CHAFTA adds to the deepening of the two countries’ economic relationship.
ChAFTA is likely to increase demand for Australian goods in China, lower the cost of investment in Australia and generate stronger returns on capital for Chinese investments in Australia.
Consider the Australian beef industry as an example. The lower cost of Australian exports due to the reduction of import restrictions – for example, on beef – will increase demand for Australian imports.
Reductions in investment barriers – via the lowering of the international investment threshold – will reduce transaction costs. The mooted removal of capital and exchange controls between Australia and China will broaden the availability and lower the cost of capital in Australia.
In sum, this will likely increase the firm-level profitability of bilateral investments between the two countries.
There is still significant room for this relationship to grow.
China’s outward investment is relatively small on the world stage and its investments in Australia are small when compared with investments from the US and the UK. To date, investments have largely been in the resource and agricultural sectors.
Implied returns on foreign investment in Australia have generally been robust at around 5 per cent. This is on par with other industrialised countries such as the US and UK across all sectors.
Returns on investment in Australian sectors such as financial services and manufacturing are surprisingly high – for example, returns on foreign investment in the Australian financial services sector are higher than their sectoral equivalents in the United States and United Kingdom.
Chinese outward investment is becoming more sophisticated and going well beyond security of supply. Chinese Investors are seeking more complex investments and better returns.
For this to happen, further liberalisation in areas such as financial services and the gradual removal of capital and exchange controls is vital
Under ChAFTA, both countries have made a commitment for this to happen. The trade and investment relationship between China and Australia can only deepen.
ChAFTA was only implemented at the end of 2015. As more Chinese and Australian businesses utilise it trade and capital flows will increase - as will investment opportunities.
Alan Oxley is Managing Director at ITS Global