligence Unit.

As the middle class swells and incomes continue to rise, Chinese consumers increased spending power is driving higher demand for Australian service and agricultural exports.

Under ChAFTA, service exporters will receive much improved market access to mainland China, with the tourism, education, and healthcare sectors in particular standing to benefit.

Australian agricultural exporters will also enjoy significant advantages over major competitors, including the US, Canada, and the European Union, according to the Australian Department of Foreign Affairs and Trade.

These improving trade terms and shifting demographics should ensure Australias AU$121 billion bilateral investment relationship with China continues to strengthen. The implications for growth could be significant.

If youre looking to access the Australianmarket, consider theiShares MSCI Australia ETF (EWA), or broaden your search to other countries.

EXPLORE: Research other countries in the Worldviews series

MORE: Heres how Australia could continue to ride the Asian boom

INFOGRAPHIC: Everything you need to know about the Australian economy

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