ChAFTA’s bright future

The first major Chinese investments in Australia were in the resources and energy sectors. This occurred at a time when one of the key objectives of the central government was to secure the supply of resources for the steel sector. 

"There is still significant room for this relationship to grow." - Alan Oxley 

Investment switched to the agricultural sector as the food demands of the Chinese populace grew and changed. One of the key drivers was the reputation of Australia’s agricultural industry as ‘clean and green’.  

In both cases, the objective of the investments has been to satisfy growing Chinese demand and consumer preferences. 

Demand

There has been a further evolution beyond goods and into services. The demand for Australian agricultural produce and manufactured food has prompted investment in transport and logistics providers to process and ship goods from Australia and the region into China.

A steadily increasing demand for Australian tourism services and investment in Australian real estate sectors has driven demand for greater transport services between Australia and China which has, in turn, prompted investment in transport operations.

Large-scale Chinese investment in commercial Australian real estate has prompted greater demand for asset management services.

Similarly, there has been a clear demand for the acquisition of Australian expertise in the services sector.

The purchase of John Holland, one of Australia’s largest engineering and construction firms, by CCCC International Holding Limited, is a clear example. Australian construction firms have a global reputation for maintaining profitability in high-cost environments.

As China’s One-Belt One-Road initiative accelerates, the global expertise of firms like John Holland will become vital.

Through its BRI initiative, China hopes to better connect with the rest of the world through a land-based trade ‘belt’ and maritime-based trade ‘road’, reaching across continents to Europe, Africa and South-East Asia.

Ports, logistics hubs and other infrastructure including roads and railways rolled out across up to 60 countries leaves plentiful opportunity for construction and infrastructure firms.

Similarly the acquisition of Healthe Care, one of Australia’s largest private healthcare providers, by Luye Medical will provide expertise in the administration of private healthcare in China.

Many of these trade patterns and investments were the result of the natural complementarity of the Chinese and Australian economies. 

Deepening

CHAFTA adds to the deepening of the two countries’ economic relationship.

ChAFTA is likely to increase demand for Australian goods in China, lower the cost of investment in Australia and generate stronger returns on capital for Chinese investments in Australia.

Consider the Australian beef industry as an example. The lower cost of Australian exports due to the reduction of import restrictions – for example, on beef – will increase demand for Australian imports.

Reductions in investment barriers – via the lowering of the international investment threshold – will reduce transaction costs. The mooted removal of capital and exchange controls between Australia and China will broaden the availability and lower the cost of capital in Australia.

In sum, this will likely increase the firm-level profitability of bilateral investments between the two countries.

Growth

There is still significant room for this relationship to grow.

China’s outward investment is relatively small on the world stage and its investments in Australia are small when compared with investments from the US and the UK. To date, investments have largely been in the resource and agricultural sectors.

Implied returns on foreign investment in Australia have generally been robust at around 5 per cent. This is on par with other industrialised countries such as the US and UK across all sectors.

Returns on investment in Australian sectors such as financial services and manufacturing are surprisingly high – for example, returns on foreign investment in the Australian financial services sector are higher than their sectoral equivalents in the United States and United Kingdom.

Chinese outward investment is becoming more sophisticated and going well beyond security of supply.  Chinese Investors are seeking more complex investments and better returns.

For this to happen, further liberalisation in areas such as financial services and the gradual removal of capital and exchange controls is vital

Under ChAFTA, both countries have made a commitment for this to happen. The trade and investment relationship between China and Australia can only deepen. 

ChAFTA was only implemented at the end of 2015. As more Chinese and Australian businesses utilise it trade and capital flows will increase - as will investment opportunities.

Alan Oxley is Managing Director at ITS Global