China tension may hit half of Australia's benchmark stock index

Tensions with China have been rising. PHOTO: REUTERS

SYDNEY (BLOOMBERG) - The ongoing deterioration of Australia's relationship with its largest trading partner is seen impacting banks, consumer firms and tourism-related stocks that make up almost half the weight of the nation's benchmark index.

Since Prime Minister Scott Morrison called for an independent investigation into the origins of the coronavirus in April, tensions with China have been rising, with Beijing suspending Australian shipments of barley, halting some beef imports and starting an anti-dumping investigation into Australian wine. Sectors likely to be impacted by the friction account for around 55 per cent of the S&P/ASX 200 Index.

The risk of declining demand for Australian products may hit Treasury Wine Estates and online jobs advertiser Seek, while infant-milk formula maker A2 Milk Co and vitamin maker Blackmores may also come under pressure from consumers, Jefferies analysts led by Brian Johnson wrote in a Sept 7 note. A fall in China coal imports is also seen as a modest negative for transport firm Aurizon Holdings and may flow through to mining services operators such as Orica.

When the global economy starts to move back toward a more normal footing, the potential for less Chinese immigration and fewer tourists is seen hitting Australia hard. A drop in migrants may weigh on house prices, which would be negative for the nation's biggest financial firms including Commonwealth Bank of Australia and Westpac Banking Corp. Qantas Airways, Crown Resorts and Star Entertainment are among the firms that may bear the brunt of declining overseas visitors.

"The situation continues to deteriorate," Mr Johnson wrote. "Australia's economic prospects are inextricably linked to China, given inbound Chinese immigration has been a strong contributor to Australian gross domestic product (GDP), and China is our largest trading partner."

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