Key ASX shares in the wine and dairy sector could be in the firing line as trade tensions look to escalate between Australia and China. A recent article from Bloomberg reports that China is considering targeting more Australian exports, following calls into an independent inquiry into the coronavirus pandemic.
Here are the latest developments on trade tensions and the key stocks that could be impacted.
Escalating trade tensions
According to the article, China is considering enforcing further trade barriers and tariffs on Australian imports, including wine and dairy products. The article states that Chinese officials have listed potential goods from Australia that could be subject to stricter quality checks and tariffs. It is also possible that China could encourage a consumer boycott of Australian products, however a formal stance has not been acknowledged.
The speculation of further economic retaliation follows China's action to block meat imports from 4 Australian slaughterhouses and the enforcement of an 80% tariff on Australian barley on Monday. Calls by the Australian Government for an independent inquiry into the coronavirus pandemic are thought to have fuelled economic retaliation from the Chinese government.
Which ASX shares are in the firing line?
A2 Milk Company Ltd (ASX: A2M) is one of the few shares on the ASX that has managed to withstand the turmoil caused by the coronavirus pandemic. Despite the company's resilience thus far, sanctions and trade restrictions on its products to China could cause major damage.
The infant formula company relies heavily on consumer demand from China to fuel revenue growth. Currently, a2 Milk reports it has a 6.4% share in the lucrative infant formula market in China and the company recently spent NZ$200 million of its marketing budget on ads in China.
Treasury Wine Estates Ltd (ASX:TWE) is another company with heavy exposure to China. Australia is the 5th largest exporter of wine in the world, with China accounting for the majority of the volume. The operations of Treasury Wine reflects the wine industry's reliance on China, with the company generating more than 40% of its total profits from Asia. The company's prestigious and luxury brands, such as Penfolds, are highly popular in the Chinese market and offer better profitability margins.
Foolish takeaway
China is Australia's most important trading partner – Chinese consumers and businesses are a reliable source of demand for many Australian goods and services. As China emerges from the coronavirus pandemic, demand will play an important role in the recovery of Australia's economy.
