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China strategy: focus on the niches

China-Australia relations have been much in the news recently – although I should say more so in Australia than in China.

I’m not going to explore the geopolitical dynamics here but I note every argument, whether hawkish or dovish, emphasises the centrality and enormity of the China-Australia economic relationship.

" [ANZ is] not a Chinese bank. We are not like HSBC or Standard Chartered or Goldman Sachs or Morgan Stanley.”

From our perspective at ANZ, a mid-size foreign bank with a Greater China footprint, the question is neither the scale nor value of the China market but rather its niches. We are not a global banking giant nor do we want to compete head-to-head with such institutions.

For me, several macro features outline the China opportunity:

  • The rise of the middle class will underpin strong consumption growth and that class will represent more than half of population by 2020.

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We expect the following the changes to have occurred by 2030:

  • Urban disposable income per capita will reach around RMB104,533 ($US31,682 in PPP), from RMB28,844 ($US7,750 in PPP) in 2014.
  • Around 326 million new middle class members will emerge in China’s urban areas and the total urban middle class population will reach 857 million.
  • The urban middle class will spend RMB42.4trn ($US12.4trn in PPP) alone in 2030, compared with just RMB13.6trn ($US4.3 trillion in PPP) in 2014.
  • China’s consumption in GDP will reach 50 per cent, from about 38 per cent in 2014.

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For businesses trading with China (buying and/or selling goods), the key issues to be addressed are:

  • Determining what currency should be used
  • How to manage risk
  • Adopting the best practice approach to working capital management

For businesses doing business in China (M&A, greenfield, brownfield investments in selected industries), the key issues to be addressed are:

  • Understanding the FDI approval process, capital controls and equity limits
  • Managing liquidity in China
  • Repatriation of earnings and avoiding trapped cash
  • Legal/regulatory/labor related issues

Perspective

From our perspective, ANZ is uniquely placed to support Australian and New Zealand companies. We have the largest presence in China of all the Australian-New Zealand banks and we are the only such bank which is locally incorporated in China.

Our on-the-ground presence and network, with a dedicated Australia/NZ desk in China, builds on the well-developed relationships we have with key Chinese third party providers which we can introduce to our customers.

I have been with ANZ – after more than two decades at other international banks in China and the region – for nearly three years and in that time we’ve focussed intently on where we actually have a competitive advantage.

We are not a Chinese bank. We are not like HSBC or Standard Chartered or Goldman Sachs or Morgan Stanley.

When we consider that macro picture, even if GDP growth continues to trend down, China is still the economic hub of the region in both trade and capital flows.

China is the largest trade economy in the world. In 2016, China exported $US2.06 trillion and imported $US1.32 trillion, resulting in a positive trade balance of $US736 billion. A large proportion of China’s trade flows take place in the Asia Pacific region.

In an historic development, with its economic transformation, China became a net exporter of capital in 2014. The 2016 figure was $US170 billion and that has implications for a vast array of initiatives, whether it is the China-Australia Free Trade Agreement, the Belt and Road Initiative or internationalisation of the RMB.

Critical

Critically for ANZ, of China’s foreign direct investment (FDI), around 70 per cent takes place in the Asia-Pacific region – including Australia and New Zealand.

That really is the opportunity for ANZ, to participate in that universe. Our focus comes down to three types of organisation:

  • Chinese companies with Asian ambition
  • Chinese companies with global ambition
  • Multi-national corporations with operations in China

In practice, that means a customer segment of companies which are not small or even smaller-medium; nor customers which are global giants. That smaller end is best served by domestic banks, that bigger end by the biggest global and investment banks. But that segment in the middle is, in itself, enormous.

Moreover – and critically – we find those segments do not have different risk profiles to what we are seeking. This is not a riskier proposition than the rest of ANZ’s business banking.

When we ask ourselves where we have a competitive edge,  for Chinese companies with Asian ambition, ANZ’s footprint in Asia fits into these clients’ needs neatly so we could facilitate their trade and capital flows within our network.

Again, when we look at Chinese companies who are global players we ask “where do we have an edge?” We definitely have an edge for this type of client when they are targeting our specialised industries such as agriculture, resources and healthcare or when they have an Australia or New Zealand focus - where we do have strong capability and home markets advantage.

For ANZ targeted multinational corporations in China, we could be a specialised bank to provide product offerings and platforms to serve particular needs of their operations.

From a product perspective, we have a strong capability to help our clients with debt capital markets, cash and trade, and risk management in markets across the region. Overall, the target segment is not dissimilar: not small, not enormous.

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Greater China

Given the China strategy is succeeding, our next stage is moving deeper into Greater China – Hong Kong and Taiwan. These are closely-connected markets.

China remains the growth engine in the region; Hong Kong holds a unique position to facilitate trade and capital flows between China and the rest of the world; there are a lot of listed Taiwanese companies who have a huge proportion of operating assets in China (both sides have mutually benefited from this collaboration on technology and management).

For Hong Kong we are interested in three types of business:

  • Local businesses operating locally in sectors such as real estate;
  • Truly global companies like Jardine Matheson and Hutchison; and
  • Chinese companies in Hong Kong, notably those companies listed in Hong Kong or with treasury operations there.

For Taiwan, our focus is particularly on those companies with operations in China which ANZ can connect more broadly in the region – and there is a huge opportunity in those companies with the bulk of their operating assets in China.

ANZ is extremely well positioned to take advantage of the opportunities as we continue to invest in product capabilities in China and in the region. We do have strong industry insights in sectors such as energy and resources, agriculture, infrastructure and healthcare to support our customers. We will continue to support our clients to grow, expand and succeed across the region.

We know too that many Chinese companies have holding companies in Hong Kong and many global companies will have a treasury function there – are Greater China strategy is designed to support such companies too.

These opportunities all fit neatly into ANZ’s strengths in debt capital markets, cash management, hedging, bond issuance and trade. The opportunity in Greater China is certainly there, it doesn’t require more capital nor is it more risky. The challenge for us now is execution.

Xiaoguang Huang is CEO Greater China at ANZ

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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