22 January 2020
Chinese New Year will fall on Saturday 25 January, kicking off the Year of the Rat. The rat is the first of the animals that make up the 12-year cycle of Chinese astrology. For this reason, it is considered a year of reset and renewal. This might present a good opportunity for key stakeholders to take stock and consider appropriate resets in the Australia-China relationship. In this article, we take a brief look at important developments which could influence business between Australia and China in 2020.
An end and a beginning
This year is the last year of the Chinese government’s 13th Five-Year Plan, during which it promised to establish a “moderately prosperous society” and end poverty. Senior members of the Chinese Communist Party’s Politburo — the seven most powerful men in China — said recently that all efforts must be taken to achieve those goals in 2020.
In recent weeks, the Chinese government has sought to stimulate the economy by:
Channelling flows of money
Already this year, China’s central bank has reduced the amount of cash Chinese banks must keep in reserve, potentially freeing up roughly US$115 billion for long-term lending. Whether such lending will flow into investment by Chinese companies abroad in places like Australia is yet to be seen.
If investment does flow into Australia from China, it is likely to do so in a manner that is more cautious and prudent than in the past. Lifestyle, wellness and high-end manufacturing sectors can expect more interest in 2020 from Chinese investors.
In 2019, China continued to experience significant capital outflows, which put downward pressure on China’s currency. China’s State Administration of Foreign Exchange – a key government regulator – recently declared that its most important job in 2020 is to prevent major financial risks, avoid “abnormal” capital flows across China’s borders and crack down on illegal trading activities.
Since the capital outflow crisis in 2015-16, China has seemingly been able to control capital flows out of China through regulated channels. According to reports, about US$74 billion left China through regulated channels in the first half of 2019, which was the smallest amount in a decade. But it has been reported that a record amount of funds left China through “unrecorded transactions” during that time. Experts estimate that US$131 billion left China in the first six months of 2019 through “hidden capital outflows” (people move money through such means, for example, asking friends and family to pool the annual limit on foreign currency they are allowed to withdraw from Chinese banks, or by claiming to make investments overseas that don’t really exist).
Reducing restrictions on foreign investment into China
The process of opening up the Chinese economy to foreign investment has flowed and ebbed since China acceded to the World Trade Organization in 2001. However, at least in part to counter capital outflows, China plans to fuel growth and innovation through further opening its economy to foreign investment. It was reported in April 2019 that the Chinese government said it would allow foreign companies to control or own their Chinese commercial vehicle joint ventures starting in 2020.
And earlier this month, China’s financial regulator released new rules to increase the amount of access foreign banks have to the Chinese market. These rules will allow foreign banks to open branches and to fully own banks in China. The Chinese government has also started allowing foreign companies to fully own subsidiaries in the life insurance sector that operate in mainland China. Similar foreign ownership caps on fund management or securities firms are expected to be lifted later this year.
China’s burgeoning middle class
China’s urban middle class continues to expand rapidly and is expected to reach 800 million people by 2030. The consumption habits of China’s middle class are becoming increasingly selective and sophisticated. This is a trend that is growing across the country and not just in the main cities on China’s east coast. This is good news for Australian businesses operating in the lifestyle, education, healthcare, aged care, food and beverage, and travel sectors.
Whereas China’s growth once came from investment and export-driven manufacturing, Chinese consumers now account for over 60 per cent of China’s economic growth. Despite 2019’s economic uncertainty, consumption in China grew by 10 per cent throughout the year. Morgan Stanley has predicted that the consumption power of China’s smaller cities will triple between 2017 and 2030.
Chinese spending on personal wellbeing is projected to grow unabated. According to a recent McKinsey survey of Chinese consumers, 72 per cent of respondents said they were actively trying to adopt a more active lifestyle.
China’s aged care market is expected to grow from RMB 4 trillion (US$573 billion) in 2019 to RMB 13 trillion (US$1.86 trillion) by 2030, according to the market research agency PR Newswire, as China’s population ages.
When China’s “Made in China 2025” industrial policy initiative was adopted in 2015, it was seen in China as a blueprint for helping the nation to become self-sufficient in high-tech industries. Outside of China, perspectives have differed. The United States’ Department of Justice has referred to the policy as a “roadmap to [intellectual property] theft”. Whatever view you take, the tech battle between China and the US will continue, and the role of Chinese technology outside of China is going to remain contentious.
It has been reported that recently the Chinese government ordered all government offices and public institution to cease using foreign computers and software within three years. Globalisation, it seems, is a matter of perspective.
Chinese tech giant Huawei will continue to be the focus of debate and concern through 2020, and Chinese companies will forge ahead in their pursuit of market power in regard to AI and social media technologies.
Moderating China’s economic growth
The Chinese Communist Party will celebrate its centenary in 2021. It can be expected that China’s economy will grow in 2020 at least at the minimum levels required for China’s government to achieve its much-publicised goal of doubling China’s GDP from 2010 levels by the end of 2020. That should see the country’s US$14 trillion-plus economy grow by around six per cent this year. China’s political leaders will also emphasise a “new normal” of moderate growth below six per cent in the coming years.
It was recently reported that 12 former executives of Chinese financial institutions and regulators have been assigned the top posts of the country’s 31 regions since 2018, compared to only two following the 2012 leadership reshuffle. The prominence of financial experts in key leadership positions shows the importance the Communist Party’s top leadership is putting on China’s debt de-risking and on managing China’s financial risks more sustainably.
Trade war turned trade deal
The bitter and lengthy trade war between the United States and China has entered a new phase. The eight-part trade deal signed by the two nations earlier this month is likely to have ramifications for Australian businesses. As the trade war ravaged, Australian importers benefitted from having Chinese exporters show more commercial interest in doing sound deals with Australian buyers, given their rejection from the US market following massive tariff hikes by the US government. Australian exporters have also gained from the fact that China placed significant tariffs on many US products entering the Chinese market.
The new US-China trade deal requires that China spends at least US$80 billion on American food and agricultural products over the next two years, US$77 billion on US-made manufactured goods, and US$52 billion on US energy and metallurgical coal. This could impact Australian exporters, especially in the beef and energy sectors.
China-related socio-economic and geopolitical uncertainties will remain a factor in the Year of the Rat, but there are still going to be many opportunities for Australian businesses to prosper from a renewed vigour in their commercial relationships with China.
Author: Carl Hinze
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.