Open letter to the new Government of Australia

Dear Next Government,

Congratulations on your election triumph! We hope that the result gives you the mandate you need for strong management and leadership of our economy for next three years. To help with your post-election action plan we thought it timely to set out our thoughts and ideas for you to capitalise in Australia’s role in the Asian century, particularly in relation to China. We have set out our ideas under five headings and invite you to consider these carefully. 

1. Innovation, investment and our services sector

It has long been touted that Australia’s greatest offer to China are our services and “smarts”. As our mining industry has been declining, our exports in services like education, healthcare, renewable technology and financial services have been growing. However, we still have a long way to go. According to the recent ‘Demystifying Chinese Investment in Australia’ Report by KPMG and the University of Sydney, the dollar amount of Chinese investment into our healthcare, renewable energy and agribusiness sectors have been growing. But this has largely been due to a small number of mega-sized deals with large Australian companies which included State Power Investment Corporation’s acquisition of Pacific Hydro for $3 billion and Biostime’s acquisition of the Swisse Wellness brand for $1.38 billion.

In my opinion, there is still a long way to go before we see more deals made with the smaller end of town. If we want to see investment across the board in our services industry, we need to remain as innovative and globally competitive as possible. Under their ‘Going Out’ Strategy, China is going around the world looking for the best technology and capabilities in which to invest and bring back to China. If our SMEs are not encouraged to innovate and have the necessary support to develop their capabilities, services and technology, we are likely to be overlooked and left behind. The raft of initiatives - such as funding for start-up incubators and increasing collaboration between industry and researchers - proposed in the Government’s new National Innovation and Science Agenda are a good start. However, these plans need to be matched with the necessary investment, funding and support if we are truly serious about attracting more Chinese investment into our services sector.

2. Top-down rather than bottom-up

In 2013, I worked with Citrus Australia to take a group of citrus growers to China to attend a number of trade shows and meet with local importers and premium supermarkets. At the beginning of the trip, many of the growers worked independently – chasing leads, having private conversations with importers and hiding confidential information from everyone else. However, after a few conversations, the growers learnt that the demand for their produce from China was so large that they could not possibly supply it alone. The growers realised that in order to meet the demand, they all had to work together under the Citrus Australia banner. Presenting a collective, united and collaborative front was also more effective in attracting attention as the Chinese recognised ‘Brand Australia’ more easily than the brands of each individual farm. This led to the group securing some lucrative contracts and since then, citrus exports to China have been doubling year on year.

I believe this is occurring across other industries, with businesses competing against each other for a cut of the pie which is, more often than not, too large for them to grapple with by themselves. Whilst the presence of Austrade and other agencies have been consistently strong in China, industry associations now need to get involved and receive the encouragement and support necessary to represent their businesses in China, just like Citrus Australia. Without a united and national brand, businesses will be dwarfed by the demand of China’s emerging middle class.

3. Are we really a multicultural nation?

We have always claimed that Australia is one of the most multicultural nations in the world – with nearly 30% of our population born overseas. But do our businesses, organisations and institutions, and more importantly, executive boards, reflect this multiculturalism? The short answer is ‘no’. In 2014 the Diversity Council of Australia released a report in which they found that whilst the Australian labour force is 9.3% Asian born, only 4.9% make it to senior executive level and in ASX 200 companies, only 1.9% of executives have Asian heritage. These percentages would be even smaller if we just looked at those with Chinese heritage. Also, many Australians who have lived and worked in Asia for a long period of time often return back to find that their knowledge, skills and experience are under-utilised and under-valued. And what about in Government? How many Asian faces do we see sitting in the Upper and Lower Houses? When dealing with a market as complex, diverse and challenging as China, we need to promote Chinese and Asian staff into roles where they can use their cultural background and knowledge to make the big decisions about China.  

Of course we cannot expect the Government to elect people into executive board roles or parliamentary seats. But we do hope that a commitment can be made to make finding feasible solutions a priority.

4. ChAFTA – Just the beginning

The signing of ChAFTA was a watershed moment in the Australia-China relationship and represents a real commitment on a Government level to further the relationship. However, I believe that ChAFTA only marks the beginning of the next chapter in the relationship. In order to fully take advantage of ChAFTA, the Government has the responsibility to educate the business community and the community at large about the opportunities and benefits China represents to Australia and what it means for our economic growth and the creation of new jobs. Without this, there is a big risk that businesses will not be mobilised and energised and will miss out on these opportunities. Chinese businesses and institutions are already taking advantage of ChAFTA – as seen by the increase in investment deals and infrastructure projects and will continue to do so. If we do not educate the greater community and provide the necessary support to businesses, organisations and institutions, there is a strong possibility that the agreement will be unbalanced with the Chinese getting more out of it than us. And if we were to look back in 10 years’ time, we would consider this missed opportunity a great shame.   

5. Education overhaul

From Hawke to Keating to Rudd to Abbott, it seems that every government since the late 1980s has promised an education overhaul to encourage more students to undertake learning an Asian language. Whilst Hawke and Keating were somewhat successful, every plan since then has been shelved due to funding issues and changing priorities. And since the year 2000, student enrolments into Asian languages have been on the decline. If our next generation grows up without an appreciation for Asian cultures and languages, how can we expect them to engage with, let alone understand, our Asian neighbours? If Australia is serious about growing its relationship with Asia and China, a sufficiently-funded national program encouraging schools to offer more Asian languages and encouraging students to study should be at the top of the new government’s priority list.

One of the things I admire about China is their 5 year planning cycle and how this has been effective in lifting thousands of people out of poverty, building world-class infrastructure and transforming their economy. Whilst I appreciate a 5 year planning cycle doesn’t quite fit in with our 3 year election cycle, I hope the Government can consider the possibility of a 5 year ‘Asian Engagement Plan’ to fully embrace the opportunities of the Asian Century.

Yours sincerely,

David Thomas & Katya Dobinson

A new era for Australian Banks?

Credit: Asian Banking & Finance

Credit: Asian Banking & Finance

What happened?

In April and May 2016, all major Australian banks announced that they had tightened the rules for lending to foreign nationals buying residential properties. The succession of announcements has undoubtedly caused much alarm across the community, with many claiming that despite Australia being ‘open for business’, these changes reflect entrenched anti-foreign investment sentiment, particularly towards Chinese investors and buyers, in our banking institutions. Some commentators have predicted that applications made by Chinese investors and buyers, who have largely been driving the property market boom particularly for off-the-plan apartments, will be consistently denied, resulting in a devastating crash in the property market.       

To be fair, not all banks have completely halted foreign lending. For example, NAB announced that it will only lend up to 60% of the value of the property to foreign nationals and recognise only 60% of their income earned offshore. ANZ will no longer grant loans to borrowers who generate 100% of their income offshore and will introduce stricter documentation requirements. Whilst Westpac and its subsidiaries say they will no longer lend to foreign nationals.

Why did it happen?

The reasons behind the regulatory changes are multi-faceted. After Australia weathered the Global Financial Crisis, a gradually increasing demand in the property market created an impetus to increase supply. This saw a flurry of activity amongst property developers, with more approvals, more projects and the sale of more stock. Combined with record-low and falling interest rates and an expectation that the market would continue to rise, more and more buyers and investors entered the market creating a buying frenzy. In addition to property prices reaching unprecedented heights, the banks also increased their lending to capitalise on the influx of buyers and investors and to capture their market share.

This, however, has considerably slowed down. The buying frenzy has resulted in some malpractice and even fraud with numbers of foreign loan applicants being found to have provided forged and fraudulent support documentation.  In addition, it has been found that many speculators who purchased off-the-plan properties were only paying a 10% deposit with a view to transferring them to other buyers with no intention of completion. APRA, the banking regulator, has put serious pressure on the banks to clamp down on their approval processes to squash such applications. In addition, the Government has slowed things down by changing the rules under FIRB to limit the type of properties foreign nationals can purchase and the increasing application fees and stamp duty they must pay.

Is it good or bad?

It is unquestionable that the banks needed to clamp down on fraudulent applications and tighten up their approval processes. It is in nobody’s interest to encourage disingenuous buyers and investors who are at serious risk of defaulting on their loans. Also, it brings about a much-needed pause in the market that was in danger of getting out of control.

However, announcements like this are perfect fuel to the fire that Australia is closing its doors to foreign investment. These announcements have been misconstrued and translated to the Chinese (via media and other channels) that the banks have completely halted all lending to foreign nationals, creating much animosity, anxiety and frustration.  

What has been revealed?

These recent events have exposed a broader issue that needs to be considered, addressed and tackled – major differences in business culture and practices. The environment, culture and framework of Chinese and Australian banking institutions are vastly different. Their approaches to rules, regulations and approval processes, as well, differ greatly. Australian banks are notorious for their rigorous application and approval processes, particularly in regards to their inability to recognise and value overseas assets. Applicants are also obliged to supply huge amounts of documentation for a seemingly simple request. Whilst processes in Chinese banks are more flexible so applications are often approved swiftly and seamlessly.

There is also a need to consider employment differences and the effects these have on loan and credit applications. Banks in Australia require all applicants to supply pay slips to support their credit and loan requests. However, in China, providing employees with pay slips is not as common as it here. It also does not help that many wealthy Chinese investors and entrepreneurs are self-employed and generate their income from a variety of sources such as other domestic and international investment portfolios. It has been our experience that both sides do not understand one another’s processes and the reasons behind them, creating immense frustration – Chinese applicants do not understand why they need to provide huge amounts of supporting documentation and Australians get frustrated with their aversion and inability to provide such information.

What can be done?

It is unreasonable to expect banks to change their processes for one group of borrowers, especially in light of recent events, but there is a growing need for flexibility. If Australia wants to continue to capitalise off the influx of Chinese investment and the greater opportunities arising from the Asian Century, our institutions have to look at solving these issues in new innovative ways.

On an executive level, there needs to be greater education and training about China’s regulatory frameworks and how and why they differ to ours. Perhaps it is time for executives to think innovatively about the methods they use to assess a borrower’s eligibility, level of seriousness and commitment? One possible method could be the utilisation of their China branches. Many Australian banks have established branches in China with the aim of promoting Australia to local market but have very little to do with assessing loan applications. Could it be possible that their local staff (all with the necessary language ability and cultural understanding) could be mobilised to help assess such applications, verify the relevant documents and interview potential clients to establish the full picture?

And on a front-line level, staff need to have the education and training to better inform and advise Chinese-speaking customers about the bank’s processes, just like how they assist and advise their English-speaking customers.  

Of course, the onus is not just on Australian banks. Chinese investors need to understand that what makes Australia the safe and profitable investment market it is, is our stringent and strict regulations that protect the market, our institutions and their customers.  

I think these recent events have been a taste of what is to come as Australia and China continue to do business with each other. Cultural differences will always be one of the biggest obstacles in cross-border deals so there needs to be a concerted push to better educate both sides about these differences. Once the property market has returned to “normal” levels, I urge our banks to think differently and innovatively about how they can continue to ride the wave of Chinese investment into Australia. If they can do this, our banks could be the paradigm of change for our other institutions, businesses and communities to modify and adapt their mindsets, adopt more flexible practices and play a leadership role in embracing the opportunities and challenges of the Asian century.

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.