Mike Smith: Asia’s importance has been undersold - not oversold

"Let me be frank. No, Asia’s importance to Australia - and to ANZ - has not been oversold, but more realistically undersold."

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We’ve achieved a huge amount at ANZ with our super-regional strategy over the past seven-and-a-half years. More than I expected would be possible. The most important beneficiaries of this are our clients in Australia, New Zealand and Asia, and our shareholders and staff. 

However this is a long-term transformation and it means there is still a lot for me to do, and for the next generation of ANZ leadership, too. We need to complete what we started and create a truly regional bank. 

There’s no question though the environment for banking is tough right now. The revenue environment globally is difficult while the impact and cost of regulation is growing.  

Only last week we saw GE throw in the towel on financial services and many banks globally are close to making the lowest returns in their history. 

I spoke at ANZ’s shareholder meeting in December about the big shifts that are reshaping the region and changing our customers’ expectations of us and redefining our future. 

Those big shifts are global integration, technology, demographics, and the pressure on the world’s resources. I believe ANZ’s strategy plays perfectly into these big themes and provides more opportunities and more options for us than any of our domestic or international peers.  

For me, for our board and for our leadership team, this combination continues to be challenging – but also incredibly stimulating. To exploit these opportunities and to deal with the challenges, I’m focussed on four personal priorities. 

FOUR KEY GOALS

First, I want to accelerate ANZ’s digital transformation to drive growth in Australia and New Zealand, to build scale in Asia and to deliver a step change in operational efficiency.

Secondly, I also want to take our presence in two key markets to the next level: in Asia through continued growth but with a particular focus on improving returns; and here in New South Wales where we are also investing heavily in a market where we have been traditionally underweight. 

Thirdly, we are preparing ANZ for the new regulatory environment through an emphasis on greater capital efficiency in every area of the business but particularly in our International and Institutional Banking Division.

Finally, I’m passionate about continuing the investment we have already made in developing the next generation of truly diverse leadership at ANZ. 

This will help embed our strategy, promote greater diversity within a company that now has over 19,000 staff working outside Australia and New Zealand, and develop the new capabilities we need to succeed in a rapidly changing digital era.

So for those of you who came to hear me discuss Asia’s significance as the resources boom wanes and whether Asia’s importance has been oversold, I may have given the game away.

Let me be frank. No, Asia’s importance to Australia - and to ANZ - has not been oversold, but more realistically undersold. 

TECTONIC CHANGE

I believe as we shift from a natural resources led relationship with Asia to a deeper, more multi-faceted engagement with the region, that Asia has never been more important to Australia’s future and to ANZ’s future.

If you think about the nature of the global economy, we are living in an era of tectonic change.

In the first decade of this century, 21 countries – all of them developing economies – more than doubled their GDP. By comparison, developed economies grew at an average annual rate of just over 4 per cent. This shift has been matched in other areas.

For example, in China, life expectancy has increased by more than 30 years since 1960, while participation in secondary education has increased from little over one-third as recently as 1990 to over 80 per cent today.

Today, the scale of the Chinese economy is such that, even at 7 per cent growth, GDP is growing by more than 50 per cent of the Australian economy each year.

And rather than continuing to rely on the export of natural resources to Asia, Australia’s relationship with Asia is becoming much deeper.

It is being supported by growth in the export of agricultural commodities, the provision of education and other services, and the growth of Asian tourism.  

In fact, 800,000 Chinese visitors are now travelling to Australia each year, up from 280,000 in 2005, making China our number one source of inbound tourism. The benefits of closer ties to Asia are however wider than commonly understood.

Engineering, financial services and technology companies all grow as they support resources and service exporters. Australian based multinational companies create jobs here in Australia as a result of their offshore investments. For example, ANZ’s domestic operations benefit from business originated in the region. 

GOOD NEWS 

Looking ahead, we expect that as financial liberalisation occurs in China, Chinese foreign direct investment could rise from around $US500 billion in 2012 to over $US9 trillion by 2030. The US and Europe will receive less of China’s outward investment with Chinese FDI increasingly favouring Asia Pacific markets. 

In this context, the emergence of the Asian Infrastructure Investment Bank is positive news, as is Australia’s decision to support the initiative. There is a large need for infrastructure development in Asia.  

In fact emerging Asia accounts for almost half of the world’s infrastructure investment highlighting the continuing geographical shift of infrastructure spending from the West to East. 

As more developed countries join the AIIB, firms in member countries can bid for these projects. Without the participation of developed countries, it is very likely this opportunity could be dominated by Chinese and Asian firms. 

In Australia the implications of the growth in Chinese FDI are significant. They are also significant for Sydney’s growth as a financial centre. For example, in 2010 around 2.5 per cent of the value of Chinese FDI was invested in Australia. 

Even if that percentage remains unchanged, the stock of Chinese FDI into Australia could be worth up to $A200 billion by 2030.This would represent a ten-fold increase on current levels, making China, Australia’s largest source of FDI. 

This investment is creating Australian jobs and is allowing us to upgrade infrastructure and businesses productivity. At the same time, we are seeing structures and agreements being put in place to support the expansion of trade and investment flows. 

This includes the outstanding work done by the Abbott Government to put in place free trade agreements with Japan, South Korea and China in the past year. 

It is easy to become transfixed by the issues of the day – softness in the resources sector, the state of politics, business confidence, and even the availability of slippers in my office. But the big shifts in the global economy are driving a deeper, more multi-faceted engagement with Asia. 

This is good for the Australian economy, it’s good for Australian business, it’s good for jobs and it’s also good for ANZ. I think business needs to lift its sights and talk up the Australian economy. 

This story is an edited version of a speech delivered at The Bloomberg Address by Smith on April 15.