China is a much bigger threat to the ASX bull run than COVID

ASX bulls have been hanging out for any piece of good news regarding a vaccine for COVID‐19, but it’s China should be keeping a wary eye out on.

Just as you think things couldn’t get any worse between Australia and our largest trading partner, the relationship just took a turn for the worse.

Prime Minister Scott Morrison defiantly stated that Australia won’t compromise on its sovereignty and security as China warned against making the Asian giant an enemy, reported Bloomberg.

China-Australia spat poses key risk for ASX investors

Australian business leaders who have been urging the Morrison government to tone down on the fiery rhetoric and offer gestures towards reconciliation will be disappointed.

The diplomatic chest beatings have not only gotten louder, but the relationship is likely to get worse before getting better.

The breakdown in Sino-Australia relations is putting the 43% S&P/ASX 200 Index (Index:^AXJO) bounce back from the COVID market meltdown in March at risk!

China is bigger than COVID

While its conceivable that the ASX can continue to climb even if it takes the world longer to get on top of the pandemic, it’s hard to imagine the bull run staying intact if China bans even more Aussie imports.

Chinese authorities have already moved to ban or restrict a range of Aussie goods entering that market. This includes copper, wine, barley, beef and timber, just to name a few.

The worry is that the black list will expand significantly and include iron ore. Not only is this Australia’s top export earner, China is really the only customer on the other side of the equation.

Brazil stepping up to the plate

This could come as Brazil’s exports of the commodity recovers from the COVID fallout. The rebound is already happening.

The latest data showed that Brazilian iron ore shipments increased by 64% week-on-week, or 7% year-on-year. This is the second highest level of the year of 8.1 million tonnes, according to UBS.

“Overall, Brazilian iron ore shipments have sequentially increased since the first quarter,” said the broker in a note issued on Monday.

“This explains the ongoing uptick in Chinese port inventories of Brazilian iron ore.”

ASX stocks at risk

Our mining giants like the BHP Group Ltd (ASX: BHP) share price and Rio Tinto Limited (ASX: RIO) share price have a lot of lose in the China-Australia tiff.

They aren’t the only ones with an over reliance on the Chinese giant. The Treasury Wine Estates Ltd (ASX: TWE) share price, A2 Milk Company Ltd (ASX: A2M) share price and Blackmores Limited (ASX: BKL) share price have a lot riding on China.

Hopefully both sides will find a much needed circuit breaker for worsening geopolitical tensions.

More reading

• Global fund managers are bullish on these 3 things
• Why a2 Milk, Crown, Immutep, & Suncorp shares are dropping lower
• Why the Aventus (ASX:AVN) share price is rising today
• ASX 200 down 0.3%: Altium FY 2021 guidance, Crown drops, insurance shares sink
• Can Magellan (ASX:MFG) prosper in a market dominated by Macquarie (ASX:MQG)?

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended A2 Milk, Blackmores Limited, and Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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