China’s wake up call for Australian business

(L-R) Vice-Chancellor Dr Michael Spence, NSW Premier Barry O’Farrell and senior partner at KPMG Graham Brooke.

The increasing significance of Chinese private sector investment, a heightened appetite by China to develop and finance Australian resources and infrastructure projects, and Chinese banks choosing Australia as a platform for global expansion are among the opportunities identified by new research into the future of reciprocal trade between Australia and China.

"In the future it will be difficult, if not impossible to have a strong global or domestic business without a strong China business relationship. The cost to Australia of a failure to develop an effective China strategy could include a loss of new capital inflows, new markets and new technology, but most importantly, traditionally captive business," says Jason Chang, Head of KPMG’s Australia-China Practice.

"China’s economic development plans are progressing at a remarkable pace, driving the country on a global quest for acquiring resources and expertise well outside the historical focus on raw materials and commodities. This creates exceptional opportunities for greater engagement between Australia and China and underscores the importance of having a comprehensive strategy for managing Australia’s economic relationship with China," he added.

Australia & China: Future Partnerships is the first result of a strategic cooperation between KPMG Australia and the University of Sydney China Studies Centre to create unique business intelligence reports for doing business with China.

The report provides insights into the long-term demographic and social forces reshaping China and Australia. It delivers a detailed analysis of the implications of China’s 12th Five-Year-Plan for Australian-Chinese economic cooperation. It identifies the drivers of future alliances and importantly, focuses on explicit opportunities for stronger engagement in the priority areas of infrastructure, banking, and energy and natural resources.

Key findings include:

• Regulatory restrictions on overseas investments by Chinese companies are likely to be relaxed in the future. This will be a dramatic game changer. One potential change is that government approval will no longer be required for resource-related investments of less than or equal to A$300 million and for non-resource related investments of less than or equal to A$100 million. Given that more than 80 percent of announced Chinese deals in Australia are within the A$300 million limit, this change alone would shift the landscape.
• China wants to develop and finance Australian resources and infrastructure. In line with China’s demand for energy and natural resources, Chinese companies are most concerned about infrastructure for coal and iron ore.
• China is already working closely with Australian partners, including in syndicated loans, with an interest in the funding and joint development of resources infrastructure. China is prepared to consider long-term and close institutional cooperation with Australia, even at a multilateral level.
• China is beginning to place more emphasis on Chinese private corporate investment in Australia. With this comes an increased emphasis on market mechanisms and risk diversification. This is already transforming the engagement between Australia and China.
• There is potential for China, Japan and Australia to fully develop the respective advantages of their resources industries and agree on the structure of collaboration. This could lead to the three countries creating an Eastern Resources Commodities Trading Centre in their time zone with links to the key global trading hubs of London and New York, to form a new 24-hour resources commodities trading centre. There are already initiatives forming in this regard.
• Australia is currently a target country for Chinese banks’ drive to head abroad. Chinese banks see Australia as a platform for helping them expand globally, including acquisition of experience, skills and capabilities.

To achieve a clear China strategy, Australian businesses must assess what China will look like over the next five-to-ten years and what its impact will be on Australian domestic markets. A five-to-10 year execution plan should include investment and marketing strategies and a means of ensuring that the business has the right skill sets and advisers to capitalise on and realise the China opportunity. Australian businesses should also seek opportunities to collaborate with Chinese companies, not just in the Chinese domestic market but importantly, in markets outside China.

Australia’s geographic position carries obvious advantages for enhanced cooperation with China, such as relatively short transport distances to China and a time difference of only two to three hours, the shortest with any western economy, says Hans Hendrischke , Professor of Chinese Political Economy with the China Studies Centre at the University of Sydney.

"For China, the most effective strategy for entering the Australian capital market is to rely on resources companies to establish two-way investment relations," Professor Hendrischke says.

Allowing shareholders of Chinese resources companies to benefit from the participation of Chinese resources companies in the Australian capital market for mining and infrastructure will be useful for building an interactive Australian-Chinese resources investment platform. This will also help to secure broad public support and lay a sound political foundation, according to Professor Hendrischke.

"The establishment of a system of mutual investment cannot be one-way. While the degree of engagement may differ between partners, policies and standards must be consistent on both sides for such a system of mutual investment to withstand any potential political storm," he says.