China to 2020

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The year 2016 marks the beginning of China’s 13th Five Year Plan (2016-2020) - the key national planning document.  China’s 1st Five Year Plan (FYP) was enacted in 1953 and since then has become the blueprint for China’s political, economic and social development. The 12th FYP (2011-2015) was seen as one of the most transformative planning documents in China’s history, marking a shift away from the previous ‘growth at any cost’ approach to a more sustainable and qualitative growth model. In October 2015, the Central Government released the broad policies of the 13th FYP (the full details will be released in early 2016) and as expected, it built upon the strategies, targets and regulations of the 12th FYP. After a decade of economic growth at breakneck speed, China has shifted focus to creating sustainable economic growth and playing a direct role in improving the quality of life for the entire Chinese population. The Central Government must now direct unprecedented focus into new industries, areas and interests to create a livable, healthy and harmonious China.

Economic rebalancing

Of course, at the heart of the new Plan is China’s economic rebalancing, particularly as it affects industry and business. As China’s factories and exports inevitably slow down, the Government has recognised the need for technology and innovation to bolster and drive the economy. Originally considered as the world’s ‘copy-cats’, China is committed to creating an environment for innovation and creativity, to produce products that are ‘Created in China’ not ‘Made in China’. Major agendas and plans have emerged to give more autonomy to research centres and institutions, transform the internet into an ecosystem to help industries grow, transform and create new products and services and to increase collaboration between tertiary institutions and business by opening more vocational training colleges. To supplement this, major funding has been committed to bring China’s schools, universities and vocational colleges up to world standards and encourage more students to study locally rather than abroad.

Social changes

China’s years of economic hyper-growth have had an enormous impact on China’s society and social structure. As disposable income levels rise across the country, people in China are now deeply concerned about the role the government plays in their quality of life. The strategies, targets and milestones set out in China’s 13th FYP have been a direct response to some of the anxieties, demands and needs of the Chinese people for a ‘better’ quality of life, particularly those in the growing middle class. The biggest reform under the 13th FYP is the nation-wide scrapping of the one-child policy to combat China’s rapidly ageing population. China’s urbanisation rate is one of the fastest rates in the world and now over half of China’s population lives in urban areas. There is strong consideration of the rural-urban and rich-poor divide in the new Plan, including the introduction of better legal rights for farmers and reforms in China’s social security system.

A healthy China

The new Plan will be dedicated to building a ‘healthy China’. Whilst the details of the new Plan have not been released, unprecedented reforms and investment into China’s healthcare system are expected, with a major overhaul of its public hospital system and the establishment of more private specialised hospitals (particularly in aged-care services). Environmental protection policies will also be extended by setting more ambitious emission reduction targets and goals to grow China’s burgeoning clean-energy industry. 

A continuation of the 12th FYP

Under the new Plan, the ‘One Belt, One Road’ Initiative will form the cornerstone of China’s ‘Going Out’ Policy that was introduced in the 12th FYP. The Initiative aims to consolidate and upgrade existing infrastructure and build new transport routes stretching all the way from Southeast Asia, through Russia, Central Europe and Africa to Western Europe. The ‘Belt and Road’ will transport resources, people and capital around the world with China in the middle facilitating the flows. Besides forming the basis of China’s new foreign policy, President Xi has also made the Initiative a key domestic economic strategy for continuing the ‘Go West’ policy of the 12th FYP. The Initiative has made specific plans to establish Chongqing as the heart of opening up and growing China’s western region. This will be supported by developing Chengdu, Xian and Zhengzhou to open up the inland areas and form the country’s logistics hub.  

Big picture visions or incremental changes?

With these major and ambitious plans, targets and goals, it has been asked by some whether there are the necessary institutional structures in place to support these big visions. In short, there is still some way to go before these structures can be fully implemented. Businesses, institutions and organisations, particularly those outside of China, should still be cautious about some of the goals and targets outlined in the 13th FYP.

However, China does have a strong track record over the past 30 years of meeting or exceeding the targets and aspirations set out in their FYPs and it has proven dangerous for foreign commentators to underestimate their capabilities for undertaking major reform programs. A good example was their goal to lift 600 million people out of poverty which was a major undertaking and exceeded all expectations. Even if, in the unlikely case, China does not reach their targets, the process of achieving these major reforms will involve significant changes and adjustments to many regulations and practices; for example structuring the flow of inbound and outbound capital, streamlining their decision-making processes and navigating the geo-political consequences of their policies. On the surface, the 13th FYP is a potential game-changer for China. However, the changing structures underneath the surface are just as transformative.

The ‘China Opportunity’ in Australia

Walking around Sydney’s CBD, it is hard not to notice the ever-growing Chinese population. Whether they are students, tourists or migrants, the numbers of Chinese arrivals in Australia have been growing exponentially over the past decade. Whilst there has been some progress and focus on opening up China to Australian exporters through the various tariff reductions introduced by the China-Australia Free Trade Agreement, China’s inbound activity into Australia is expected to provide even more opportunities in the short-term for Australian businesses of all sizes. However, we believe there is still a long way to go for Australian businesses to fully realise this opportunity.

The numbers

At the end of 2014, there were 859,500 visitors to Australia from China, but in just 5 months, this number shot up to 921,800 visitors. Three years ago, it was predicted that there would be 1 million Chinese visitors to Australia by 2020, however, with the current trajectory; we may actually reach that number by the end of 2016! Chinese tourists are also spending more than before. By May 2015, Chinese tourists generated A$6.4 billion in revenue, up from A$5.7 billion at the end of 2014.

The Chinese community in Australia has also experienced similar growth. The number of Chinese-born Australians has doubled over the past 10 years to reach 450,000 and is still growing. And last year, our Australian universities recorded over 150,000 enrolled Chinese international students. 

The opportunities

With this kind of growth, Australian businesses are in a unique position to engage in the ‘China opportunity’ without actually leaving Australia. As an example, luxury hotels, retailers and high-end food and beverage providers can expect a boom in business since Australia overtook France as the number 1 international luxury destination for Chinese tourists at the end of 2014. The Chinese community also provide an effective testing ground for Australian products before exporting to China. And businesses may not need actually need to export their products as tourists and international students are sending more and more Australian products back home to friends and family. As you may have read in the news, many local Chinese people are purchasing infant formula from Australian supermarkets and bringing it into China with them to give to their family and friends. In the services space, small and micro businesses can develop tailor-made services targeting the wealthy Chinese in Australia. I recently met with the owner of a small family-run beautician in Sydney which was providing specific skin treatments to the wealthy Chinese living in the local area. Similarly, I also came across a small restaurant in Sydney which had developed a website hosted in China to advertise their business after they saw a rise in Chinese customers.

There is still some way to go…

Despite the opportunities in exporting and selling Australian products and services, the local Chinese community are not fully engaged by Australian businesses. In 2014 the Diversity Council of Australia released a report in which found that whilst the Australian labour force is 9.3% Asian born, only 4.9% make it to senior executive level. 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. Australian companies are also very reluctant to hire Chinese international students as interns and to recruit and sponsor them after graduating.

We predict that the Chinese community in Australia will eventually become the bridge for Australian businesses wanting to engage fully with the Chinese market. However, businesses need to realise that China’s inbound activities in Australia do not only present an opportunity for selling and exporting products and services. By hiring a Chinese intern or full-time employee, the worst thing that can happen is that you will have a hard-working, diligent and talented person working for you in your office. The best thing that can happen, however, is that they could use their connections through family, friends and colleagues to open the door to invaluable business opportunities with China.


China is modernising, not westernising

I've recently returned from a week in Hong Kong and Singapore attending Board Meetings and conducting fund manager visits in my role as an Advisory Board Member of the Emerging Markets Masters Fund. The main topic at every meeting was the investment and economic outlook for China, particularly after the recent market falls and volatility, and reading my notes from the week, and having had time to reflect on what I heard and learnt, here are my main conclusions:

1. China's economy is slowing. This is deliberate

  • However you look at it (export numbers, PMI, retail sales, fixed investments) China's GDP growth is slowing and probably sits within the 5% to 6.5% range. Almost certainly below the official number of around 7%.
  • China doesn't need growth at the moment. Unemployment is steady (around 4% - 5%), domestic consumption is picking up slowly and exports haven't contributed to growth for the past 2 years. If China wanted growth, they could easily provide some kind of stimulus which would provide short term gain (but long term pain!)
  • What China needs is better governance, market reform, increased transparency and the elimination of corruption. The Central Government, and President Xi in particular, is very committed to achieving all of these things. I learnt of over RMB 1 trillion in approved projects which haven't yet been implemented due to the widespread fear amongst local Government officials of potential investigation and scrutiny (of both present and past projects) which is certainly slowing their economy but shows how seriously the austerity measures are being taken. This will be good in the longer term.

 2. The market will recover

  • The recent euphoric rise in the share market was driven by retail investors with too much leverage. When the market turned (for various reasons, including the tightening of margin lending, the surprise RMB devaluation and wild speculation in the western world about what was happening) these same two factors drove the market down. I saw a chart of the number of negative western media comments on China over a 20 year period and it spiked off the chart in September 2015!
  • China's economic fundamentals are still in place:
    • economic reforms
    • corporate restructuring
    • lower interest rates
    • deregulation
    • modernising the economy (not 'westernising')
  • The move by the Central Government to convert local Government debt (a source of major concern, particularly amongst foreign commentators and economists) into Government backed municipal bonds (with a 4% yield) is seen as a stabilising influence and removes some of the anxiety about this issue which has existed in recent times.
  • Volatility will continue in the short term with the slowing economy (see above) weak macro numbers and with the Government exiting the share market after providing the bolstering that was necessary to avoid a major collapse (on a scale we can only imagine) which would have had wide and unforseen consequences (eg SOEs now offering share option plans to executives and staff) and would have taken years to restore confidence. In the longer term (say 12 months from now) the economic fundamentals will prevail and the market will recover. Short term weakness should be seen as an opportunity to accumulate stocks at lower prices.

3. There's no sign of weakness on the ground

  • I visited a plastics manufacturing factory in Quanzhou City in Fujian Province (a short one hour drive from Xiamen) and met with the factory owners whose clients include many well known international brands and a multi-million dollar business operating large factories in five cities across China. They reported that business was growing steadily, there are signs of slowing in some areas of the economy, but their business was strong and stable. No slowdown there.
  • Tourism is a fast growing industry. Over 100 million Chinese people travelled overseas in the past 12 months and their own domestic market is booming. No sign of any slowdown there.
  • Household spending figures (excluding Government officials and SOEs) are strong and there is evidence of this everywhere you look. You can't seem to get into a restaurant without booking, there are queues outside the luxury brand stores (although perhaps slightly less than there used to be) and you can't move in shopping malls at the weekends. 
  • Property prices are rising again, notably in the first and second tier cities, and inventories in the third and fourth tier cities are starting to reduce. Vanke have reported a 30% increase in sales in August 2015. This is significant as the property slowdown has been regarded by many as a potential trigger for a future 'hard landing'.

We have maintained our position in China A shares (approx. 20% of the EMMF) and will no doubt consider increasing this over time to reach the MSCI EM weighting for China (though this doesn't include any weighting to China A shares) of 23% (we trimmed our position just before the market fall) when some of the short term volatility settles down. Whilst we can invest in a broad range of China A share managers, our preference is to invest in local boutique Chinese managers as opposed to international brand names, particularly those who don't run a local team. I have always maintained the view that the only way as a foreigner to understand China (whether as an investor, entrepreneur or business leader) is to work with the locals. I would be surprised if this changes in my lifetime!

Review of ACBW China 2015 - CIFIT in Xiamen

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From 7 to 10 September, I attended China’s biggest international expo – China International Fair for Investment and Trade in Xiamen, China along with my colleague, Katya. 70 Australian exhibitors and delegates joined the Australia China Business Week delegation to showcase and promote their services, businesses and investment opportunities. Throughout the 5 day mission, delegates attended a variety of functions including the official CIFIT Welcome Event (where I was fortunate to see Jack Ma, founder of Alibaba, speak to a VIP crowd), the official ACBW 2015 China Forum and a number of business matching events.

The Australian Pavilion, organised by the Australian Business Forum, was the highlight of the trip. The Pavilion showcased a variety of businesses ranging from financial services, agricultural projects, real estate and wine. With its distinct Australian branding, it attracted literally tens of thousands of visitors, investors, entrepreneurs and businesses with a genuine interest in Australia as an investment and business destination.

In addition, I chaired the bilingual ACBW China Forum which was co-hosted by the Fujian Government’s Department of Commerce.  Deputy Director General from the Department of Commerce, Mr. Shaohe Chen, also presented to the audience, commenting on the importance and future of the Australia-China relationship. The Fujian Government and ABF also organised a unique opportunity for Mission delegates to engage exclusively with local businesses, and present their projects and services in a one-on-one business matching setting. We also attended the Business Matching Symposium hosted by CIFIT where we met a variety of individuals and businesses from across China looking to engage with the Australian market.

Overall, the Mission was a fantastic opportunity to source investors for a variety of projects, to promote Australia in China as a business and investment destination and to make valuable connections and networks in China. After recently singing an MOU with the Fujian Government, ABF will host another Australian Pavilion at next year’s CIFIT in Xiamen. If you want to be a part of the 2016 delegation, please keep the 8 and 9 September free and we will be back in touch at the beginning of next year with more information.

Anhui - The link between China's East and West

Located next to China’s wealthiest and most developed cities and provinces, Anhui has long been overshadowed by the affluence and influence of its powerful neighbours. Located in the Yangtze River hinterland, Anhui is considered part of the Yangtze River Delta Region, China’s largest and wealthiest economic zone. However, with the Government’s recent focus on the development of its second and third tier provinces, Anhui is quickly emerging as the key link between China’s rich eastern seaboard and underdeveloped western and central areas. The big cities of Shanghai, Nanjing and Wuhan lie within a 500-km radius of Hefei (Anhui’s capital) and within that radius; there are 500 million people who account for nearly 40% of the nation’s GDP.

About Anhui

Anhui province is considered part of China’s eastern region and is located across the basins of the Yangtze River and the Huai River. The province was established in the 17th century and is the birthplace of the famous Hui group of merchants, the strongest of all merchant groups in China. Anhui is regarded as a 2nd tier province, with a comparably lower GDP than others. However, similar to other 2nd the 3rd provinces, Anhui has a GDP growth rate of approximately 9% per annum.

Anhui’s geographical location boasts two significant advantages:

-          Firstly it lies on extremely fertile and mineral rich land. Over 123 different types of minerals have been discovered in Anhui and the province is considered to have some of the most abundant and rich reserves of coal, iron and copper.  It is no surprise that some of China’s well-known manufacturing corporations such as Ma Steel Group (iron and steel manufacturer) and Conch Group (plastic and cement producer) are based in Anhui.

-          Secondly, Anhui lies along the Yangtze River – China’s longest river connecting 11 provinces from the East China Sea to Sichuan. In September 2014, the Chinese Government launched the ‘Golden Waterway Yangtze River Economic Belt’, a national plan to transform the river region into an economic super zone. Port cities along the River (such as Wuhan and Chongqing) have also made transport and logistical plans to handle and take advantage of the expected increase in activity along the Yangtze. 

Major industries:

1.       Hardware and software – manufacturing and education

With its abundance of primary products and materials, a large population and its strategic location along the Yangtze, Anhui has long been considered as an important manufacturing hub for China. The province is well-known for producing modern equipment, automobiles and home appliances, and manufacturing petrochemicals and machinery. In fact, Anhui products are China’s leading automobile exports – making up 22.1% of the nation’s total. Also, the province’s production of air conditioners, televisions, refrigerators and washing machines accounts for approximately 20% of the national total. Its capital city, Hefei, is considered as China’s biggest production base for household appliances.

In recent years, the Government has made a concerted effort to push Anhui up the production value chain – developing its capabilities, skills and knowledge in the production of green and hi-tech products such as new energy materials, advanced intelligence information technology, biopharmaceuticals and hybrid cars and buses. To foster this growth, Anhui has implemented a strategic provincial plan which includes the establishment of three national technology and innovation zones and an economic district in the north which receives special benefits such as tax incentives and fee exemptions to encourage companies to experiment, innovate and nurture talent. The province is now well-known for its strengths in science and education – it houses over 2000 research institutes and universities and over 40 specialist laboratories and technology research centres, only second behind Beijing for its concentration of scientific education institutes.

2.       Transport

Anhui’s transportation infrastructure has been a popular target for investment and the province is now considered a sophisticated and diverse transportation and logistical hub. The province has six airports, providing passenger services to major Chinese destinations and some overseas cities such as Bangkok, Osaka and Singapore. Anhui also has nearly 400 berths along the Yangtze River with a carrying capacity of over 1,000-tonnes, the most in China’s central or western regions. Perhaps most significantly, Anhui is a major railway terminus, connecting China’s key north-south and east-west routes such as the Jinghu (Beijing-Shanghai) and Ningxi (Nanjing-Xian) lines. Fast trains from the capital Hefei reach Nanjing in only one hour, Wuhan in two hours, Shanghai in three hours and Beijing in less than four hours. There is currently nowhere else in China with such a dense concentration of high-speed railways either completed or under construction.

3.       Tourism

Anhui is a major tourist destination in China and its tourism industry accounts for a major proportion of its services sector’s revenue. Anhui boasts some of China’s most famous scenic areas, including the Yellow Mountain (Huangshan黃山) and Tianzhu Mountain (天柱山). Over the three-day May Day Holiday in 2014, over 20 million tourists travelled to Anhui. The Yellow Mountain alone attracted around 70,000 tourists. The tourism bureau also observed that more tourists were visiting natural and rural sites, rather than urban areas. However, much like China’s tourism industry as a whole, Anhui lacks the quality services it needs to cope with the sheer volume of tourists. The Yellow Mountain, in particular, has been identified as a site needing more sophisticated, streamlined and modern services as more and more tourists visit each year.

The opportunities

In China’s 12th Five-Year Plan, tourism and technology have been identified as target sectors requiring significant development and improvement and China is looking outside of its borders to source foreign talent, knowledge and investment to bolster their own capabilities. Perhaps what is most exciting about Anhui is its geographical location. Everyone knows the unprecedented pace at which China’s eastern seaboard was developed and how the central and western regions were largely neglected and overlooked. However, as part of the government’s “Go West” policy, there has been an enormous push to build up China’s underdeveloped western and central regions, encourage foreign companies to do business in these areas and transform many of these areas into important and specialised industry clusters. As these areas grow and develop, Anhui is poised to be the link between China’s east and west and will undoubtedly benefit from the increasing levels of trade, business and activity.