APRIL 2015

Volume 12: Issue 3

www.sbrchina.com

ISSN: 1813-310X

Compliance Strategies

Pricing Techniques

Howard Sherman Doremus

Pointing the Way

Construction Industry Report

Australia Profile

Shenzhen Focus

Brands in China are using events for marketing in increasingly sophisticated ways

SHANGHAI BUSINESS REVIEW APRIL 2015 www.sbrchina.com 39

COUNTRY FOCUS AUSTRALIA

Tightening Trade TiesSino-Australian economic ties continue to be strong and

solid, with reliance on each other’s economies and a recently

announced Free Trade Agreement. By Kači Peringer

ustralia and China have “wonderfully

complementary economies”,

according to Danny Armstrong,

general manager for National Australia

Bank, China Banking. The relationship has

become increasingly cooperative, as the two

nations enjoy strong trade relationships

and are, at least globally, in relative close

proximity. Investment into Australia from

Chinese sources is high and continues to

grow. Their economic relationship has

blossomed in recent years, marked initially

by favourable currency arrangements and

reinforced by the recent announcement of

the Sino-Australian Free Trade Agreement.

In addition to the trade which has fuelled

most of the economic relationship in the

past, Chinese demand for products is

evolving through the growth of its middle-

class, and Australia is seeing the benefits

of this, particularly in education. Measures

now in place confirm a commitment on

both sides towards continuing and elevating

the relationship, demonstrating that the

potential in the Sino-Australian economic

partnership for the future is strong.

Resourceful partners

“For the better part of the last 20 years,

the China-Australia relationship has been

characterised by supply and demand,” says

Brett Evans, executive director for Atlas

Wealth Management. China is Australia’s

biggest trading partner in terms of both

imports and exports, with the majority of

this trade being in commodities. At the

same time, Australia is China's fifth-biggest

supplier of imports and its tenth-biggest

customer for exports. Iron ore is the biggest

export from Australia to China, followed

by other natural resources including coal,

gold, petroleum and liquid natural gas.

Conversely, according to the Parliament

of Australia, China currently supplies

Australia with 99 per cent of its

merchandise imports. Of those, 90

per cent are elaborately transformed

goods such as engineering, office, and

telecommunications products. “Australia’s

relative geographic closeness to China has

benefited both parties and elevated Australia

above that of South America and Africa as

a trading partner,” says Evans. Up to 10 per

cent of the cost of natural resources comes

from transportation, thereby promoting

Australia’s competitiveness because of its

proximity to the mainland.

China’s sustained demand for natural

resources has buffered Australia from

being harder hit by the global economic

slowdown. China requires these resources in

order to sustain its high rate of growth and

development, which has become a more

challenging aim in the past several years.

As China develops and its middle class

grows, it is believed that demand will shift

from natural resources to more elaborately

A

Commodities, like iron ore, still make up the majority of trade between Australia and China

40 SHANGHAI BUSINESS REVIEW APRIL 2015 www.sbrchina.com

COUNTRY FOCUS AUSTRALIA

developed products and technology. In June

2013, a McKinsey report on the Chinese

upper-middle class said business strategies

needed to reflect China's new rising incomes,

shifting urban landscapes, and generational

change, since “millions of Chinese are

trading-up and becoming more picky in their

tastes”. Australia has made a name for itself

as a supplier of resources to China, but risks

losing some of its competitive advantage

as a supplier of manufactured goods as

Chinese demand changes. There is scope

for Australia to remain a priority trading

partner because of a history of cooperation

and geographical advantage, but Australian

suppliers to China must be aware of these

coming changes.

Food and the FTA

Food security and trade in food products

is also emerging as a new trend in Sino-

Australian commerce. With Chinese media

overflowing with stories concerning food

safety, Chinese citizens, especially those

in the growing middle class, are starting to

demand more from food and other products.

“We have witnessed strong trade growth

in food, wine and agricultural exports in

recent years, and we have also seen growth

in areas such as education, tourism and

other services,” says Craig Aldous, general

Brett Evans, executive director for Atlas Wealth Management

de

20

What are the sectors in which Australian companies are doing well in China?

If we talk about what dominates in terms

of trade, it is hard to beat resources -

Rio Tinto and BHP Billiton, have more

than AUD40bn worth of trade a year

between them. In comparison the rest

of us are just minnows. I would also

say (wearing my hat as president of the

Global Mining Association of China)

that both the suggestion that iron ore and

other commodity prices are in permanent

decline, and the idea that the mining boom

is over are just not true. What happened

was that China caught the mining industry

by surprise, things were a little inflated for

a while, and now what we are seeing is a

readjustment as supply and demand begin

to match.

Peter Arkell, Chairman of AustCham Shanghai, shares his views on the

situation for Australian companies in China

Away from mining, there is a very vibrant

Australian business community here.

Financial services are well represented, so

is education and hospitality, construction

has a big presence, and we have a number

of Australian SMEs doing well here too.

However, you could say that Australian

investment in China is a little shallow,

we have these two mega companies, and

a number of smaller ones who are very

successful, but are they towing others

along? Are they bringing their suppliers

and clients to China too? I think this is an

area in which we can improve.

How would you summarise attitudes to China back in Australia?

I think there is something of a disconnect

between the attitude on the ground here in

China, where people are very optimistic (we

do a business sentiment survey every year

and respondents always overwhelmingly

express a positive or very positive outlook

for the coming 12 months), and attitudes

back in Australia which are more

negative. In my opinion there is a self-

induced malaise in that the analysts that

are reported in the Australian media will

often talk down the Chinese economy in

an ill-informed way. This then impacts on

the way that head offices and boards look

at their China strategy, and some decide to

withdraw capital or headcount.

What e"ect did the visit of Tony Abbott have last year?

Australian media will often talk down the

Chinese economy in an ill-informed way.

This then impacts on the way that head

offices and boards look at their China

strategy, and some decide to withdraw

capital or headcount.

SHANGHAI BUSINESS REVIEW APRIL 2015 www.sbrchina.com 41

INDUSTRY REPORT

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42 SHANGHAI BUSINESS REVIEW APRIL 2015 www.sbrchina.com

COUNTRY FOCUS AUSTRALIA

manager of Elders Fine Foods Limited.

This trend is certainly likely to continue.

A 2011 KPMG study of Australia-China

trade relations noted that “Chinese investors

see the benefit in securing land assets,

notably the source of food production”

and that investors have also been looking to

Australia as China’s closest Western trading

partner for the supply of food products.

“We will see demand for high quality food

and agricultural items continue to rise in

China, and more of this demand will be

met by higher levels of Chinese investment

upstream in the supply chain in Australia,”

Aldous says. Additionally, ‘As the trade

relationship in food and agriculture gets

more interdependent, we will see higher

levels of cooperation in the sharing of

technology, production techniques and food

safety management practices,” he adds.

A declaration of intent has been signed

regarding an Australia-China Free

Trade Agreement (FTA), with the actual

agreement to be signed later this year

coming into force when formalised by

both countries’ parliaments. Though some

are starting to question whether China is

producing so many trade agreements that

they are becoming less valuable, Australian

Prime Minister Tony Abbott claimed it

was “the most comprehensive agreement

that China has concluded with anyone”.

A significant area of benefit will be seen

by the Australian dairy and beef industries,

which will have tariffs removed. In the

other direction, Chinese exports to China

Australia including clothes, vehicles and

electronics will be tariff free. Both countries

will see freer access to service sectors such

as education, tourism and healthcare, and

according to Evans, the FTA will also

have a “massive effect on the financial

services industry”. Armstrong sums up

the agreement by saying that “It won’t

necessarily change volumes significantly

overnight, but is a really important political

signal between the two governments.

They’re saying, ‘Here’s our intention for our

economic relationship going forward, and

this relationship is open for business.’”

The investment scene

Although trade in goods has been a huge

part of the Australia-China economic

relationship, investment from China into

Australia has also been important and

influential. China is currently Australia’s

thirteenth-biggest investor. Armstrong

points to China allocating Australia a

RQFII quota, involving “trialling a number

of elements to enable qualified Australian

institutional investments, once in China

investors, to invest in China utilising

renminbi”, thereby cementing greater scope

for investment in the future. According to the

Australian Treasury, Australian businesses

have also invested in China, with a number

of notable successes.

As China continues its economic

liberalisation, and capital flows become

easier, there will be further opportunities for

Australian businesses to invest and expand

operations on the mainland. Although

growing investment levels benefit both

countries, the level of Chinese investment

into Australia has not been received well

by many of the latter’s citizens. The annual

Lowy Institute Poll has consistently shown

that a majority of Australians (currently

58 per cent) believe that too much Chinese

investment is being allowed into Australia,

providing a potential source of tension in the

relationship moving forward.

As developing human capital is a growing

concern in the Chinese market, Chinese

citizens are continuing to go to Australia

for university studies, in order to gain skills

and competitive advantage in the workforce.

This has created a growing market for

education and training, helped to cement

the relationship culturally, and resulted in

Craig Aldous, general manager of Elders Fine

Foods Limited

Danny Armstrong, general manager for National

Australia Bank, China Banking

<< Australia

has made a name

for itself as a supplier of resources to

China >>

<< Iron ore

is the biggest

export from

Australia to

China >>

ma

Th

ma

Th

SHANGHAI BUSINESS REVIEW APRIL 2015 www.sbrchina.com 43

COUNTRY FOCUS AUSTRALIA

links between learning institutions in both

countries. As levels of enrolment in higher

education institutions in China continue

to swell, the level of enrolment by Chinese

students in foreign universities will reflect

this surge.

Australia is a natural destination for

middle-class Chinese looking to study

abroad. Additionally, China is seeking

knowledge from Australia outside of formal

higher education: “There is an export of

Australian intellectual property through the

migration of skilled labour into China,”

says Evans. “From automotive engineers

assisting Chinese car manufacturers to

enhance their product, to professional

service providers in the accounting and legal

professions, there is a massive transferral

of skills and knowledge occurring at the

moment.” The result is that the economic

and business relationship between the two

countries is becoming more nuanced and

hard to define exactly, suggesting greater

entwining of both economies.

With China claiming the title of

“Australia’s best friend in Asia” and trade

links continuing to grow, the two countries

seem to have arrived at a sound and thriving

partnership. All the measures have been

put in place to ensure that this mutually

beneficial, productive economic relationship

will continue to flourish, with the Free Trade

Agreement serving as official evidence. As

the two countries approach another year of

relatively solid cooperation, the stage is set

for even closer and more diverse ties.

Broadly speaking, how would you sum up the business and economic relationship between China and Australia?

The past year was a big year in our

business and economic relations. The

relationship is now truly or ‘in

full swing’ with two-way trade of more

than AUD150bn (USD116bn) annually

and significant levels of direct investment

(AUD20.8bn (USD16bn) Chinese

investment in Australia with AUD6.4bn

(USD5bn) flowing the other way).

In addition, last year Australia and China

concluded the China-Australia Free Trade

Agreement (ChAFTA), which will open

myriad new opportunities for both sides.

We also saw some big business and trade

deals during the year including between

resource giants Baosteel and Aurizon;

China Eastern and Qantas airlines;

and the ‘Australia Sino Hundred Year

Agricultural and Food Safety Partnership’

between Australian agribusinesses and

Chinese food and beverage companies.

These deals enhance our already vigorous

economic links as reflected by our trade

and investment figures.

China and Australia worked closely

together to pursue economic and

governance reforms as the respective

hosts of APEC and G20, and Australia

also continues to support China’s

Alice Cawte Consul General of Australia

in Shanghai discusses Sino-Australian

co-operation

ambitious economic reform agenda. Two

of our largest banks – ANZ and Westpac

– are working closely with business and

government on trialling financial sector

reforms in the Shanghai Pilot Free Trade

Zone.

The recent establishment of Sydney as an

international Renminbi clearing and trade

settlement hub will also support China’s

goal to internationalise the yuan.

What impact do you think the recently concluded China-Australia Free Trade Agreement will have when it eventually comes into force?

ChAFTA will unlock substantial

opportunities for both countries. Chinese

consumers can expect better access and

lower prices on a range of Australian food

produce – including seafood, dairy, beef

and wine – as China abolishes tariffs of

between 10 and 19 per cent on these goods

over the next few years. It will also unlock

greater opportunities for Australia’s world

class service providers, a number of whom

are already active in China, to contribute to

China’s developing service sector in areas

such as health care, engineering, design and

legal and financial services, among others.

Chinese private companies investing in

Australia will enjoy a higher threshold

- AUD1,078m (USD843.5m) - for

investment screening by the Foreign

Investment Review Board, while new

investment facilitation arrangements will

allow investors to develop more flexible

responses to labour shortages.

Alongside ChAFTA, we are also

introducing a work and holiday visa

programme which will allow 5,000 young

Chinese annually to visit Australia for up

to 12 months.

Away from business, are there any other areas in which Australian and Chinese co-operation is particularly significant?

China and Australia cooperate in many

areas outside business including education,

culture and the arts, sports and science.

We have, for example, recently agreed to

step-up cooperation in the Antarctic and

to strengthen our sister-city and sister-state

relationships.

Alice Cawte, Consul General of Australia in

Shanghai