The recent Free Trade Agreement (FTA) between Australia and China is expected to have some significant positive impacts on the Australian economy with the removal of tariffs in the agriculture, mining, and services sectors. The FTA will also have an impact on Chinese investment in Australia, which is critical for investors to understand as companies slowly become takeover targets by Chinese firms.
Australian exports to China are worth $90 Billion to Australia and account for 1/3 of all goods sold abroad. Iron Ore exports account for 56% of these exports. In terms of agriculture Australia exports 23% of agriculture to China, our largest Agri export market, and this provides $8.7 Billion (2013-14).
In terms of demand projections the US Department of Agriculture (USDA) projects that between 2013 and 2023 there will be a doubling of Chinese imports of cotton and beef, a 60% rise in pork and oilseed demand, and a 30% rise in barley demand. Similarly, Australian Dept of Agriculture Research Bureau ABARES project that between 2009 and 2050 sheep and goat meat demand by China will rise 20 fold or +1000%, Beef demand will rise 10 fold (500%), fruit demand will rise +200%, dairy +165%, Sugar +100%, and Cereals +50%.
So it is clear that this FTA as the potential to provide significant benefits for Australian agricultural exports. However, the agricultural sector is not the only winner in this FTA and not all parts of the argi sector are to be treated the same.
Tariffs on dairy, beef, sheep meat, wine, horticulture, seafood, and hides/skins/leathers are to be removed, whereas Rice, Cotton, and Sugar tariffs are not being removed as these are sensitive sectors in China. The Mining sector also wins with tariff removal on coal, alumina, and other mineral ores.
The Services sector is also a winner with improved market access for many service providers including the financial services, healthcare, legal services, construction, and mining services sectors. A look at the Healthcare sector can quickly show the benefits that this could have on the services sector. The FTA will allow healthcare companies to establish wholly owned hospitals and aged-care facilities in China. Ramsay Healthcare has already signed a memorandum of understanding to buy 50% of Jinxin Groups healthcare assets in Chengdu, mainland China’s 4th most populated city.
One of the other effects the FTA will have is on Chinese investment in Australian assets. Currently Chinese investment in Australia reached $20 billion in 2013. This is still a relatively small amount behind the Netherlands, Singapore, Japan, the UK, and the US (smallest to largest). To date most of this has been in the mining and property sectors. The main outcome in this area is the raising of the threshold at which investments in non-sensitive sectors by private sector entities from China are considered by the Foreign Investment Review Board (FIRB) from $248 million to $1,078 million.
However, the news is not all good as it would be expected that the FTA would be the final nail in the coffin for the Australian manufacturing sector that is already being affected by high labour costs in Australian and a high Australian dollar. It is expected that this will also throw fuel on the debate regarding foreign ownership of Australian asses.
As investors it is important to be informed of these developments as it shows us which sectors may benefit, and others be affected, by these changes. It will also help continue the shift of our focus on the mining sector as other sectors such as agriculture and services are also expected to benefit, and more so than the mining sector.
Source: Written with the assistance of the National Australia Bank.