China still remains incredibly important to Australian business

With China’s economy showing signs of recovery as the country begins to emerge from the COVID-19 epidemic, we can’t lose commercial sight that China remains incredibly important in the medium-long term to Australia. Australian companies need to be pragmatic and remain well aware of key policies and economic trends in China and focused also on planning for the recovery in the medium-long term.

There is no denying China’s vital importance to Australia for export trade. In 2019 alone, Australia’s exports to China grew 26 percent to $150 billion and accounted for 38 percent of our total exports. Chinese consumers view Australia as a source of high-quality natural resources and safe food products. Despite the impacts of COVID-19, this view has not dimmed, with an increase during these past weeks in the demand for imported iron ore and food products, including Australian meat.

China’s COVID-19 recovery is finely balanced

The daily number of new COVID-19 cases in China shows that the situation started stabilising in March, with the pace of infection slowing down for a few weeks. However, recently the number of new cases has started increasing again, with concerns around imported cases, which is why they’ve locked down the national borders. There are very limited international flights into China. That said, within China, restrictions are easing. The official lock down of Wuhan is lifted on 8 April, following the rest of Hubei province on 25 March.

The risk of further outbreaks within China remains real, particularly as very large numbers of workers return to factories across the country. It would be very premature to assume that this crisis is over and it’s business and life as normal again.

Measures to fight COVID-19 in China are set to continue, with a focus on avoiding a resurgence of the epidemic. Whilst addressing COVID-19 is still the priority, the Chinese Government is also taking measures to resume economic activity.

A range of data and qualitative sources shows that we are beginning to see economic recovery and normalisation after a very challenging three months.

Reliable data from Beijing based analysts Trivium China suggests Chinese industrial enterprises are operating at 80-85 percent of normal activity levels, and 95 percent of the largest Chinese companies have resumed operations.

Some 25 provinces are reporting full resumption rates (of between 99-100 percent) for large businesses. These provinces account for 89.2 percent of China’s national GDP.

The ongoing reliability of data remains a valid concern and there are no doubt cases of factories with the lights on but little manufacturing activity happening. However, AustCham Beijing members were recently briefed by senior DFAT and Austrade China representatives that there is widespread evidence of government inspectors checking factories of larger Chinese companies for genuine activity given subsidies being paid by Government to encourage resumption of business.

Specific Chinese Policy measures

The Chinese government is implementing a series of fiscal and monetary measures to support economic growth and help companies resume their operations, from providing subsidies and preferential tax treatment to expanding liquidity and cutting the cost of financing. Over the past four weeks, efforts have been geared toward normalising production and reducing supply disruptions. Now, the key goal will be to support increased consumption, by households and businesses, so that full scale operations can be achieved.

China is focusing on four key areas:

1.Trade logistic services

Ports are operating at close to normal (90 percent +) but there are still some post-port logistics issues. Air freight traffic is very limited which impacts time sensitive or fresh, perishable freight and this could remain for next few months at least impacting Australian dairy and seafood exports.

2. Consumer demand stimulation

Twenty three ministries released a joint plan to facilitate consumption on 23 March with measures including strengthening logistics infrastructure consumption, improving supplies of imported goods through preferential tax policies, enhancing competitiveness of domestic brands, building domestic tourism.

3. Promoting inbound foreign investment

4. Increasing bank liquidity

The central bank cut RRRs by 50-100 basis points on March 16, injecting RMB550 billion into banking system. On the same day, China’s central bank injected a further RMB100 billion through its medium-term lending facility

What is the near term outlook?

There seems to be little appetite for massive stimulus package like there was for the GFC in 2008-9 as the Chinese government is wary of debt levels, but authorities have pledged stimulus measures designed to boost investment and consumption. Beijing hopes to have the massive Q1 economic contraction resolved and normality restored in the next few months, though this will be difficult to achieve.

We are eagerly awaiting the announcement of when the next ‘Two Sessions’ meetings will be held in Beijing, as these  will provide important insights into the policy direction and measures that the Chinese Government will implement to support the economy and society over the coming year and beyond.

Global and regional COVID-19 contagion will impact China’s economic recovery

The key problems for Chinese businesses going forward are more the disruption to global export markets, disruption of their regional Asian supply chains, and sluggish domestic consumption rates. South East Asian countries are major markets for manufacturing and bilateral trade for China and many are in the early stages of their COVID-19 crisis which is a serious disruptive threat. Much of the world is shutting down borders just as China is coming back online. Also domestically, local Chinese consumer confidence will also take time to recover, although e-commerce traffic has been strong.

It looks likely at this stage that China will be the first major economy out the other side, but who will they sell to and trade with given borders all around the world are closing? China’s growth will be impacted by the extent of the ASEAN and global COVID-19 crisis (exports and their own supply chain) and expected medium term softness in consumer demand.

What does this mean for Australia?

COVID-19 has severely impacted the Chinese and now our Australian economy. However all is not lost – we saw steady volume orders in February for iron ore being shipped to open Chinese ports although the medium term outlook for steel production is unclear. Meat exports in March were very strong and over 50 percent of Chinese university students are now back in Australia.

The coronavirus outbreak has highlighted a number of sectors in which China needs more expertise and better technologies, which could present opportunities for Australian companies after we emerge from our immediate crisis and get back to business.

For example:

  • Food security and traceability, as well as cold-chain logistics, to ensure that food products are fresh, safe and do not pose a risk to the health of Chinese consumers;
  • Water and waste-management solutions, to avert disease outbreaks in locations which have traditionally been prone to them, such as food markets and public toilets; and
  • Digital technologies, to ensure connectivity and avoid disruption of company operations during a disease outbreak.

KPMG also foresees that there will be an increase in the demand from Chinese consumers for high-quality, safe and healthy food products, which should be beneficial for Australian businesses provided we see more dedicated air freight links in the coming month.

Final word

Australia and China are important trade partners, we will eventually come through this and business leaders need to pragmatically look ahead. Given the scale of economic inter-dependency, Australian business leaders need to keep well informed about the specific markets, stay connected with Chinese clients and suppliers, and maintain a pragmatic medium-long term commercial view on China trade.

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