Tapping into the Sino-Australian Relationship

October 6, 2017
Editor(s): Wen Lin Ong
Writer(s): Tharaka Segar, Oliver Thorne, Acqeel Ziyad

The Australia-China relationship is based off trade dealings and investment opportunities. In 1972, both nations chartered diplomatic relations that led Australia to build an embassy in Beijing in 1973 (DFAT, 2017). The establishment of this relationship has brought about advanced cooperation with global issues such as international security, human rights, climate change and law enforcement. Annual meetings between the Australian Prime Minister and Chinese President play an important role in building this relationship. During these past 45 years, the relationship has had its political ups and downs, low points including Chinese investment in Australia and the arrest of Chinese Australians in China. However, they have also had some highlights, such as the China-Australia Free Trade Agreement (ChAFTA), enacted on 20 December 2015.

Trade

Since 1970, China has grown in numerous sectors, including manufacturing, investment and urbanisation. Australia’s extensive supplies have been able to meet these demands, and use this partnership to grow their own economy. In order to reap the rewards of the Chinese market, Australians have familiarised themselves with cultural, political and business practices in China, as well local market conditions. Presently, China’ shift in focus toward developing social structural growth has caused a diversion away from their traditional agenda: physical infrastructure investment to consumption and importing from trade partners, such as Australia. Of Australia’s exports, 13 per cent comprise thermal coal to China (Holmes, 2017), whilst 25 per cent of Australia’s imports come from China.

Currently, Australia is China’s sixth largest trading partner, and that relationship continues to grow with each day. With that in mind, Australia consider China to be their largest trading partner. In 2016 alone, their export market reached $93 billion which accounts for nearly a third of total exports, whilst imports hit $62.1 billion (DFAT, 2017). A major contributor to this partnership is the fact that few countries have massive supplies of iron ore and coal like Australia; additionally, the geographical proximity between both countries helps to reduce shipping costs.

That said, whilst the trade partnership has created numerous opportunities for Australia, China is still a competitor on many levels. Australia’s manufacturing industry has plummeted because of Asian development, particularly technology and household appliances (Green, 2015). Currently, 90 per cent of Australian merchandise imports are from China, and half of total imports are electronics (Holmes, 2017).

Investment

As of 2017, Australia is the second largest recipient country for accumulated Chinese investment, with data showing almost $90 billion of accumulated new investment since 2007. China’s penchant for investment in Australian assets despite low returns can be explained by China’s emergent financial system. Within China, there exists few opportunities to sustainably build wealth through capital investment; the key consideration here being sustainability. Volatility abounds: during 2014-2015, Chinese stock prices increased by more than 150 per cent (Lardy, 2015) to the point where the stock market had proliferated to almost 50 per cent of China’s GDP (Chen & Zhiwu, 2013). However, the rapid growth was followed by a sharp downturn, with the Shanghai Stock market losing 8.49 per cent of its value on 24 August alone (Denyer, 2015) In order to maintain stability, and thus confidence in the market, the Chinese Securities Regulatory Commission intervened by mandating a trading curb rule, a market mechanism that halts trading when losses reaches a certain threshold (Bradsher & Tsang, 2016). However, this had led to the widespread notion that the stock market was an unsafe investment ultimately subject to the control of the government. The main attraction of Australia to Chinese investors is its stable mature market with transparent rule and government accountability.

Commercial real estate remains the largest sector for Chinese investment in Australia with 36 per cent accounted for by Chinese private investors. Infrastructure, driven by multi-billion dollar investments in Asciano Ltd and the Port of Melbourne, marked a record 28 per cent by offshore Chinese investors. A May 2017 report by KPMG showed “significant change in real estate investment with residential development sites now accounting for 51 per cent of value (ABC, 2017)”. This can be attributed to the relative lack of viable investment vehicles in China’s emergent market economy, leading Chinese investors to seek overseas housing markets: Sydney, a city considered the second most unaffordable city in the world, with an income-house price multiple of 12, is considered to be veritably in bubble territory, since it lies above the 4x multiple usually found in functioning housing markets (Irvine, 2015). However, Shanghai prices are considered at least 25 per cent higher than Sydney’s on a price per square meter basis. Further, in China, citizens can only purchase residential property on a 70 year lease, which can be capriciously terminated at any moment through compulsory purchase at the government’s assessed price, often far below market value (Balogh, 2017). Thus, Chinese investors are attracted to the investment and legal security of purchasing Australian real estate.

The rate of investment growth, however, is slowing and falling behind other countries. According to University of Sydney Professor Hans Hendrischke, “Australia has proven itself to be a preferred destination for Chinese capital, but we must be cognisant that the growth in investment is slowing compared to other parts of the world such as the United States and the EU.” Chinese investment flows slipped by more than one third from 9 per cent in 2015 to 5 per cent last year, resulting in a slump in the mining industry.

Future Outlook

Throughout his tenure, China’s current President, Xi Jinping has sought to reduce corruption, improve governance transparency and further foster relations with Western countries (BBC, 2013). Theoretically, Mr. Xi’s policies should improve investor confidence, both domestic and foreign. Thus, there should be a bilateral increase in investment between China and Australia. However, Mr. Xi had recently taken a more isolationist stance with views to China becoming a military power (BBC, 2013).

Reported by KPMG, China is increasing its oversight of overseas investment to reduce excessive capital outflows and mitigate financial risks. Indeed, Chinese authorities now have singled out real estate, hotels, film, entertainment and sports as ‘irrational’ industries for overseas investment for China’s current economic plan (the 13th Five Year Plan). Currently, Chinese firms are protected by its central government (many of which are state owned) and foreign investment is highly restricted (Australians, for instance, cannot purchase Chinese residential property) (Balogh, 2017). This discrepancy could lead to protectionist retaliation against China, especially as China transitions towards a developed economy.

Nevertheless, it is believed “China’s overseas direct investment will continue to grow over the long term, especially in the sectors and markets whose development is necessary to achieve the goals laid out in the 13th Five Year Plan (Barber, 2017). Over the last financial year, Chinese investment in Australian agriculture and energy industries has grown. “Australia is providing major goods for Chinese consumers that are agricultural goods, that is services, so Australia is part of a new orientation of the Chinese economy,” Professor Hendrischke told the ABC’s RN Breakfast program. The rising demand for quality dairy, meat, seafood and wine can be attributed to China attempting to secure resource supply and build supply chains. Private investors claim most of the share in deals as, previously mentioned, China shifts from an export driven economy to a consumer driven economy.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, its Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.