Thursday, 29 December 2016

Australia's Next Economic Frontier - The Services Sector

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Australia is taking steps to leverage its services sector as a broader driver of trade and growth as the end of the commodity boom, combined with the shrinking of the local manufacturing sector, has forced the nation to look elsewhere to sustain its economic prosperity.

A China trade report by the Australia China Business Council (ACBC) projects that Australian education and tourism stand to gain the most as China rebalances its economy towards greater household consumption. The report, The Long Boom: What China's Rebalancing means for Australia's Future, projects that Australian education and tourism stand to gain the most as China rebalances its economy towards greater household consumption.

Professor Edward Buckingham, director of engagement at Monash University, said the transitioning of China's economy raised questions about how Australia would move on from the commodities boom.

"Our analysis suggests that China's future growth patterns will likely demand a much wider variety of goods and services from Australia than we have previously experienced, and that even a moderate increase in Chinese consumption growth could see up to 25 per cent of Australia's services exports going to this market," Prof Buckingham said.

Steve Hughes, head of commercial banking, HSBC Australia agrees that the focus on services is a positive move for the Australian economy and China is primed to play a significant role in the sector's development.

"It's encouraging to see the Australian economy successfully broadening into services exports, which means we're less reliant on the resources sector to drive future growth," Mr Hughes said.

Education, tourism, healthcare and the financial services sectors are all expected to benefit as China's own economy transitions and its burgeoning middle class – the largest in the world at 109 million adults – contributes to significant new export opportunities for Australia.

"It's encouraging to see the Australian economy successfully broadening into services exports, which means we're less reliant on the resources sector to drive future growth,"

Steve Hughes, Managing Director and Head of Commercial Banking, HSBC Bank Australia

Education – Australia's third-largest export

International education is Australia's third-largest export after iron ore and coal. The most recent available data suggest that Australia is the third-most popular destination for outbound Chinese students, behind the United States and the United Kingdom, according to the Australian Department of Education and Training. As of 2015, China accounted for 26 per cent of Australia's education services exports – far ahead of the second-largest contributing nation, India, at 11 per cent, the department said.

"When you have this number of students coming in, there clearly is a multiplier effect on related sectors such as real estate, retail and leisure," Mr Hughes said.

International education contributed more than $19.7 billion to the Australian economy in 2014/15, according to Deloitte Access Economics. As the Chinese market represents around 35 per cent of total international student numbers, it is estimated that Chinese students contributed around $7 billion to Australia's economy that year.

While there is an economic benefit of having international students studying and living in Australia, there is a broader enrichment to the wider community stemming from the cultural exchange of overseas visitors.

Phil Honeywood, Chief Executive Officer at the International Education Association of Australia (IEAA) – an independent body that represents the interests of professional/academic staff who work in international education – said international education offered Australia far more than just economic benefits.

"It plays a key role in the development of bilateral and multilateral relationships, which enhance cultural awareness and community engagement," Mr Honeywood said.

"Australian-educated alumni form lasting international networks and, in turn, become ambassadors for Australia long after they return to their home countries. All of this is fostering better relationships with our neighbours in the Asian region and the rest of the world," he said.

To compete with offshore tertiary institutions, some Australian universities are providing internships and work-integrated learning programs to assist Chinese students to be more employable after graduation. Mr Honeywood said some other Australian universities were also going through the intensive, and expensive, regulatory approval process to build and operate their own campus in China.

 

Chinese visitors propel the tourism market

China is Australia's most valuable and fastest-growing inbound tourism market – expected to be worth more than $13 billion by 2020 from almost $9 billion now – and 2017 has been declared the Australia-China Year of Tourism.

According to Tourism Australia, there were 1.16 million Chinese visitors in the 12 months to July 2016, up 23 per cent on the previous corresponding period, and that China was poised to overtake New Zealand — with 1.33 million Australian arrivals in the year to July — as Australia's largest tourism market in 2017. In five years, the number of Chinese visitors has more than doubled from the 500,000 arrivals of 2011.

"China continues to be a real stand out for Australian tourism, with Australia enjoying one million annual Chinese arrivals for the first time in 2015," said John O'Sullivan, Tourism Australia Managing Director.

The Australian government's initiatives such as streamlining visa applications, increasing aviation capacity and making tourism infrastructure a priority are helping drive the growth of the industry which supports around one million jobs in Australia. To encourage more visitors, Australia has introduced 10-year visas, visa applications in Chinese and improvements to online visa application services.

KPMG said there were now direct flight into Australia from 11 different mainland Chinese cities – Shanghai, Beijing, Guangzhou, Chongqing, Fuzhou, Nanjing, Xian, Xiamen, Chengdu, Wuhan, Shenzhen, with another four cities – Kunming, Changsha, Hangzhou and Qingdao – adding to the list.

Chinese visitor numbers continue to grow in part due to the Approved Destination Status scheme which allows Chinese tourists to travel to Australia in guided groups, although in recent years there has been a move away from the traditional group traveller towards a younger and independent traveller.

In the year to June 2016, Chinese visitors spent a record $8.9 billion, up 27 per cent on the previous year, according to Tourism Australia. In other words, Chinese visitors account for just under 25 per cent of all international visitor spending in Australia which totals $38.1 billion. Tourism Australia believes Chinese visitors will be spending in excess of $13 billion annually by 2020.

"Tourism Australia's focus is more on the free and independent China traveller," Mr O'Sullivan said. "They tend to stay longer, travel more deeply into the country and, ultimately, spend more money."

Catering to China's ageing demographic

Under ChAFTA, the Australian healthcare industry stands to gain as Chinese demand for these services expands. Currently, more than 200 million people are aged 60 or over in China, accounting for 14.9 per cent of the total population. In 2020, China's population is expected to reach 1.4 billion and 248 million of these people will be aged 60 years or over.

HSBC's Mr Hughes said with an aging population, the requirement for health care services in China would become more pronounced and Australia stood to benefit due to its sophisticated health services industry and health professionals.

He said Chinese policies such as improving medicine supplies and a plan to give citizens equal access to public health care by 2020 would result in "an increased requirement for medical services".

There are several export opportunities open to Australian companies wanting to tap into China's healthcare and aged care market. The Chinese government is introducing policies to attract private capital and services from domestic and overseas investors as it transforms the nation's healthcare and aged care industry.

"China's growing middle class population is also demanding high-quality services which will put more pressure on a medical system that is already grappling with new health issues like cancers, heart disease and obesity," the Australian Trade and Investment Commission (Austrade) said.

Australian providers will gain access to this expanding market and be able to offer services such as diagnostics, quality control, medical training, as well as the establishment of hospitals, medical centres and aged care facilities in certain provinces.

"China's growing middle class population is also demanding high-quality services which will put more pressure on a medical system that is already grappling with new health issues like cancers, heart disease and obesity,"

Australian Trade and Investment Commission (Austrade)

Greater Access to Financial Services

China's financial services industry is still changing from a centrally planned to a market-oriented industry. During the transformation process, which has accelerated in the last 10 years, opportunities have arisen for Australian financial services companies. ChAFTA has also opened the way for Australian companies to gain market access in the banking, securities and futures sectors.

Among the changes, Australian insurers will be able to open branches and have access to China's lucrative statutory third-party liability motor vehicle insurance market. China has also agreed to reduce the waiting period for Australian banks to engage in renminbi business from three years to one. In the funds management sector, Australian securities brokerage and advisory firms will be allowed to provide cross-border securities trading accounts, custody, advice and portfolio management services to Chinese Qualified Domestic Institutional Investors.

Austrade said China's financial services market had introduced many regulatory reforms in recent years, yet doing business there was not without its pitfalls due to strong government regulations and different business cultures. "Nevertheless, the rewards and upside for companies that are successful in the market are significant and attractive," Austrade said in its report, Financial Services to China – Trends and Opportunities.

Long-term benefits

Despite the cultural differences between Australia and China, Mr Hughes believes there are longer-term benefits for both societies such as integration and a mutual cultural respect.

"As we see closer cultural interaction now, we'd like to think that would also facilitate closer economic interaction down the track," Mr Hughes said.

John Brumby, the chair and president of the ACBC, said while China would remain Australia's largest trading partner, "the nature and composition of this relationship will dramatically change as the Chinese economy shifts from an investment-heavy, commodity-based economy to one driven by domestic consumption and services-led growth".

"For Australian businesses to fully capture the opportunities of this historic shift, they will need to invest not only in developing an understanding of customer preferences in this market, but also in the skills and capabilities of their work force best suited to the international arena," Mr Brumby said.

Issued by HSBC Bank Australia Limited ABN 48 006 434 162 AFSL 232595.

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