The critical point
China stories often begin with a variation on the line about the Chinese word for crisis being composed of two characters, one danger and the other opportunity. That’s not quite right, the second character is, less precisely, “critical point”.
Yet with much of the world – the northern hemisphere anyway – now worried about a China crisis, ANZ’s Gilles Planté does believe the world’s second largest economy is at a critical point.
“We are talking about an evolution in China,” he tells BlueNotes. “When you look at the last decade, everything was going up – asset prices, trade, foreign direct investment, growth, consumption, in those circumstance the emerging market looks a particularly nice place. Every investment works. Everyone is better off, that’s great.”
The difference today, the critical point, is China is entering a different phase with new leadership, a new series of five year plans and a shift from manufacturing and exports to internal consumption.
“That means there will be more volatility,” says Planté. “There is going to be a potentially painful transition from the old paradigm. Away from the old heavy manufacturing, polluting industry, physical infrastructure to consumption, what the west has also done over the last century.”
With that pain though there is indeed opportunity and Planté believes many have missed the emergence of whole new sectors of the Chinese economy and the shift in financial markets and business they entail.
The new China economy
For ANZ, for example, some of the bank’s biggest clients are now internet and new technology companies.
“Some of the most important companies in China are internet companies – Baidu, Alibaba, Tencent,” Planté says. “Obviously iron ore, commodities, are still important but as China makes this transition, these other companies, more like western economy companies, are much more significant.”
These companies also make different demands on capital markets and banking systems. They are less capital intensive, have broader customer bases and are more international and internationally structured.
“The old economy was much more credit intensive where internet companies are more about cash management,” says Planté. “And these newer companies are also very inquisitive about the international way of doing things. So we can offer them facilities overseas for example. They are also much more service intensive. Alibaba, for example, is going into micro-finance. These companies are more open to partnerships, doing things in a progressive way. The older industries have more challenges from their incumbencies.”
A new world for financial intermediation
The opportunities for the banking sector in these new industries lie in cash markets, overseas funds, short-term finance. The good news for banks is these are less capital intensive product lines – good from a regulatory perspective – and deliver higher returns on equity.
They are more about the flow of funds than loans on a balance sheet.
“That directs our strategy too,” says Planté. “We have to offer this capability in terms of geography and that means opening branches where these companies are located like Chengdu or Hangzhou, where Alibaba is. You have to be where the clients are. So for ANZ, this is where we are rolling out our cash management platform.”
And a new world of consumers
Planté believes the new China sectors like retail – both domestic and international – are attractive as are those particular industries an emergent middle class values, such as quality food.
“We know the emerging middle class is more conscious of food security, so that’s a good story for Australia and New Zealand,” he says. “But then there’s a supply chain, we have to make sure we connect the buyers and the suppliers. Our role is to use our network, find solutions, take knowledge from different markets, consider ports, transport, logistics.
“So maybe growth in China goes from 10 to 7 per cent. But then we have a client, a Tassie guy, doing organic baby food and his business can’t keep up. There are hundreds of these opportunities. These are opportunities for smaller companies, they are a little more difficult to identify but we can work with them to show the opportunity and how to exploit it.”
China fanning out
Planté, based in Hong Kong and frequently on the mainland, is sanguine about the China outlook despite his view it will be a more fragmented economy with more flux in the corporate world.
On the mid-term outlook, Planté sees an acceleration in both inbound and outbound investment as a major theme. Multi-nationals with long established manufacturing bases in China will increasingly see the country as a market to sell into rather than export out of. “So China still has massive opportunity but it will be different, it will be more volatile, there will be failures, other issues – like any normal economy,” he says.
A China crisis?
“People talk about China and the headlines are pretty sensational, boom or gloom, and from the Australian perspective it is iron ore or coal. But viewed through another prism the story is more complex when you consider different geographies and new businesses.
“As far as the Chinese government is concerned, they have made it very clear there are strategic industries which will have protection but other commodity industries maybe not. These strategic industries too have an outbound investment agenda and Australia and New Zealand, along with Indonesia and ASEAN, are extremely well positioned.”
ANZ in China
As far as the opportunity for ANZ, Planté is more optimistic because the bank is positioned not just for economic growth but to help clients negotiate volatility.
“We are not the size of Citi or HSBC obviously but I don’t see it in terms of tier 1 or tier 2 – we are number 4 on the Greenwich Survey (of corporate banking in Asia) so while we don’t have that incumbency we have recognition and we have an unparalleled offering in Australia/New Zealand, the Pacific and some parts of the Mekong,” he says.
“We also have an advantage in having an exclusive focus on the region, we are not global, we are not local, we are regional. And thirdly we are a safe, well regulated institution, we didn’t get in trouble during the GFC or after – touch wood – and Australia as a whole is well regulated, stable.”
Planté says the example of foreign direct investment, about which many countries – including Australia – have sensitivities which feed into the political realm, is an area where ANZ’s network is valuable.
“There will be opportunity for people like us, ANZ, locally incorporated companies, who have local knowledge, local connections, who understand the detail of the market, to form partnerships and have deeper relationships,” he says.
“We know there are FDI sensitivities but a bank like ANZ can help there because of our presence on the ground in different markets and our strong existing relationships, our branches, whether that’s with policy makers or other stakeholders.
“While that doesn’t mean we can force a deal through, we can facilitate. Our name has positive reputational connotations and you don’t get that without a franchise on the ground, you can’t do it with a fly in, fly out presence, you have to have that sense of permanency, of people, branches.”