One of the key questions concerning Australia’s future growth is the extent to which China’s once-torrid pace of growth continues to slow. After all, China is Australia’s largest trading partner, absorbing more than a third of the country’s exports.

In 2013, for instance, China accounted for 27.4 percent, or USD141.6 billion, of Australia’s total international trade, swallowing up 35.2 percent, or USD91.6 billion, of the country’s exports.

And while Australia may be comparatively tiny in terms of population, at just 23.5 million people, the country’s resource riches mean that it’s also regarded as an important trading partner from China’s standpoint. In fact, last year Australia ranked sixth among China’s trading partners.

According to the World Bank, Australia’s exports of goods and services accounted for 21 percent of gross domestic product (GDP) in 2012. By comparison, exports only accounted for 14 percent of US GDP that year.

Fortunately, the Reserve Bank of Australia (RBA) believes China’s growth in infrastructure investment is likely to remain strong for the foreseeable future, given Chinese policymakers’ plans to facilitate further urbanization.

The Chinese government is targeting an urbanization rate of 60 percent by 2020, an increase of 6 percentage points from the current level. The RBA says this would mean an additional 100 million people migrating from agricultural and rural areas to the cities, and an estimated CNY42 trillion (USD6.7 trillion) of investment, equivalent to 74 percent of one year’s worth of GDP, spread out over the next six years.

And since so much of this investment is dependent upon the commodities that are naturally abundant in Australia, that bodes well for the country’s exports over the medium term, even if prices of raw materials such as iron ore and coking coal are slumping in the near term.

In the central bank’s quarterly Bulletin, the RBA observed that even with the significant rise in China’s infrastructure investment in recent decades, the level of infrastructure is still below that of developed-world countries.

In particular, the bank cites Chinese cities’ relative lack of urban rail transit infrastructure compared to countries in the West. For example, Beijing’s rail system is just slightly more than one-third the size of Tokyo’s transit system and just 13.5 percent the size of London’s transit system, based on kilometers of rail per million people.

Investment in rail infrastructure, which is one of the most dependable modes of transportation in China, given the country’s vast space and varied terrain, should benefit Australia, which is the world’s largest iron ore exporter, because rail construction is so steel intensive.

Beyond fulfilling cities’ needs for greater transport infrastructure, such as rail and paved roads, the Chinese government is also emphasizing municipal infrastructure, particularly pipes, sewage works, and flood control systems.

While infrastructure spending will help foster the country’s rapid urbanization, it can also be used to bolster the economy amid periods of uncertainty. As the RBA notes, “In addition to being employed to advance the longer-term development of the Chinese economy, infrastructure investment has also been used as a countercyclical policy tool to stimulate economic activity.”

During the Global Financial Crisis, for example, the Chinese government rapidly implemented a stimulus program targeted at infrastructure to help support the country’s economy. So should China’s economy surprise to the downside or the global economy hit the skids, then that could spur additional spending in this area.

While commodities prices have fallen substantially from their recent highs, it’s possible that higher production volumes could offset these declines, as a number of mining projects that attracted investment during the resource boom are finally coming on line.

Portfolio Update

Speculation continues to swirl around Aggressive Portfolio constituent GrainCorp Ltd’s (ASX: GNC, OTC: GRCLF) prospects as a takeover target.

Of course, the main suitor is still Archer Daniels Midland Co (NYSE: ADM), which remains GrainCorp’s single largest investor, holding 19.85 percent of shares outstanding despite the fact that late last year the Australian government spurned its AUD3.2 billion bid for GrainCorp.

Late last week, Australian brokerage Bell Potter boosted its rating of GrainCorp’s shares to “hold” from “sell,” because it believes there’s a 50 percent chance ADM will renew its bid for the firm. The broker observed that GrainCorp’s share price continues to include a takeover premium even though the company itself is “overvalued.”

More recently, the Australian government has made comments that seem to lay the groundwork for a future acquisition, while ADM has said it intends to increase its stake in GrainCorp.

Meanwhile, earlier this month, GrainCorp announced an AUD200 million investment initiative called “Project Regeneration.” The three-year plan is intended to enhance the efficiency of the company’s grain-storage network through the consolidation of grain-storage sites and improvements in rail-loading.

As part of this process, GrainCorp will consolidate its network to the 180 high-volume storage sites that receive 90 percent of the grain it handles. The company has what it terms a “long tail” of 72 smaller sites that handle just 10 percent of the company’s grain volume. Presumably, the company plans to shutter many, if not all, of the latter.

This network of 180 sites will then be organized into 34 clusters, each with one or two primary hubs, to facilitate greater efficiency in rail transportation.

These improvements will be further augmented with rail-loading upgrades, such as by streamlining operations with single-load points and pre-positioning bins, while also installing high-speed elevators. Management believes these reforms and upgrades will triple the average load rate.

The company intends to fund the project from cash flow and debt facilities.

GrainCorp’s mix of analyst sentiment remains largely neutral, at two “buys,” eight “holds” and four “sells.” The consensus 12-month target price is AUD8.45, which is slightly below where the stock trades currently. This suggests that analysts believe the stock trades at a slight premium to fair value.

Although there are now upstart competitors challenging GrainCorp’s regional dominance, it still has the power of incumbency. And we believe ADM will do what is necessary to realize a gain on its investment, either through an eventual takeover or by providing financial assistance to help GrainCorp maintain its dominance.

GrainCorp is a buy below USD10.