Tuesday, 28 November 2017

Building Australian opportunity along the new Silk Road

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James Cameron, Co-Head of Infrastructure and Real Estate Group in Asia Pacific, HSBC

Chinese President Xi Jinping emerged from the 19th National Congress of the Communist Party of China, held in October 2017, with his power more firmly entrenched than ever. Xi’s name has been enshrined in the Communist Party’s constitution, placing his vision alongside that of Party founder Mao Zedong, and the man who unleashed China’s current economic boom, Deng Xiaoping.

Also added to the constitution was the President’s signature Belt and Road Initiative (BRI). First launched in 2013, this ambitious plan to foster the development of a new Silk Road – and boost regional economic growth – spans more than 65 countries, which together account for 29 per cent of global GDP and 63 per cent of the world’s population1. On the back of the BRI, China expects its annual trade with these countries to surpass USD2.5 trillion in the next decade, up from about USD1 trillion in 2015.

This wide ranging initiative will remain the focal point for China’s foreign policy and international economic engagement in the near future, and its impact is likely to last well beyond President Xi’s current term of office. Are Australian businesses ready to embrace the new opportunities it can offer?

Rising middle class

In a recent interview with the national broadcaster, Australia’s shadow trade minister, Jason Clare, said the nation needs to “get its skates on” if it wants to reap the rewards of Asia’s growth potential. He emphasised that the region is “where all of the opportunities” lie for Australia in the years ahead, with Asia’s middle class expected to grow to over 3 billion people over the next 10 years.

But while 18,000 Australian companies presently do business in New Zealand, only 7,000 do business in China, according to an August 2017 study by PwC2. Furthermore, of the top 200 companies listed on the Australian Stock Exchange, the report’s analysis showed that only 55 reported revenue from Asia in 2016.

It’s a figure that has to change, according to HSBC’s Co-Head of Infrastructure and Real Estate Group in Asia Pacific, James Cameron. He says the BRI is intrinsically important to China’s economic policy and physical connection to the rest of the world – and hence Australia.

Mr Cameron points out that the policy presents significant immediate opportunities for Australia in the infrastructure space, both from increased exports of services and expertise, and from the potential for increased inbound investment. Importantly, Mr Cameron says the potential for BRI to stimulate income growth in Asia holds even greater long-term promise.  

Competitive advantage

As the BRI’s infrastructure push gathers momentum, Mr Cameron believes Australia’s infrastructure construction, operation and investment related professional services expertise is likely to be highly sought after in Asia and elsewhere.

“There is deep skill set in Australia and there are opportunities to work with HSBC clients looking to invest domestically and across BRI countries,” Mr Cameron says. “For example, Australian infrastructure funds and construction companies with global expertise in developing, investing in and managing infrastructure have the opportunity to work with Chinese clients to bring this expertise into both new and existing markets.”

China has already invested over USD160 billion in regional development across BRI countries and is likely to grow its investment significantly as the policy gains momentum.

A 2017 report by the Asian Development Bank indicates the Asian region needs USD1.7 trillion in infrastructure investment just to maintain current levels of economic growth3.  

Mr Cameron says that a “key macro driver behind this regional infrastructure need is urbanisation”. As a result, while core infrastructure needs such as transport and power will need to be met, many countries in Asia will also require the skills and services to effectively plan the urbanisation process and to develop public urban and social infrastructure like hospitals and schools. The prospects for Australia in this area are positive, according to Mr Cameron, given the country’s experience successfully delivering such social infrastructure through public-private sector partnerships.

Downstream growth

Although the BRI will revolve around construction in the first instance, Mr Cameron also believes the rise of Asia’s urban middle class will be a significant “economic growth multiplier”. This will see growth in demand for many utilities, goods, and, through increased mobility, services like education and tourism.

He highlights the potential for this growth in trade and mobility to also increase demand for Australian technological expertise in areas such as logistics and supply chain management. He also believes that the benefits of increased infrastructure investment will extend to the resources sector through greater demand for raw materials and to developers of downstream opportunities associated with improved infrastructure, such as the real estate market.

HSBC’s Global Head of Growth and Innovation for Commercial Banking, Vivek Ramachandran, says the BRI is likely to have a significant impact on ASEAN members in particular.

“The BRI is driving economic momentum across ASEAN and will increase trade and provide economic benefits to all member countries,” he says. “Incomes in these countries are likely to increase, and so their demand for goods and services like healthcare and education will also grow in the future.”

The US abandonment of the Trans Pacific Partnership trade agreement in January 2017 has also made the significance of the BRI more pronounced, especially now that the 11 nations who remain in the deal have moved closer to a new agreement.

Professor James Laurenceson, the Deputy Director of the Australia-China Relations Institute, a University of Technology Sydney think tank, says the obvious BRI opportunities for Australia relate to infrastructure construction, management and financing.

“Our resources companies will also be happy because the BRI is likely to boost demand for raw materials,” he says. However, he warns that businesses need to start actively fostering regional BRI relationships if they want to take advantage of any avenues the new Silk Road may open.

“With some creative and persistent Australian diplomacy, the BRI could be so much more. China talks about boosting connectivity in five areas – infrastructure, policy, trade, finance and people-to-people exchanges,” Professor Laurenceson says. “When your largest trading partner provides a platform to engage across such a diverse range of areas, Australia should be seizing all the opportunities possible.”

Inbound opportunity

Although the BRI has obvious potential for Australian business exports, Mr Cameron says he believes Chinese institutional investors are keen to invest in Australia. However, he says consistency and clarity around this type of foreign direct investment is important.

“The key is having visibility of and confidence in the rules around investment in the infrastructure space,” Mr Cameron says. “There’s a need for policy certainty around the where, why and how Australia allows infrastructure investment from overseas, especially when considering investment from different types of strategic or financial investors.”

He says there are many areas where Australia could benefit greatly from Chinese capital and experience and points to the potential for agricultural development in the Northern Territory and North Queensland – as well as the recently announced 1,700 km inland freight rail route that will link Brisbane and Melbourne via regional Victoria, NSW and Queensland – as the types of projects where HSBC’s Chinese clients have particular expertise.

To this end, Mr Cameron believes the Critical Infrastructure Centre recently set up by the Australian government has an important role to play and that a degree of policy certainty could facilitate a wave of Chinese capital into those areas of Australian infrastructure where it is most needed and wanted.

“It’s an historic opportunity for private investment in infrastructure as Chinese investors go looking for business partners,” Mr Cameron says.

1 HSBC June 2015 investor update, citing “China’s Belt and Road initiative to mobilize surge of overseas investment”, Xinhua Finance, 30th March, 2015. See also “Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road”, the National Development and Reform Commission of China (NDRC), 28th March, 2015 and the Hong Kong Trade Development Council (HKTDC) Belt and Road website.

2Match Fit: Shaping Asia capable leaders”, PwC Australia, the Institute of Managers and Leaders and Asialink Business, August 2017.

3Meeting Asia’s Infrastructure Needs”, Asian Development Bank, February 2017.

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