How to stay the course on China

The volatility across global markets and data out of China has unsettled many across the region. While the much-feared 'China Syndrome' is a fanciful worst-case scenario for many, what is happening in the Asian giant today is not the catastrophe many believe.

Some investors have reappraised risk, reading the real economy as being reflective of markets. Central government intervention has startled others.

"To be deterred from a China business strategy or from grasping ChAFTA opportunities would be a mistake."
Leonie Lethbridge, ANZ Regional Chief Operating Officer in Shanghai

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But China is not Greece and there is broader context to what is happening. Understanding this context means that to be deterred from a China business strategy, or from grasping ChAFTA opportunities would be a mistake.

How should Australian business proceed?


Notwithstanding a short-term denting of sentiment, China's consumers continue to rise and will continue to demand the products and services in which Australia excels.

The services sector presents a strong opportunity beyond already well-recognised areas of education and tourism.

Seeking to develop its services economy as a fundamental component of a consumption-based economy and as key to improving quality of life, China is incrementally opening the services sector to foreign investors.

According to official Chinese data, of the record $US68.4 billion of foreign direct investment into China in the first half of calendar 2015 two thirds was in the services sector, with substantial European representation.

This takes on many guises including financial services, education, engineering services and noticeably restaurants, as Chinese consumers increasingly travel abroad and gain exposure to fresh, fusion cuisine.

Under the Australia's free trade agreement with China (ChAFTA), the country has a unique opportunity to collaborate with the Asian giant in its efforts to reform a stretched and fractious Health system.

A visit to a Chinese hospital is itself an exercise in resilience and patience. Lacking an effective primary care and general practice system, seeing a doctor can mean travelling half the breadth of the country to a Tier 1, 'Class 3' city hospital, to be greeted by a very long wait.

This of course assumes that such a journey is financially feasible – a possibility that is way beyond the reach of many.

The consultation which follows may conclude within a minute or two, be conducted on the basis of the patient self-diagnosing and self-prescribing medications and is almost invariably conducted with other patients within earshot (if not within the same consulting room).

Reflecting a fundamental lack of trust in accreditation systems, China's patients hunt for doctors of long experience, appropriate specialisation (based on self-diagnosis) and of reputation.

Newly qualified doctors are underutilised whilst their older colleagues may see several hundred patients per day.

The sense is of a queue that embodies expectation and anxiety followed by a meeting with doctors often acting as brusque proxy salesmen for pharmaceutical companies rather than as agents of insight and care.

Not surprisingly, this is a major social and political issue which gives rise to the government's sustained reform agenda. In this context, China's ChAFTA-based invitation to Australian Health Care providers to establish wholly Australian owned hospitals in China is strategic.

Whilst initially likely to be a niche opportunity, prospects will grow, including as China expands and deepens its health insurance scheme.

Supplementary insurance may also represent an ancillary growth opportunity, as may internet-delivered diagnosis, which China's digital giants are exploring.


Opportunity however does not equate to sound business rationale. The phrase “If it seems too good to be true, it almost certainly is", is nowhere more pertinent than in China.

Reading the context correctly is vital to calibrating the risk. The Shanghai Composite Index, which certainly was too good, is not a proxy for risk (or return).

Flicking stocks on the iPhone is not remotely based on fundamentals and is largely disconnected from the real economy.

The Mandarin verb for playing the market 'chao', is the same as that for 'frying' rice, conveying a sense of rapid turnover before the product starts to burn – a scenario that China has been seen previously.

This scenario also features government intervention, which whilst not a fail-safe at the individual level will be broadly appreciated by many Chinese investors.

Regulatory risk is also cited as a major deterrent for Australian business entering China. Regulatory change should however be seen not as uncertainty, but as a certainty.

Regulatory change is proxy for reform, which China has been sustained since 1979, and which will continue.

The health sector reform which opens the sector to Australian providers will in due course be opened to others. Further, government interventions in capital markets are also highly likely to occur whilst China continues to build and deepen the market.

Regulatory risk should also be calibrated relative to other markets: Australia is often seen by many in Asia as too small, too regulated, too taxed to be worth the effort, and too opaque and complex to be understood.

Similarly governments intervening in markets including to actively cheapen money supplies is prevalent across the globe.


All business services firms (lawyers, tax experts, banks) are well represented on the ground, have long experience doing business and well understand both context and risk.

Similarly agencies such as Austrade have deep in-market expertise and Business Chambers provide business development capabilities.

Whilst the focus has been on the content of the FTA, the real question should be on how to execute against the opportunities it provides. Fortunately there is a well-lit path.


Advantage may lie in a clustered approach that incorporates business partners. Aged Care requires training, as does hospitality and tourism, with the FTA opening opportunities in all of these.

A cluster strategy is adopted by many Chinese investors abroad - developing a mine may also bring the road, the port and the town - and notably by many German firms.

It often hastens execution pace and is also difficult to replicate. This may be a particularly pertinent and useful strategy for Australian SMEs, coupled with eg TAFE or University training providers, marketers, and other ecosystem partners.


Protein, including beef, pork, lamb, and dairy, is already a multi-faceted, fast-paced $US300 billion-a-year story.

While pork has historically dominated the Chinese diet, Chinese consumers are developing an appetite for beef. From average consumption of less than one to two kilograms per year in the 1980s, per capita consumption has since increased more than tenfold and now features on many mid to high-end restaurant menus.

By 2020 the projected shortfall in beef supply is equivalent to current total consumption. Importantly, China's constrained history in beef production means quality imported beef faces only limited domestic competition – a likely medium to longer term situation.

Imports have therefore not merely plugged a domestic-supply gap but created a market. Whilst only 8 per cent of the Chinese market imports have increased 300 per cent in 2013/ 2014, also underpinning recent heightened Chinese agri-investor interest in Australian supply chains.

Australia is China's largest supplier, with an unrivalled brand and reputation for quality and food safety. Imports from other prospective suppliers are constrained by disease considerations.

The recent China-Australia free trade agreement eliminates tariffs of up to 25 per cent, further opening the market to the expanding, appreciative middle class.

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Photo credit: 06photo /

Australia is China's largest supplier with an unrivalled brand and reputation for quality and food safety. Imports from other prospective suppliers are constrained by disease considerations.

The recent China-Australia free trade agreement eliminates tariffs of up to 25 per cent, further opening the market to the expanding, appreciative middle class.

The protein story doesn't stop there. Supplying pork to China may be counterintuitive, but Chinese pork production is volatile and China will commercialise and reform the sector from the present largely backyard approach.

Concerns about food safety result in organic pork chops from China's remote mountain areas retailing at $A60 kilogram.

Australian dairy also services this need for safe, additive-free supply. Food safety including in infant formula is a source of deep anxiety across the country arising from incidents such as those involving carcinogen contamination.

Australian fresh milk therefore retails in Shanghai supermarkets at $A9 to $A12 a litre and Australian yoghurt, along with German products at $A12 to $A15 per 500 grams.

Opportunities do not however cease with production; gargantuan logistics centres that surround China's cities point to the ongoing demand in expanding logistics and cold-chain capability to service these imported and domestic flows.


Twenty-seven per cent of Australian business conducting business with China has started to do so in the last three years.

This trend is good news, including as dealing with China is complementary to competing in other markets.

Similarly, ANZ has seen strengthened interest and diversification in the Australia-China trade and investment corridors, increasingly involving third markets, such as those in ASEAN.

This trend will continue as global supply chains are fundamentally transformed. The unique advantages of FTA will not last indefinitely, whilst the opportunities will remain.

Take the first-mover advantage while it still exists.

Leonie Lethbridge is ANZ Regional Chief Operating Officer in Shanghai.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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