Girl wearing China Australia Flag

The Chinese economy is showing signs of losing steam in the second quarter. A slew of disappointing indicators have analysts around the world worried. The official Purchasing Managers Index fell to 50.4 last month, and based on current data, growth in the second quarter is expected to fall below 8 percent. The two main drivers of Chinese growth, investment and consumption, are showing broad signs of weakness. And this could be bad news, not just for China, but also for some of its biggest trading partners, with commodity-dependent countries like Australia, especially at risk. China is the world’s largest consumer of raw materials, and the ongoing slowdown could have ramifications for mining and metal exporters.

China is Australia’s biggest trade partner and a major consumer of its commodities. Australian exports to China were $64.8 billion in the year to June 30, primarily driven by demand for iron ore. Mining and mining investment make up around 14 per cent of Australia’s gross domestic product (GDP). China is targeting growth of 7.5 percent for 2012, and most of that growth is expected to come from consumption rather than the investment that drives demand for Aussie commodities.

Marius Kloppers, chief executive at BHP Billiton plc (ADR) (NYSE:BBL), the world’s biggest mining company, has admitted that expansion plans are looking more and more risky, keeping in mind the current economic uncertainty. BHP was expected to spend close to $80 billion on some of its major new projects in Australia that included the $30 billion Olympic Dam expansion project in South Australia and the $20 billion export facilities at Port Hedland in the Pilbara region. Rivals Rio Tinto plc (ADR) (NYSE:RIO) and iron ore producer Fortescue Metals Group Limited (ASX:FMG), also agree that there is a drop in Chinese demand for steel and other metals. Chinese iron ore demand seems to have plateaued, and this could be bad news for these companies. A hard landing for China’s economy could also affect major Australian banks like Australia and New Zealand Banking Group (ASX:ANZ), Commonwealth Bank of Australia (ASX:CBA), National Australia Bank Ltd. (ASX:NAB) and Westpac Banking Corporation (ADR) (NYSE:WBK), because of the prospect of a rise in the island’s unemployment rate, and drastic fall in real estate prices.

Australia, however, stands to benefit from China’s demand for clean energy. The burgeoning Chinese middle class will need more and more energy, and natural gas is the fuel of the future. Coal accounts for 70 per cent of the Chinese energy mix, and the country is trying its best to shift away towards gas and other renewable sources. Woodside Petroleum Limited (ASX:WPL), Australia’s largest operator of oil and gas production, Santos Limited (ASX:STO) and Oil Search Limited (ASX:OSH) are geared to capitalize fully on the expected rise in LNG demand in the near future. All three of them are currently undertaking major expansions plans in LNG mining and production capability to meet this growing demand.