Political transition washes through China

Our biggest export market has slowed demand, but a new growth phase is under way.

VOLATILITY in the iron ore price may have added to concerns about the economic health of Australia’s biggest export market, but there were no long faces when business and diplomatic leaders met for a big banquet in Perth last week to celebrate China’s national day.

The mood was buoyant at the event, which was co-hosted by the China Chamber of Commerce in Australia and Australia China Business Council and attended by 888 people, a lucky number in Chinese society.

The leadership of miners Focus Minerals and Norton Gold Fields and their advisers were among those in attendance focused on good fortune and long-term opportunities. Both gold players had just struck deals with Chinese investors, proving that the investment flow has not stopped.

A key speaker at the occasion, China’s ambassador to Australia Chen Yuming, was also talking down the possibility of a real economic crunch in his homeland.

Mr Chen highlighted the International Monetary Fund’s forecast that a hard landing of China’s economy was a remote possibility, and noted estimates that China would grow by 7.8 per cent this year and 8.2 per cent in 2013.

“In the long run, China’s economy has structural drivers for long term and stable growth,” Mr Chen said.

“China’s urbanisation will continue at an annual rate of 0.8 per cent.

“Ongoing industrialisation, application of information technology and agricultural modernisation will continue to unlock great potential of development and enormous consumption demand.

“Through restructuring and transforming growth patterns, China will realise more balanced and sustainable development of higher quality.”

All this was music to the ears of Western Australia’s business players with strong links to China.

While many are braced for a year of sluggish performance from this important market as it undergoes a leadership transition and finds the right economic settings after the GFC, there is one key element that China has that Western democracies lack - the ability to stick with the plan, no matter what.

ANZ Institutional Australia managing director Cathryn Carver is one who saw this first hand working out of Hong Kong before she came to Perth six months ago.

“Having seen the Chinese government, especially in financial services, come and say ‘yep we are going to do this’ and you see it happen ... it is just amazing to see those things work through,” Ms Carver said.

Ms Carver’s observations were part of a WA Business News boardroom forum looking at Chinese investment and trade with WA across a broad range of sectors.

The guest list also included: Gindalbie Metals and Sundance Resources chairman George Jones; Fortescue Metal Group marketing program manager and former City of Perth councillor Sandra Liu; Mt Gibson Iron senior adviser Philip Kirchlechner; KPMG corporate finance partner and Australian China Business Council WA president Duncan Calder; University of WA deputy vice-chancellor Bill Louden; and Perth Education City Greater China manager Leo Yu.

In the main, guests believe the Chinese economy had slowed due to the transition and was likely to remain below par for the next year.

“I think in China at the moment everything is a bit stalled,” Mr Calder said.

“I think it has been that way for a while.

“Unlike here, when you have a leadership change (in China) it cascades all the way down to the provinces. I think there is a bit of lag or delay as people wait for the outcome of the leadership change.

“The economy is soft.

“This started as a policy led slowdown but I think it got out of control because of the cyclical factors around the world in terms of turning off supply for Chinese products.”

FMG’s Sandra Liu agreed, believing the impact of the political transition was significant.

“For the next two years we might see a bit of a steady period,” Ms Liu said.

She felt that while the Chinese leadership transition would ensure continuity of the nation’s approach to economic development, the new leaders would still want to put their stamp on policy, which took time to put in place.

Ms Liu added that the Chinese leadership had time because they had a 10-year term at the nation’s helm.

On the deal-making front, George Jones said he had not seen a slowdown at all, despite all the talk of the transition stalling the capacity of Chinese business leaders to make decisions.

“I see plenty of evidence of people using that as an excuse,” Mr Jones told the boardroom forum.

“Big deals are still being approved, touch wood, the $6 billion deal with Sundance is going to be approved before the change of leadership; money is still pouring in to the gold deals here, (there was) Cubby Station, and dairy (assets); deals are still happening.”

Mr Jones said a slowing down was not necessarily negative in economic terms. The Chinese economy had grown to be the second biggest in the world and could not maintain the pace of the past 40 years.

Perth Education City’s Leo Yu is a regular visitor to China, having returned to WA after being based in Shanghai as a representative of the state government.

Mr Yu said it was clear on the ground that consumer spending had continued unabated, even though those watching commodity markets would have concluded an economic shock had hit the country.

“Reports after the (recent) National Day holiday is that Chinese tourists had spent a lot of money overseas in Europe, in America and in Australia,” he said.

“I was thinking ‘isn’t the economy slowing down in China, aren’t people holding back on their spending’ but when I arrived in Chengdu, in the western part of China, people are out shopping and spending their money.

I “It doesn’t look like a slowing down at all, then I think of the opportunity we have is the rising of the middle-class consumers. “Before, people didn’t have the chance, but now they have the money to spend and to travel and send their children overseas to study.”

This observation was matched by others who recognise a maturing of the Chinese economy, partly driven by rising wealth, which not only changes consumer-spending patterns but also alters the types of work that people are willing to do.

The luncheon forum noted that jobs requiring cheap labour are increasingly being exported from China because it is harder to find the people who want that sort of work.

Outside the luncheon forum, ANZ chief economist Greater China Li-Gang Liu noted some of this change in a recent presentation provided to WA Business News.

Mr Liu said that, since the latest five-year plan commenced in 2011, there had been a deliberate effort to improve the quality of economic growth.

“An emphasis on rebalancing the economy means that the policy focus and priority will centre on a gradual evolution from an investment-led growth model to a consumption-driven growth model,” he said.

Mr Liu pointed to efforts to boost consumption, move up the technology ladder, increase energy efficiency and reduce C02 emissions as examples of this shift.

“If these targets progress accordingly, the fundamentals for sustainable growth will become more solid,” Mr Lui said.

“Our core view remains that growth drivers of China will be domestic demand driven in the next three years; greater China economies comprising mainland China, Taiwan and Hong Kong will continue to sail through the global uncertainties from now until 2015.”

While the macro-level impact of this meant strong demand for key commodities supplied by WA, there were many other areas of opportunity highlighted by those who attended the WA Business News luncheon forum.

UWA’s Bill Louden said China was putting significant resources into education, and while it had excellent students, its teaching and research capacity lagged that of leading Australian universities.

“They have now realised that they have to engage in deep partnerships with universities outside China,” Professor Louden said.

However, it remained unclear as to how exactly this higher education policy would pan out during the leadership change.

Ms Liu said she saw a significant opportunity in health and aged-care services due to the impending impact of the one-child policy, started more than 30 years ago.

That has left an ageing population issue more extreme than that being encountered in Western countries, especially as China lacks a welfare system such as Australia’s.

“One person has to support six other people, their parents and two sets of grandparents,” she said.