08/08/2013 - 08:32

New buds amid Sino slowdown

08/08/2013 - 08:32

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A moderation in the growth of China's economy has sharpened the focus on trade opportunities beyond the mining and resources sector.

New buds amid Sino slowdown
CLASS FOCUS: Simon Rodwell is developing a collection of branded foodstuffs to sell to China’s increasingly discriminating middle class. Photo: Attila Csaszar

A moderation in the growth of China's economy has sharpened the focus on trade opportunities beyond the mining and resources sector.

THE slowdown in China's economic growth has reverberated around Australia, and nowhere more so than in the resources-rich west, but many local businesses were looking beyond the mining boom long before the iron ore price came off its peak.

A joint study by KPMG and Sydney University's China Studies Centre earlier this year found that China had injected more than $US16 billion into Western Australia in the six years to 2012, with investment heavily concentrated in mining and resources.

The bulk of this investment has gone into a small group of iron ore ventures, including CITIC Pacific's Sino Iron project, Ansteel's funding of the Karara project and Sinosteel's acquisition of Midwest Corporation.

Despite this, WA businesses are increasingly looking to China's new markets and the appetites of its vast and rapidly growing middle class to drive new ventures.

This is fuelling the export of the state's fresh produce, education and environmental services to China; and then there are the businesses leveraging China's deep capital markets to support projects such as property development in WA.

SWAN-AGRI has been selling wool to China for two decades but its managing director Simon Rodwell is now focused on China's burgeoning demand for WA's clean, green produce to drive a new venture.

While only in the development stage, SWAN-AGRI is devising a collection of branded foodstuffs to sell to China's increasingly food-savvy middle class.

It's a significant diversification for the business but Mr Rodwell is confident this new operation could account for as much as a third of the company's turnover within five years.

SWAN-AGRI's range will target the top 5 per cent of the Chinese population with a selection of products, including dairy and seafood.

This educated slice of Chinese society wants to eat produce from countries with strict pesticide, herbicide and hygiene controls, after several food safety scandals in China in recent years.

And Mr Rodwell predicted China would be quick to embrace organic and certified foods, which represent yet another opportunity for WA's agricultural sector.

SWAN-AGRI plans to leverage its wool network in China as well as its long trading history in the country to develop a distribution network for its food line.

"We have a pretty good network in China and if you have experience trading in China as we do with wool you know what to look out for and what's acceptable and what's not," Mr Rodwell said.

It's a bold move by SWAN-AGRI but in many ways it's emblematic of the broadening of the trade relationship between WA and China.

Adam Handley is a senior partner at Minter Ellison with a special focus on Chinese investment into WA.

Despite the softening in our resources sector, Mr Handley said there had been a marked increase in the pace of Chinese investment in the past few months.

"The peak of the boom is over but I think people are over-estimating (the negativity of) China's attitude towards investing in WA. Now that asset prices have come down quite significantly there is still a lot of continued interest on the resources side in China," Mr Handley said.

"And we haven't yet seen a wave of agricultural investment and Chinese money coming in, I think we are on the cusp of that but we haven't seen it materialise yet."

Chinese group Heliongjiang Feng Agricultural, a subsidiary of the state-owned enterprise Beidahuang Group, has spent more than $70 million buying farmland in the Great Southern region through Victoria-based partner Vicstock Grain.

That figure may soon reach $85 million, with negotiations in the works on a further land sale.

Vicstock managing director Will Crozier said the investment would bring significant flow-on benefits to struggling Western Australian farmers and traders.

"This is going to be a huge competitive advantage that the other states haven't got in that this customer is now looking squarely and solely at the WA Wheatbelt to get their requirements," Mr Crozier said.

HFA and Vicstock have also leased farms in the same area and invested in facilities at the port of Albany, with the aim of creating an alternative supply chain for grain exports to China.

Vicstock and HFA aim to export 1 million tonnes of grain a year to China once upgrades are completed on its port facilities at Albany, with first shipment targeted towards the end of the 2013-14 harvest.

The purchase of WA farmland by Chinese investors has attracted a political backlash in some circles, prompting the federal government to establish a Senate committee inquiry into foreign investment and the national interest.

Mr Crozier admitted there had been some "bitterness and resentment" from a minority of farmers but said there was nothing to fear from Chinese investors.

"We should be embracing it and we've got to be out there," Mr Crozier said.

"We've got to present our product to these markets otherwise we're going to be passed by."

Looking beyond the horizon to the next wave of opportunities, professional services represent one of the next big frontiers in China. However selling Australia's architectural, accounting, environmental and legal services is challenging without a free-trade agreement in place.

Australia China Business Council WA president Duncan Calder said it was essential for Australia to strike a free trade agreement similar to the contract New Zealand had secured to open the doors to these opportunities.

He said most major firms would like to do more work in China and the federal government needed to make this agreement a priority.

Minter Ellison's Mr Handley said there was a lot of interest in China for environmental services and Australian technologies to address some of the "fairly pressing issues" the Chinese were grappling with.

Just how Chinese investors will secure these services and innovations is uncertain, but Mr Handley said the sophisticated Chinese investors were increasingly opting for joint venture-style agreements that leveraged Australian expertise.

"There are still significant challenges around that and ... I say to a lot of our clients, ' your single largest challenge to successfully joint venturing with an Australian company is cross-cultural understanding," he said.

"On the Australian side we need to work a lot harder and be a lot more flexible to understand the different way of thinking the Chinese have ... connections and relationships are fundamental to long-term success."

It's a sentiment common in conversations with WA businesses working in China, with the idea of building bonds and investing in relationships underpinning every successful venture across all sectors.

Mark Butler from Otan Property Funds Management laughingly describes the business as "an overnight success in China in 25 years".

The managing director of the property investment fund has been travelling to China for more than two decades, and in recent years this investment has led to meetings with Chinese institutions and private investors with the capital and appetite to invest in WA property projects.

It's the result of a number of factors, including a slowing in the Chinese economy, a weaker Australian dollar, as well as the federal government's 888 visa, which provides residency for investors who sink more than $5 million into Australian projects.

Otan is busy nurturing what Mr Butler referred to as a "trickle" of capital so far, but he was confident investment from Chinese institutions and private investors could account for as much as 50 per cent of Otan's capital within a few years.

This fresh capital will provide Otan with the capacity to borrow more and ultimately undertake more construction.

But the investment flow between WA and China isn't all one way, and local stockbroker Triple C Consulting Stockbrokers recognises the potential for big returns from investment in Chinese technology products targeting the country's burgeoning middle class.

Triple C is currently raising $2 million for a $20 million raising for Chinese mobile commerce business 99 Wuxian.

Triple C director and investment adviser Scott Williams characterised the Chinese economy as moving from an iron-ore economy to an iPod economy, with rocketing demand for technology products.

The mobile commerce market in China is expected to grow 500 per cent in the next five years, and smart phone usage is expected to jump from about 22 per cent to around 65 per cent in the same period.

"That will add another 500 million smart phones to that market' it's the same as when they had their construction boom, all of a sudden you had this huge demand for bulk commodities and now they have this huge demand for products for their people," Mr Williams said.

This increasingly affluent Chinese middle class is using its newfound wealth to invest in the entire array of Western luxuries, including travel.

And a significant and growing number are choosing Australia as their holiday destination.

The Australian Bureau of Statistics' latest data on overseas arrivals revealed Chinese tourist numbers soared by more than 18 per cent from June 2012 to June 2013.

Perth education provider Phoenix Academy has criticised Tourism WA for not doing enough to promote the state as an education destination, but work has been going on behind the scenes to make Perth a more China-friendly destination.

The City of Perth recently announced it would sponsor 20 Perth city businesses popular with Chinese tourists to attend one of the Tourism Council WA's China Ready programs.

These workshops were introduced in 2011 when China Southern Airlines introduced direct flights to WA.

Despite indicating it might increase its schedule of three flights a week to a daily service, China Southern spokesman Bill Bryant confirmed this week it had not increased the frequency of the flights.

 

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