Advance Australia and embrace the ChaFTA: why business with China is good business

Doug Ferguson, Head, Asia Business
Doug Ferguson, Head, Asia Business

I am a proud Australian who has studied, lived and worked in Greater China as a professional services advisor for nearly 20 years. During this time, I have personally witnessed China’s dramatic economic rise at an average 9.5 percent annual GDP growth which has been to Australia’s great fortune in terms of export trade and now Chinese inbound investment.

We are all growing and benefiting with China. China is our largest single trade partner with nearly 25 percent of our exports going to Chinese customers. KPMG and University of Sydney analysis shows that Chinese accumulated direct investment since 2007 has exceeded USD$70 billion making it the fifth largest foreign investor and climbing fast. This investment is rapidly moving away from state owned enterprises investing in mining and gas projects towards a mix of private and state owned Chinese investment in our commercial real estate, infrastructure and leisure and consumer sectors.

According to the Australia China Business Council, nearly 200,000 permanent Australian jobs are directly sustained by trade with China and average household incomes have improved by 17 percent since 2013 due to China trade’s impact on GDP. Residential real estate values are booming in Sydney and Melbourne, a supply of new and affordable apartments are on the way and the economy benefits by approximately $5.5 billion a year from the nearly 800,000 Chinese tourists and 150,000 students visiting and spending here.

I attended functions at the famous St. Regis Hotel in Beijing in 2005 when then Prime Minister John Howard and Trade Minister Mark Vaile announced intentions to negotiate a China–Australia free trade agreement (ChaFTA) and recall the key provisos being [it] had to serve Australia’s best interests and should be comprehensive to include services trade and investment, so not be rushed…

Nine years and six Australian Federal Trade Ministers later, we finally saw a very comprehensive and advantageous Free Trade Agreement announced in late 2014. This was skilfully negotiated by our most experienced trade negotiators, personally driven by Minister Andrew Robb, supported by over 600 companies who joined Australia Week in China last April and perfectly timed during President Xi Jinping’s historic visit to Australia last December.

We as a country have one final yet critical step – the ensure ChaFTA passes through the Senate in late October. It seems clear that there is no intention by either negotiating side to re-enter already concluded negotiations and if we did, perhaps it would be to China’s advantage.

One only has to take a cursory read of the ChaFTA fact sheets prepared by Austrade and DFAT to appreciate the scale of tariff cuts and priority market access benefits offered by China to Australian companies – in particular substantial tariff reductions for agribusiness exports (creating huge benefits for Australian meat, dairy, wine, grains) and services (providing unrivalled access for Australian health care, insurance, banking & funds management, environmental, clean energy and education sector companies).

The cream on top of the ChaFTA cake is the Most Favoured Nation (MFN) status clause which essentially guarantees that Australian companies will be protected from any potential future revisions back from the agreed terms by Chinese regulators and Australia will enjoy the benefits of any enhanced future trade terms agreed by China with other countries.

The Investor State Dispute Settlement (ISDS) is standard and works to protect both sides but in my view, benefits Australia more as it provides added protection for Australian companies investing and operating in China against certain discriminatory practices.

As President Xi clearly pointed out, Australia is seen as an ideal partner to help China to develop and ChaFTA is the key mechanism.

This Chinese leadership has announced a comprehensive set of economic reforms between 2014-2020 which are designed to transition China’s economy away from a heavy polluting, low value export industry model driven by the state owned sector and financed by national fiscal and monetary coffers to a more sustainable, services and high-value manufacturing and export economy which is driven more by private sector companies (Noting that power, steel, mining, telco, transport and banking sectors will remains largely state dominated).

From my observations as a Deals Advisory professional, the leaders of American, European, Japanese and Chinese companies have read the details of ChaFTA, understand that it offers unrivalled access and protections into China’s markets and are planning further investment into Australian companies so that they can take advantage of these benefits. The timing of the fall in AUD, record low interest rates and undervalued yet attractive Australian corporate targets are also magnetically attracting foreign investors who understand the China thematic very well.

But where is Australia in all of this excitement?

For such a well-educated, culturally diverse and fair-minded group of individuals who embrace rolling up the sleeves to have a go, I am often surprised by our apathy and our prejudice.

Recently, KPMG released its global CEO Outlook Study report which included a special section on the outlook of Australian survey respondents. While globally 47 percent of CEOs are planning significant international expansion in 2016, only 21 percent of Australians are.

The ChaFTA door is nearly open, but I fear Australian companies may fail to take advantage.

I sense that the largest Australian companies are proceeding warily with their China strategy, perhaps seeing things as largely ‘business as usual’ and without the urgency or priority I would have expected.

For SMEs, I sense the What? (the opportunity) and Why? (because China is important) questions are generally understood but the What if? (the risks) and How? (to successfully execute) issues remain misunderstood.

Experience has taught me that success in China requires careful planning, a niche and disciplined strategy, strong and reliable local Chinese partners and leaders who are culturally savvy, supported by their local Chinese staff and who are empowered and fully supported by Headquarters.

I can also see that there is fear in our society in making this challenging journey with Chinese companies and this fear is playing out publicly around “cheap Chinese labour coming in and taking our jobs” and “selling the farm to the Chinese”.

Like many Australians, I am surprised and offended by the constant stream of radio and TV advertisements inaccurately proclaiming the threat to Australian workers from the ChaFTA.

The Chinese investors (along with Japanese, South Korean and American companies) were certainly unhappy with the prohibitively high cost and delays of heavily unionised labour during the mining and gas boom period 2008-2012 and would like to see this addressed in future. It was clearly a major negotiation objective for them, along with seeking FIRB thresholds increased for SOE investment to $1 billion – which has to date been avoided.

Here’s how I understand the Investment Facilitation Agreement (IFA), which is a side agreement via MOU to the ChaFTA, should work:

  1. Planning phase – for major infrastructure projects over $150 million in size requiring significant skilled labour, Chinese companies may approach the Department of Immigration within 12 months of the intended start date with their plan and resource needs and their approach to testing resource availability within the local market when required.
  1. Implementation phase – if after local resource testing has been completed and there is a shortage, the Department of Immigration may consider and approve applications for skilled labour with qualifications from approved Chinese institutions, on standard section 457 visas which require compliance on minimum wage, health and safety, tax and superannuation conditions for a fixed visa period (this applies to all 457 visas). The employer is directly responsible for compliance and financially accountable for their 457 employees.

Provided the testing system is robust, fair and properly monitored and enforced by Australian authorities (which I am sure the Government let alone the unions will insist on) and given the delays in new infrastructure project pipelines, shouldn’t we keep this matter in perspective and focus on growing the pie for the benefit of Australian employees?

On the topic of agricultural land ownership, the reality is that Chinese have invested less than USD1.5 billion into our commercial agribusiness sector and mostly into food companies and processing assets rather than land. Based on KPMG’s 2014 update on Chinese investment, there were only 3-4 completed deals and none big enough to cause concern to the overall market.

Our Government is wisely developing a land ownership register and the threshold for FIRB review and approval for agricultural land has recently been lowered to AUD15 million with anti-avoidance provisions to protect against aggregation strategies which roll up smaller land purchases to build scale.

We have well established post investment laws and regulations that all foreign investors must adhere to and I am quite sure that the Chinese investors will want to retain experienced Australian management and remain compliant with all laws as they have done to date.

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