Henan – China’s new logistics epicentre

A model for the Zhengzhou Airport Economy Zone (credit: China Daily)

A model for the Zhengzhou Airport Economy Zone (credit: China Daily)

Long overshadowed by the economic powerhouses of Beijing, Shanghai and Guangzhou, Henan province, and its capital city, Zhengzhou, has quietly emerged as one of the key strategic provinces as part of China’s ‘One Belt, One Road’ Initiative. With its strong capabilities in international and domestic logistics and its emerging tourism industry, Henan province is a growing international hub with ambitious plans to open up China’s inner-western regions to the outside world. 

Henan Province is located in the inner-western region of China, between Beijing and Shanghai. For a long time, Henan had been considered a rural backwater by the rest of China. However, somewhat surprisingly, its provincial economy is now one of the largest among inland provinces, growing at approximately 8% per year. It is also China's third most populous province with a population of over 94 million (behind Guangdong and Shandong). If it were a country, Henan would be the 12th most populous country in the world, just behind Mexico and ahead of the Philippines. 

With vast mineral reserves and large availability of fertile land, Henan’s economy is largely built on mining, agriculture and heavy industry. However, much like many other heavy industry-dominated areas in China, there has been a strong government-led push to move Henan up the value chain and develop capabilities in hi-tech manufacturing and IT. Three national-level industrial parks, focusing on hi-tech manufacturing, bio-pharmaceuticals and IT have recently been established in Zhengzhou and have already attracted a number of international investors. 

Tourism

As the birthplace of the Han people (China’s main ethnicity group), Henan is considered the “cradle of Chinese civilisation” and has great historical significance. Four of the Eight Great Ancient Capitals of China – Luoyang, Anyang, Kaifeng and Zhengzhou are all located in Henan. Also, some of China’s world famous tourist sites – The Shaolin Temple and Longmen Grottoes (which is World Heritage Listed) are also in Henan. The province receives nearly half a billion domestic Chinese tourists each year, providing a significant boost to the province’s developing economy.  

Logistics

Despite being largely unknown to the West, Henan’s capital city, Zhengzhou, is actually one of China’s largest international passenger and goods railway hubs. Zhengzhou Eastern Railway station serves as the junction of high-speed train services travelling all over China to Beijing, Kunming, Xian, Wuhan, Guangzhou, Shanghai and Hong Kong. 

Even more surprising is that Zhengzhou offers a direct cargo rail service crossing 10,000km to Hamburg in Germany which has been in operation 2013. According to estimates made by the Zhengzhou Hub Development and Construction Company, the Zhengzhou-Hamburg railway service accounts for one third of entire China-European rail traffic. 

As China’s ‘One Belt, One Road’ Initiative continues to grow, Zhengzhou has invested into further developing its capabilities, services and infrastructure aiming to become the logistics hub in north China. According to a recent South China Morning Post (SCMP) article, planning has begun for the Zhengzhou Airport Economy Zone around the Xinzheng International Airport. This zone has been labelled as an ‘aerotropolis’ mixing national and international logistics infrastructure with high-end manufacturing and business services. As well as the airport, it has 8 industrial parks, with businesses engaged in IT, electronics and e-commerce. The area covers 415 square kilometres – 5 times the size of Manhattan Island!

The planned Western Europe-Western China highway will also pass through Zhengzhou, connecting China’s Jiangsu Province with St Petersburg in Russia. Once completed, it will become possible to transport products by road to Russia in just 10 days.

Why Henan?

So why Henan and Zhengzhou? And why should Australian businesses consider it a launching pad into the China market? Firstly, in China’s 12th and 13th Five-Year Plans, tourism has been identified as a target sector requiring significant development and improvement, and China is looking outside of its borders to source foreign talent, knowledge and investment to bolster their own internal capabilities. As a popular tourist destination for domestic and international visitors, Australian tourism providers have an opportunity to participate in Henan’s flourishing tourism industry by exporting our capabilities, services and expertise and exploring options to partner with local companies. 

Secondly, Henan is a ‘tier 2’ province (and Zhengzhou a ‘tier 2’ city). This means that foreign competition is not as fierce as the big international players usually prefer to go to the wealthy, developed and well-established markets in tier 1 cities. Also, Zhengzhou has been identified as a key city of China’s ‘Go West’ policy which is focused on building up China’s underdeveloped western and central regions, encouraging foreign companies to do business in these areas and transform them into important and specialised industry clusters and hubs. 

Finally and perhaps most importantly, the ‘One Belt, One Road’ Initiative will transform Zhengzhou into an epicentre for regional and global logistics. The SCMP article highlighted that as Zhengzhou develops into a comprehensive import/export and transport hub, it is also expected to attract a number of secondary supporting industries such as warehousing and manufacturing businesses and eventually global financial services. The hub of activity and the creation of new jobs will drive people into area which will draw focus on the development of other industries such as, property, healthcare and education. We can expect that the Government will be providing incentives, particularly to foreign companies, to set up in Zhengzhou and participate in the ‘One Belt, One Road’ Initiative. So our advice to Australian companies is to get in now before it’s too late! 

Chongqing - the next destination for foreign business and investment

Image credit: The Telegraph UK

Image credit: The Telegraph UK

Once an old industrial base, Chongqing has rapidly emerged as one of the fastest growing and fastest urbanising cities in China and, according to some reports, the world. Located in China’s west, the municipality of Chongqing boasts a population of over 30 million (one of the largest in China) and a GDP growth rate of 11% year on year (also one of the fastest of China). It is also the centre of China’s ‘Go West’ Strategy which has created a unique business and investment environment for foreign companies. Despite its profile, Chongqing still remains largely unknown to the West who often look to Beijing and Shanghai when entering the China market. For Australian companies wanting to launch into the China market, we believe that Chongqing should be there next destination. 

Besides from being one of China’s fastest growing cities, it was made a provincial-level municipality in 1997 (the highest rank for a city in China) and is directly controlled by the Central Government in Beijing.  This was extremely significant as it highlighted the Central Government’s plans to speed up economic and social development in the country’s western regions. Since 1997, Chongqing has evolved from an old heavy industrial base into the region’s international financial, logistics and commercial hub. Its growth has also been supported by China’s ‘Go West’ Strategy (as part of the 12th Five Year Plan) which aims to shift China’s economic activity away from the eastern seaboard into the inner-western regions. Chongqing was identified the centre of this strategy and since then, millions of RMB has been spent to transform the city into the region’s international finance hub and logistics centre. The Chongqing Government also introduced a number of strategies including corporate tax breaks, incentives for investing in the high-tech and green industries, reforms to encourage urbanisation and pursuing and attracting foreign investment to further support its development under the ‘Go West’ Strategy.

Chongqing has also committed to invest up to RMB1.2 trillion in infrastructure construction as part of the ‘One Belt, One Road’ Initiative – China’s new foreign policy to expand its ‘Going Out’ Strategy by building trade routes stretching all the way to Africa and Western Europe. As the Initiative gains momentum, we can expect to hear more from this city.

What makes Chongqing unique is that despite its breakneck economic growth, wealth of business and investment opportunities (created by the ‘Go West’ Strategy and ‘One Belt, One Road Initiative’) and array of Government incentives, it has been largely overlooked by Western companies and businesses who feel more comfortable in entering the well-established and familiar markets of Beijing and Shanghai. Currently, Hong Kong is the largest source of foreign direct investment (FDI) in Chongqing – in 2014 it accounted for 78% of the total utilised FDI (this was followed by Singapore and South Korea). This is good news for Australians as there is less competition from Western companies, more unique and lucrative business opportunities and the potential for local Government support in the form of subsidies, incentives and concessions. Is this the next destination in China for foreign business and investment? We certainly think so.

Is Australia overbought?

With the well-publicised growth of Chinese investment into Australian commercial and residential real estate; and the surge in property prices, many have been asking if Australian property is becoming ‘overbought’.  

Despite an easing in the overall amount of Chinese investment into Australia in 2014, for the first time, investment into commercial real estate and infrastructure accounted for over half of the total transactions and was dominated by investments made by high net worth individuals and private enterprises. Also in 2015, Melbourne and Sydney overtook London as the second most popular destination for Chinese investment (Manhattan in New York is currently number one). With numbers like this, it is easy to understand why so many are concerned about the sustainability of Chinese investment into Australia and are worried that it may grind to a halt. However, I believe that the wave of Chinese investment is only just beginning and we still have a long way before Australia could be regarded as ‘overbought’. 

Over the past decade, China has accumulated large reserves of foreign capital due to the disparity between its outbound FDI and inbound FDI. However, since 2008, outbound FDI has started to increase dramatically and in 2014, it was almost equal to inbound FDI for the first time. And it is expected to grow even more – by approximately 10% year on year according to the Chinese Ministry of Commerce (MOFCOM). This is driven not only by the Government’s ‘Going Out’ Strategy and the new ‘One Belt, One Road’ Initiative (China’s new foreign policy encouraging infrastructure investments and developments across Asia and Europe), but also by encouraging private individuals and enterprises to invest overseas through a number of well publicised initiatives, including the Qualified Domestic Individual Investor (QDII) scheme, the internationalisation of the RMB and the push for greater diversification of assets overseas. With such a large wave of outbound foreign capital and a national priority to invest overseas, this indicates to me that the wave of investment from China has only just begun, and is likely to continue well into the future.

2014 was a significant year for Chinese investment into Australia. Even though overall investment decreased slightly from 2013, it was the first year that Chinese private sector investment exceeded state-owned enterprise investment. And also the first time that investment was diversified away from the mining and resources sector into new sectors, such as commercial real estate, infrastructure projects and the tourism and leisure industry. Also, Australia represented around 6% of China’s outbound FDI in 2014 indicating that there is still plenty more room for this number to grow. As China increases its outbound FDI by 10% each year, and with the growing interest in overseas property and infrastructure, we can expect to see new Chinese private enterprises, individuals and property development companies entering the Australian property market.

Chinese investment into global commercial real estate

Chinese investment into Australian commercial real estate

According to Knight Frank, for the first time ever in 2015, Chinese outbound investment into global commercial real estate reached USD$30 billion, double that of 2014. But what was particularly notable was that Australia received nearly 15 percent of this amount. I believe this is extremely significant because it demonstrates China’s commitment and interest in Australia’s property market. From travelling around China, particularly to the second and third tier cities, and my discussions with lesser-known but comparatively large property development groups, many are developing their own ‘Going Out’ Strategies and are drawn to Australia because of the well-established bilateral relationship, our well-regulated and relatively stable market government and our ‘clean, green and safe’ credentials.

Source: Knight Frank Research

Source: Knight Frank Research

So who can we expect to invest into Australian property? Besides wealthy Chinese individuals and private companies investing into off-the-plan properties or new property developments, research from Knight Frank indicates that Chinese insurance companies are also expected to participate in the next wave of investment. Currently, only Sunshine Insurance has invested in Australia (they purchased Sydney’s Sheraton on the Park Hotel and ‘The Vintage’ resort in the Hunter Valley) but the table above indicates that more than half of the major insurance companies have expressed interest to invest offshore. Of course there is no certainty that they will invest in Australia but the growing trend is evident. Taking into account the growth trajectories, the bilateral relationship and Chinese Government policies working in our favour, it is reasonable to assume that these companies may begin to start making significant investments across Australia, only adding to the ‘demand side’ of the equation.

Interestingly, it is not only ultra-rich Chinese individuals who are investing in Australian luxury properties; ultra-rich Indians are also becoming increasingly interested in the market. According to Agent Ken Jacobs, the head of Christie’s International Real Estate in Sydney, more ultra-rich Indians are embarking on ‘due diligence’ checks. Whilst these have not yet translated into sales, he expects this to happen in the next few years. In addition, ultra-wealthy investors from other Asian countries, such as Singapore, Malaysia and Indonesia, are also expected to follow Chinese investors and become much more active in the Australian property market (residential and commercial).

To answer the question, no, I don’t believe Australia is overbought. There is every indication that Chinese investment into Australian property will continue to grow and we can also expect new players to emerge from other parts of Asia, including India, Malaysia, Singapore and Indonesia. The bigger question is whether Australia will be able to meet this demand. With Sydney and Melbourne’s CBDs becoming increasingly overcrowded; Governments, town planners, businesses and entrepreneurs have a once in a generation opportunity to capitalise on future inbound investment to design and build new residential, commercial and infrastructure projects to contribute to the growth of the outer suburban and even regional areas across Australia. This process of “nation building”, which is now so prevalent in other Asian countries, could be transformational for Australia as we grapple with the challenges and opportunities of living in the Asian Century.

Our 8 Key Learnings from this year’s “Invest in Australia” Mission

Our annual “Invest in Australia” Mission ran from 17th to 22nd of January 2016. Over six days we attended the Asian Financial Forum and other events in Hong Kong and also visited Zhuhai and Macau for a day of business networking, presentations and tours. These were our key learnings from the trip:

1. China is transitioning

At the Asian Financial Forum, former Chairman of the US Federal Reserve, Dr Ben Bernanke, had much to say about the direction of the Chinese economy. The comment that stuck with me most was his explanation of China’s economic slowdown. He made the point that, over the past thirty years, China’s manufacturing and heavy industrial based economy was relatively easy to measure– the output of manufacturing, factory inventories, PMIs, volumes of exports and cargo and so on are all tangible, identifiable and measurable. However, China is now transitioning to a services and consumption based economy which has less tangible outputs to measure. Therefore, we should be careful how we react to China’s growth rate as it is inevitable that their economy is perceived to be ‘slowing’.

2. Zhuhai – not just a tourism destination

Perhaps what struck me most during the trip was the relevance of Zhuhai to Australia. Despite being a ‘small’ Chinese city (population of 2.3 million), it is beginning to play a significant role in the development of China’s southern region. This is largely due to President Xi’s concentration on further opening China’s southern cities – Zhuhai is home to the Hengqin Free Trade Zone (which we visited during our tour) and many local government business departments are actively attracting and engaging foreign companies to set up in Zhuhai. For Australians, competition in Zhuhai is less ferocious and many of its focus industries (tourism and leisure, financial services, education and advanced technology) match with some of Australia’s key strengths. To know more about our time in Zhuhai, please read our last blog post.

3. Preaching to the unconverted

During the Mission, the Austrade office in Hong Kong organised a seminar for our delegation focused on opportunities in the services sector emerging from the China-Australia Free Trade Agreement. Everyone in the room knew about and believed how important China is and was actively engaged with and excited about the opportunities it presents to their businesses and organisations. And back in Australia, there seems to be a weekly conference, seminar or presentation about China with an equally motivated audience. But are all Australians as well informed and passionate about China or are we just preaching to the converted? We have to ensure to engage all Australians, even those sitting far away on the other side of the fence, about the relevance and importance of China.

4. Hong Kong as the launch pad

Hong Kong’s history with Britain and China has resulted in a unique environment that is particularly beneficial for businesses looking to expand into China. Hong Kong is a launching pad for your China business because, over time, it has become home to many Hong Kong locals who have been actively engaged with China, many Chinese mainlanders who have set up in Hong Kong and many expatriates who have dealt closely with Hong Kong and China for many years. Their expert advice and unique insights and experiences are extremely valuable to a company looking to set up in China for the first time. As a result, Hong Kong’s role as the traditional gateway to China (and its emerging role as a platform for outbound Chinese investment) is as relevant today as it always has been.

5. Hong Kong’s role in the ‘Belt and Road’ Initiative

Something that became extremely apparent to me during the AFF was that Hong Kong has pinned its economic and relevance future on China’s ‘Belt and Road’ Initiative. Using its strategic position between China and the rest of South East Asia, Hong Kong will become the facilitator of capital, services and people traveling along the Belt and Road. Utilising its strengths in financial and professional services, Hong Kong has promoted itself as the foreign service provider to countries looking to tap into the opportunities and direct investment in and out of China. As the ‘Belt and Road’ Initiative develops, it will be interesting to watch how Hong Kong grows and develops alongside it.

6. Australia in the Asian Century?

The AFF is one of the world’s largest economic forums, bringing together some of the most influential members of the global financial and business community to discuss developments in the dynamic Asian market. The theme of this year’s forum was: “Asia: Shaping the New Paradigm for Growth” and it was obvious that many Asian countries are seriously planning to work together to develop the Asian market. For example, the Deputy Prime Minister of Russia and Thailand’s Vice Minister of Finance both made opening keynote presentations about their own domestic policies to support the ‘Belt and Road’ Initiative and the greater economic development in Asia. However, Australia was not mentioned in any discussion, presentation or workshop. This was disappointing because Australia can play, and should play, a very important role in the markets of Asia and is already a member of the Asian Infrastructure Investment Bank which is plays a critical role in funding many of ‘Belt and Road’ initiatives.

7. Sustained interest in SIV

Due to the July 2015 changes to Australia’s SIV program, service providers in Hong Kong and China are trying to better understand the new regulations and requirements. The SIV Seminar in Hong Kong, organised by co-mission leader Stacey Martin, drew a crowd of nearly 50 participants from across the migration, fund management and banking industry. Many have argued that the changes to the SIV program will seriously damage its popularity in China and Asia and application numbers are likely to drastically decrease. This is still too early to say. However, the audience engagement at our event was a good indication that interest is still strong.

8. Macau’s golden years are over

As one of the most popular gambling destinations in the world, Macau’s wealth has sky-rocketed over the past decade. From 2009 to 2014, Macau’s compound annual growth rate was 30% due to a combination of economic stimulus programs from China, plenty of funding opportunities from Chinese developers and the large numbers of wealthy Chinese travelling to Macau for gambling and recreational purposes. However, the bubble is now beginning to burst. Macau recorded a 43% fall in revenue in 2015, partly due to China’s own slowdown but also its crackdown on corruption which has stopped many Chinese government officials from going to Macau’s casinos. As Macau adjusts to this ‘new normal’, it will be interesting to see how far-reaching and long-lasting its effects are.    

Australian Mission to Zhuhai - 20th January 2016

At the Hengqin Free Trade Zone with Eric Zhang and Cimy Ma from the Hengqin FTZ Business Development Centre

Our annual “Invest in Australia” Mission was held from 17th to the 22nd January 2016 in Hong Kong and China. As well as representing Australia at the Asian Financial Forum in Hong Kong, we also led an Australian mission to Zhuhai in China’s Guangdong Province for a day of tours, business meetings and presentations. Being one of the first Australian missions to Zhuhai, our delegation represented an opportunity to lay the foundations for a platform of business, trade and investment relationships between Australia and the rapidly emerging 3rd tier city of Zhuhai.

In the morning, we visited the Hengqin Free Trade Zone, one of the three pilot free trade zones in the Pearl River Delta Region to be announced by President Xi Jinping in 2014. We were met by representatives from the Hengqin FTZ Business Development Centre who provided a brief tour and presentation of the FTZ. When fully completed, the Hengqin FTZ, with its preferential policies and financial incentives, will be a great platform to support Australian businesses entering the China market.  In addition, its focus industries (tourism and leisure, financial services, education and advanced technology) match with some of Australia’s key strengths. 

We then travelled into the Zhuhai CBD to meet with representatives of local government agencies (the Zhuhai Bureau of Commerce, the Investment Promotion Services Centre of Xiangzhou District and the Investment Promotion Centre of the Zhuhai Hi-tech Industrial Development Zone) who presented opportunities in Zhuhai for overseas investment and business collaboration in key emerging sectors such as biomedical technology, tourism & leisure and financial services. This was followed by a traditional Cantonese banquet including a discussion about the possibilities and opportunities for establishing a platform for engagement between Australia and Zhuhai.

As an emerging and fast-growing city, Zhuhai represents a unique platform for Australian small to medium sized businesses to expand into China. With a small population (2.3 million) and relatively low numbers of international companies operating in Zhuhai, competition is less ferocious and the local government associations are very welcoming of overseas companies looking to do business in Zhuhai.  Also, many of the city’s industrial zones receive preferential policies (for example tax incentives and rent-free periods), making it a relatively easy and cost-effective destination for expansion. And with the completion of the Hong Kong-Zhuhai-Macau Bridge, business and travel will become even easier, opening up Zhuhai to Hong Kong and the rest of the world.

We hope to come back to Zhuhai in 2016. 

Lunch with Carrie Lin from the Investment Promotion Centre of the Zhuhai Hi-tech Industrial Development Zone, Cheryl Zhang and Foster Xie from the Zhuhai Bureau of Commerce and Yi Wei Jiang from the Investment Promotion Service Centre of Xiangzhou District