CHINA'S foreign policy under the new leadership deserves closer scrutiny. Developing closer trade ties with emerging economies such as Latin America, Africa and Russia is important because China needs to deepen economic and political relationships with more allies. An obvious choice is Australia, which is the world's sixth-richest country.

The new strategic partnership between China and Australia signifies the diplomatic priorities of both countries to foster stronger relationships on all fronts. Such status will facilitate high-level dialogues between senior officials in Australia and the Chinese leadership on an annual basis. China has offered this status to only three other countries: the UK, Germany and Russia.

Trade ties between China and Australia are close. China is Australia's largest trading partner and Australia is China's seventh largest trading partner. While China's overall trade volumes grew 8.2 times over 2000 to 2012, bilateral trade with Australia surged 14.3 times.

China runs a sizable trade deficit with Australia, and the bilateral trade deficit has increased 28 times over 2000 to 2012. Imports from Australia as a share of total imports in China charged up in a straight line from 1.8 percent in 2003 to 4.7 percent in 2012. Chinese exports to Australia have proven to be much more resilient than other developed economies during bad times.

Natural resources

Natural resources for China are set to assure growth for Australia.

Australia supplies much of China's energy needs. More than 90 percent of Australia's exports to China are primary commodities, and more than half of these are iron ore. In particular, Australian iron ore has been gaining market share in China over the past five years, rising from 41.3 percent of ore imports in 2008 to 47.2 percent in 2012.

China has become an increasingly important market of Australian commodity exports.

From 2001 to 2004, Japan was the largest market for Australian iron ore exports. Since 2004, Australia's exports to China surpassed those of Japan and have since risen rapidly to around 70 percent of Australian iron ore exports in 2011. Japan and South Korea imported most of the remaining 30 percent.

Mining is the backbone of Australia's economy. According to a report by the Australian Bureau of Resources and Energy Economics, there has been a significant increase in the value of investment in the mining sector over the past decade.

In 2011 and 2012, investment in new capital expenditure in the mining sector was of 53 percent private new capital expenditure. Australia now has 87 mining projects in the "committed stage," which have an estimated total investment value of A$268 billion (US$275 billion). Australia's nominal GDP in 2012 was approximately A$1,488 billion. If we assume five years of investment period, annual capital expenditures would amount to about A$54 billion, or 3.6 percent of GDP. No wonder the Australian dollar is so sensitive to China's growth numbers.

Australia's share of total Chinese annual outward direct investment has increased from a mere 0.4 percent in 2006 to 4.2 percent in 2011. Australia is the largest destination for Chinese investment, excluding Hong Kong, the Cayman and Virgin Islands.

Risks ahead

There lie risks ahead.

While historical facts are encouraging, worries over Australia's over-dependence on commodity exports to China are intensifying as China's growth cools. In 2012, the bilateral trade deficit narrowed for the first time in more than eight years, primarily due to much slower import growth in China. In particular, the value of iron ore imports fell 9.4 percent. This slowdown will arguably continue in the medium term as China carries out structural reforms aimed at rebalancing the economy. China's first-quarter GDP growth at 7.7 percent scraped below market estimates and aggravated the prevailing pessimism.

Despite these clear risks, Australia has decided to deepen its relationship with China. It has no choice. China will most likely still be Australia's biggest market for commodity exports in the coming decade, even if its growth decelerates. When it comes to doing business, absolute market size matters as much as market growth. Australia's confidence in China shows it understands the current economic slowdown mostly engineered by Beijing.

Controls on the property market have already lasted more than two years, and the authorities have no intention to relax controls anytime soon. It's safe to say that an imminent bursting of the property bubble is unlikely. The frugality campaign aimed at fighting corruption and state extravagance is also self-initiated. Other than external trade - over which China has no direct control - the slowdown hitherto is intentional and under control.

Restraint on property investment and ongoing appreciation of the yuan in spite of subdued export growth suggest the Chinese government is committed to rebalancing the economy at the expense of short-term growth. The idea of reform is to put China's economy on a more sustainable growth path. Meanwhile, the urbanization drive will create corresponding demand for all sorts of goods and primary commodities, fuelling China's demand for Australian exports.

On April 8, Australian Prime Minister Julia Gillard announced that the Australian dollar will become the third currency, after the US dollar and yen, to trade directly with the yuan. Two weeks later, the Australian central bank said it plans to invest about 5 percent of its foreign reserves in Chinese government bonds. Australia has chosen to forge closer financial ties with China at this time, showing its faith in the Chinese economy.

China's temporal growth deceleration will unlikely derail friendly relationships firmly rooted in economic interdependency. The new emphasis of green development and environmental protection under Xi Jinping's leadership could potentially open the door to cooperation with non-mining companies. There are plenty more opportunities to exploit.