Bullish in the China shop

Monday, 5 May 2008
By Tim Harcourt
China’s sudden rise as an influence on the global economy has been on everyone’s lips. With double-digit economic growth levels for almost two decades and a great leap up the global economic ranks (the latest World Bank report had China now outranking Germany and Japan as the world’s second largest economy on a purchasing power parity basis – that is taking into account what money can buy in China at its lower price levels), China’s global influence is a major chapter in the 21st century’s story of the global economy.
We are certainly feeling China’s influence here in Australia, particularly in this Olympic year. Look at the economic evidence. China now wins the gold medal as Australia’s number one trading partner in terms of merchandise exports, the silver as our number two export destination (after Japan) and gold again as our number one source of imports.
Services exports are also becoming important between China and Australia particularly in financial services, professional services (such as architecture law and engineering), education and tourism. China is also moving up the ranks as a source of foreign investment for Australia and more Australian companies are investing in China as well.
Major Australian corporates like BHP Billiton, Rio Tinto, Woodside, Telstra, Qantas, ANZ, AMP, Westpac and CBA all have China as a major plank in their global business platforms for expansion.
However, while the story at the top end of town is well-known, the evidence shows many small and medium enterprises (SMEs) are “hugging the panda” as well and are hopping on planes to Beijing, Shanghai and Guangzhou as well as the second and third tier cities like Kunming, Chengdu, Qiangdao and Chongqing to take advantage of the economic expansion of China on the coasts and increasingly in the inland regions in the centre and the west.
Austrade’s new research on China bears this out. In terms of exporting companies, in 1989 China didn’t even make the top 10, but now there are over 4250 Australian businesses exporting to China (on a good basis alone) putting China in sixth place in the top 10 ahead of major economies like Japan and Germany.
In addition, over 3000 Australian companies have bases in China and to respond to this increased demand Austrade now has 15 offices in the Greater China market. In terms of SMEs, according to Austrade-Sensis research, China is now up there with New Zealand, the USA and Britain as a major export destination, and China is regularly top of the pops when exporters are asked about future growth projections in the DHL Export Barometer.
So why is Australia doing so well in China?
First of all, there’s a strong historical relationship. Before he became prime minister in 1972, Gough Whitlam visited what was then Peking ahead of US president Richard Nixon and since then Australia has been a strong supporter of China’s quest to engage more fully with the global economy. In more recent times, Australia was a strong supporter of China joining the World Trade Organisation (WTO) despite some international opposition.
And now with Australia’s new Prime Minister Kevin Rudd being a fluent Mandarin speaker and keen scholar of Chinese history and culture, we can expect the Australia-China relationship to be pivotal to both nations and to the rest of the world too.
Secondly, there’s strong support from Australian business for engagement with China. Australian exporters have a very favourable impression of China’s potential and this may reflect their positive take on a potential trade past. According to the DHL Export Barometer, in terms of the 12 month outlook, the majority of exporters believe that China will be their number one market for growth with similar results expecting looking five and 10 years ahead.
Exporters also want more overseas trade representation in China and see the Beijing Olympics as major opportunity to make high level representative contacts and learn more about the expanding Chinese economic regions.
Thirdly, the Australian-China trade relationship is growing but also broadening and diversifying.
In the high-profile resources areas China’s insatiable appetite for coal, iron ore, alumina and liquefied natural gas (LNG) as it industrialises and attempts to spread economic activity to poorer provinces westward, has created another resources boom in Australia.
Not only is this creating enormous wealth in the resource rich-states like Western Australia and Queensland but the demand for resources in China is also creating a boom in related areas providing mining equipment, mining technology and services to mining (like software and training in areas like occupational health and safety) in the rest of the country.
China has also created opportunities for Australian manufacturing exporters. Many companies are exporting to China because of the limited size of the domestic market in Australia. Take the example of Longwall Associates, based in Mackay, which manufactures face conveyors for long wall mines in Central Queensland.
According to the managing director, Peter Van Iersel: “We have no choice but to export as in Australia there are just 28 long wall mines, compared to 52 in the USA but 1,300 in China! After we establish a foothold in the Chinese market, we will also consider branching out into Russia and India”.
The size of the Australian market is also an issue for companies that manufacture aviation equipment like Lochard (who produce flight monitoring devices) and Aviation Compliance Solutions (ACS) who provided related aviation services. ACS – which was formed by a group of Ansett employees who lost their jobs as a result of that airline’s demise – is a company that conducts conduct aviation operational safety and security audits for airlines.
The company has now conducted audits for 65% of China’s airlines – including Air China – and is now in talks to secure further business in China to expand its already dominant market share. ACS managing director, Jackie Barnes is positive about business prospects in the People’s Republic: “Once you’ve won your first job in China you’ll create the momentum to win further business,” she explained.
Professional services are also on the up and up. Australian architects (like PTW, who designed the famous “Water cube”, the aquatic facility for the Beijing Olympics Woodheads and Hassells) are doing very well in China – particularly in the second-tier cities for which Beijing is investing much needed infrastructure – and Australian lawyers (like Deacons, and Hunt and Hunt) are helping China-based Australian owned firms conduct in China. The challenge of climate change in China is increasing bringing in Australia assistance in environmental technology and design as well.
So what of the future? First things first, let’s bring on the Beijing Olympics! Just as it did in Sydney 2000 and at the Commonwealth Games in Melbourne, Austrade’s Business Club Australia (BCA) will be hosting major networking events in Beijing to ensure that Australian businesses – large and small – take advantage of the holding of the Olympics in China to meet a number of high level Chinese and international government and business figures. BCA has generated over $1.7 billion in trade and investment deals from previous major events so it is likely that a strong Australian presence in Beijing will significantly add to that tally.
Australian businesses from top to bottom are taking advantage of the growth potential of China. We’ll see from the strong expected Australian presence at the Beijing Olympics and beyond that our commercial engagement with China is a real sign of the times.

Tim Harcourt is Chief Economist of the Australian Trade Commission and the author of Beyond Our Shores and The Airport Economist