China has long been considered an important part of Australia's trade future, however there is some uncertainty around its long-term impact on the Australian economy.
China's economic growth has been spectacular: until recently growing at around 10 per cent per annum from a low economic base to arguably the leading global economy. While construction and infrastructure projects were the primary drivers of growth, the opening of the Chinese economy to foreign investment in the late 1970s saw it become the 'factory of the world.' The fuel to drive this growth was a massive growth in Chinese consumption of resources - steel, iron ore, copper - you name it China needed it. You can see this consumption growth reflected in Australia's export statistics.
With an increase in wealth came an increase in consumerism with a growing middle class. And, with a growing middle class came a property boom with many Chinese able to afford better housing. Demand for housing escalated and development after development was launched, many snapped up within hours of launching.
The cost of this success was a rapid increase in the cost of living, high property prices fuelled by speculators, and corruption.
With the global financial crisis, demand for China's goods started to decline creating excess capacity, factory and company closures, and staff lay-offs. Banks were then asked to reduce their loan exposure and Government projects scaled back.
Starved of funds some companies sought funding from underground banks – shadow funding - paying extreme rates of interest that further aggravated the slow down and excess capacity.
The People's Bank of China recently reported that it expects economic growth to be 6 - 7 per cent over the next three to five years – although businesses on the ground will tell you it's lower than this at about 5.8 per cent. Interest rates were cut for the sixth time in 12 months in late October to try and hit growth targets.
To maintain growth, the Government is embarking on transformation programs focussed on austerity and knowledge technology and transfer.
We can see some of the fruits of this commitment to knowledge transfer with China now our largest export market for services representing 13 per cent of our global services exports
On top of this investment program, China has eased restrictions on foreign owned investment firms, no longer requiring them to partner with local managers.
In terms of outbound investment, China's State Council recently bolstered its offshore investment program - the Qualified Domestic Individual Investor program. Currently limited to a pilot program with the Shanghai Free Trade Zone, the program allows for an expanded range of offshore investments in greenfield and joint venture projects, real estate, and shares, bonds, insurance products, etc. You can expect to see the effects of this in Australian development projects.
The Free Trade Agreement with China is set to pass Parliament with the Labor Party negotiating a series of reforms to protect workers rights. The amendments put in place minimum wage safeguards for temporary skilled migration, new 457 visa conditions linked to relevant trade licenses, and the capacity to impose a ceiling on the number of new work agreements for 457 visa workers.
Australian expansion into Asia is increasing for businesses of all sizes. In a recent survey, the ANZ recently reported that the majority of Australian businesses that have expanded into Asia have experienced a substantial lift in profits, with almost 40 per cent of small businesses making a return on investment within 12 months. If your business is not already looking at its international potential, is it time to review the opportunities?
Talk to one of our in-house International experts for more information on 02 9957 4033.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.