13 November 2017

Advantage Australia in China’s new economy

By Helen Wong, Chief Executive, Greater China, The Hongkong and Shanghai Banking Corporation Limited

Capitalizing on the broadening trade and investment links to China will ensure that Australia extend its record 26-years-and-counting economic boom.

This year marks the 45th anniversary of the establishment of diplomatic ties between China and Australia. To understand how far China has come – from being a largely agrarian society to the world’s second-largest economy – consider this: Sino-Australian trade grew from US$86 million in 1972 to US$107.8 billion in 2016, a 1,252-fold increase.

Since 2009 China has been Australia’s largest market for exports and largest source of imports. But the composition of the goods and services flowing between the two countries has changed because China’s economy has been shifting from an investment-led to a consumption-driven growth model.

China’s 13th Five-Year Plan for 2016-2020 aims to grow the service sector’s share of GDP to 56% by the end of this decade. It was 50.5% in 2015, the first time services accounted for more than half of China’s GDP. Nowhere is this march towards a service economy more apparent than in China’s startup scene.

According to some research, China is home to the world’s second-, third- and fourth-most valuable unicorns – private companies valued at US$1 billion or more. Didi Chuxing (US$50 billion) is China’s top ride-hailing app, completing 20 million trips per day; Xiaomi (US$46 billion) is among the world’s leading smartphone vendors; and Meituan-Dianping (US$30 billion) offers on-demand services including but not limited to food delivery, film ticketing and restaurant booking.

These made-in-China unicorns are emblematic of the country’s growing demand for services and consumer goods. While Australia will continue to export resources to China, the next big opportunities lie in services, such as tourism and education, and high-quality food products. China is already Australia’s largest export market for wine, and with direct flights now offered between Australia and 13 mainland Chinese cities, China will soon overtake New Zealand as Australia’s largest source of inbound tourists.

Australia has also been a key beneficiary of China’s outbound investment growth, being the second-largest recipient country for accumulated Chinese ODI since 2005. Again, the shift in China’s economic growth model has shaped what Chinese companies invest in.

In the 1980s China’s two largest investments outside Hong Kong were both in Australia and – not surprisingly – related to resources. Meanwhile, in 2016 commercial real estate and infrastructure accounted for almost two-thirds of Chinese ODI in Australia. What is more, 2016 was a record year in both the number and the value of deals signed with Chinese private-owned enterprises (POEs).

There are two big reasons that China’s outbound investment growth will only continue. One is that China is still playing catchup: China’s share of global ODI is two-fifths the size of that of the US, even though China’s economy is about three-fifths the size. The other is that China has been encouraging Chinese firms to “go out”, most recently through the Belt and Road Initiative, which aims to increase connectivity between Asia and the rest of the world through the construction and upgrading of infrastructure.

Foreign investment is attracted by Australia because of its strong economy – and important to Australia because of its small population and relatively low average national savings rate. The infrastructure sector, which accounted for almost 30% of China’s ODI in Australia last year, may continue to attract strong capital inflows given Australia’s need for infrastructure investment and China’s appetite for overseas infrastructure projects.

Finally, China’s transition to a more sustainable economy will provide plenty of opportunities for Australian businesses and investors who are keen to play their part in reducing carbon emissions.

Take the bicycle. According to the Earth Policy Institute, bike ownership in China fell by 35% and car ownership more than doubled between 1995 and 2005 as the country became wealthier. Recently the bicycle has made a comeback in China – as a means to improve air quality and reduce road congestion – and there are now two bike-sharing unicorns in China. Green can be good for business and the environment.

Green can be good for capital markets as well. Because the 13th Five-Year Plan aims to reduce the consumption of water and energy and the emission of pollutants, the scene is set for accelerated growth in sustainable financing in China. And China’s green bond market has developed rapidly from a standing start: more than US$33 billion of Chinese green bonds were issued in 2016, accounting for over one-third of the global total and up from US$1 billion in 2015.

The opening-up of China’s capital markets to foreign participants, as well as the construction of sustainable infrastructure under the Belt and Road Initiative, will be catalysts for further growth in the green bond market. The next step is to bring together companies who want to raise capital for sustainable projects and investors who demand assets that align with environmental, social and governance principles. In a recent survey of Australian institutional investors, all of the respondents intend to increase their green investment.

It is not only green assets that will garner the attention of Australian investors. Although China has been opening up its capital markets, foreigners own about 2% of China’s onshore bonds and stocks. Australia, with the world’s fourth-largest pool of pension savings, will increasingly look to China as its superannuation funds outgrow the local capital markets.

Australia has benefitted greatly from China’s economic boom: over the past 10 years, while China’s GDP has doubled, Australia’s has grown by 25%. This close relationship will have plenty more to offer Australian companies and investors as China continues its transition to a services-oriented – and more sustainable – economy.

This article first appeared in The Australian on 13 November 2017.