Better financial linkages open rich vein of opportunities for Sino-Australian cooperation
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FOREIGN VIEWS
It is not widely appreciated just how significant the finance sector is for a city like Sydney.
On the whole, Australia is associated in China with mining and agribusiness. It is also a major tourist destination. So Chinese visitors are often surprised when they realize that a major part of GDP growth in the country is through banking and finance, and that many people, at least in urban areas, work in these sectors.
The potential role of services and finance as a new focus between Australia and China has come to the fore for two reasons in the last year. The first is because of the fall in iron ore prices, and the second due to the Australian China Free Trade Agreement due to be signed this year.
Dealing with iron ore prices first, their dramatic collapse has exposed the Australian economic relationship with China to radical change.
In 2012, during what might be looked back on as a golden age for mining companies, iron ore was over US$150 a tonne. Now that is down to US$40. The Australian Treasury Minister Joe Hockey has admitted that this could fall even further to US$35. Companies like Fortescue which made healthy profits by selling ore into China have seen the value of their company plummet.
The Western Australian area where many of the major mines were located has seen its finance tumble, with a reported AUS$2 billion shortfall for government revenue forecast in the next year.
Critics in Australia have wondered why the country never foresaw this sort of possibility. Over dependence on one sector is never a good thing. One former head of a major Australian mining company commented in Sydney in 2014 that there was always a danger of placing too much emphasis on an economic relationship where “the key thing was us making money from China from digging stuff out of the ground and selling it to them.”
Perhaps the most surprising thing, however, is how quick this turnaround of fortunes has happened. The knock-on effect for Australia is that the country’s GDP is now creeping down. It almost shadows the trend of the Chinese growth figures. As they slip, so too does Australia’s.
Plan B on the horizon
For a decade, even through the global financial crisis from 2008 alone of major developed economies Australia maintained good growth because of the huge need for its raw materials in China. But now China is slowing down Australia too is experiencing a tough landing. For once, however, there is a Plan B for the country on the horizon. This brings us back to the surprising strength of the services and finance sector in Sydney. On the whole this is something that is little understood in China, and particularly in Shanghai.
During her visit to China in 2013, former Australian Prime Minister Julia Gillard signed a yuan trading deal with Sydney, which allowed direct invoicing in Chinese currency for goods and services for Australian companies, rather than using an intermediary currency like the US dollar.
Surveys in the last year have shown despite this that many Australian companies are still not using this facility, or unaware of its advantages in saving them conversion costs. The same is probably true in China.
The final signing of a Free Trade Agreement (FTA) between China and Australia which is likely to happen later this year will be the moment when Australian businesses can start to think much harder about what the economic relationship with China looks like in the era after the high tide of mining exports.
A major part of the FTA is about liberalizing service sector access into China. So the epicenter of business engagement between the two countries will no longer be western Australia, where the mines mostly are, but the cities on the eastern coast like Sydney and Melbourne. It is here where the service provides, fund managers and capital is mostly clustered.
The FTA will provide the framework for Australians to start thinking about trading relations with their largest economic partner now in a different way. But the real challenge will be how they intend to go about implementing this.
It is one thing to have an agreement, but quite another to actually do something about it. One of the most practical means of engaging is simply for the finance sector in Sydney to look to deepen its relations with Shanghai, and in particular with the Free Trade Zone there and with the International Finance Centre.
Some companies like the bank ANZ have already done this. But plenty of others could now join in. Seeking to invest more into China, or to manage more Chinese investment as it comes out, from the state and non-state sector, are all major parts of this story. But locating it in Shanghai at least narrows the focus down and allows more strategic precision.
Why Shanghai?
Shanghai, after all, might geographically be about the same size as urban Sydney, but it has a population which is the same as the whole of Australia. Trying to forge a services sector profile for Australia in China becomes manageable if Shanghai at least figures as the first port of call, and the initial focal point.
And Shanghai’s high per capita income and relatively high level of service sector activity and consumption mean that, of all the provincial economies of China, it comes closest to Australia’s. Shanghai therefore is the natural place for Australia after the signing of the FTA to reset its relationship and move away from digging things up from the ground and selling them into China, to treating China as a service user, and an investment provider.
Mr Kerry Brown is the Director of China Studies Centre and Professor of Chinese Politics, University of Sydney.
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