There has been a lot of discussion about China lately – the Free Trade Agreement, financial stability and growth and the impact on the Australian economy, and Chinese investment in Australia.
With the help of Paul Wan, Director of Paul Wan & Co, part of our international affiliation of accounting firms (Morison KSi), we take an insider’s view of China and its impact on Australia.
According to Austrade, one in every three Australian export dollars earned is from sales of goods and services to China. On top of that, 80 % of the value of Australia’s export growth in 2013-14 was from trade with China. It’s not surprising then that we have a fixation with the welfare and continued consumption of Australian goods and services by China and China’s rising influence on the Australian economy.
Chinese growth – an insider’s view
China’s economic growth has been spectacular: until recently growing at around 10 per cent per annum from a low base to arguably the leading global economy.
While construction and infrastructure projects were the primary drivers of growth, the opening of the Chinese economy to foreign investment in the late 1970s saw it become the ‘factory of the world.’
The fuel driving this growth was a massive increase in China’s consumption of resources – steel, iron ore, copper – you name, it China needed it. You can see this consumption growth reflected in Australia’s export statistics.
With an increase in wealth came an increase in consumerism with a growing middle class. And, with a growing middle class came a property boom with many Chinese able to afford better housing. Demand for housing escalated and development after development was launched, many snapped up within hours of launching. The cost of this success was a rapid increase in the cost of living, high property prices fuelled by speculators, and corruption.
With the global financial crisis, demand for China’s goods started to decline creating excess capacity, factory and company closures, and staff lay-offs. China refocused to bolster the strength of its local market and reduce the economy’s dependency on the export market. Banks were asked to reduce their loan exposure and Government projects scaled back. Starved of funds, some companies sought funding from underground banks – shadow funding – paying extreme rates of interest that further aggravated the slow down and excess capacity.
In early 2015, China’s stock market linked to Hong Kong’s exchange with the Shanghai-Hong Kong Stock Connect trading link. Within 3 weeks, both the Shanghai and Shenzhen rose 15% in their respective index. By early March, the index was up 1,000 points – companies rushed to list and ride the market. Some US-listed Chinese companies delisted and relisted in China.
The resulting market bubble burst in mid June this year. Efforts to stablise the market failed with companies massively inflated – the average PE is around 90 to 110. The share price has no fundamental value. In context, it’s hard to see how the value of companies on the stock exchange can rise when China’s GDP is declining.
Looking forward
The People’s Bank of China recently reported that it expects economic growth to be 6 – 7 % over the next three to five years – although businesses ‘on the ground’ advise it’s lower at around 5.6 – 5.8 %. Interest rates were cut for the sixth time in 12 months in late October to stimulate growth and meet targets.
To maintain growth, the Chinese Government is embarking on austerity and transformation programs focused on bolstering knowledge technology and transfer. We can see some of the fruits of this commitment to knowledge transfer with China now Australia’s largest export market for services representing 13 % of our global services exports.
China has also eased restrictions on foreign owned investment firms no longer requiring them to partner with local managers.
In terms of outbound investment, China’s State Council recently bolstered its offshore investment program – the Qualified Domestic Individual Investor program. Currently in a pilot program with the Shanghai Free Trade Zone, the program allows for an expanded range of offshore investments in greenfield and joint venture projects, real estate, shares, bonds, insurance products, etc. You can expect to see the effects of this in Australian development projects.
Free Trade with China
Australia’s Free Trade Agreement with China is set to pass Parliament with the Labor Party negotiating a series of reforms to protect workers’ rights. The amendments put in place minimum wage safeguards for temporary skilled migration, new 457 visa conditions linked to relevant trade licenses, and the capacity to impose a ceiling on the number of new work agreements for 457 visa workers.
Australian expansion into Asia is increasing for businesses of all sizes. In a recent survey, the ANZ reported that the majority of Australian businesses that have expanded into Asia have experienced a substantial lift in profits, with almost 40 % of small businesses making a return on investment within 12 months.
If your business is not already looking at its international potential, is it time to review the opportunities?
Paul Wan works extensively throughout Asia in corporate advisory, cross-border IPOs, and audit. His firm, Paul Wan & Co is part of our international affiliation of accounting and advisory firms through Morison KSi.
Regardless of where your business is looking to expand internationally, we’re likely to have a local partner who can help guide you – because nothing replaces local knowledge and contacts.
