Spies and corporate takeovers: what’s next for the China-Australia story?
Spies defecting, a foreign power secretly taking control of Australia via 5G, the stealthy infiltration of universities and CSIRO, a new arms race waged through cyber-warfare.
This is not a John Le Carre novel, these are the headlines shaping the narrative in Australia about China, as local security agencies convey deep anxiety about the ways in which the country’s largest trading partner is influencing events here.
But if there are sides, business would be in the other hemisphere, demanding greater cooperation and understanding.
China buys more than double the volume of goods from Australia than our number two trading partner, Japan, and it is keenly interested in the country’s up-and-coming industries of renewable energy, battery storage, healthcare, and tourism, according to AusTrade’s 2018-19 annual report.
And as China’s giants turn their eye to Australia, as dairy heavyweight China Mengniu did buying infant formula star Bellamy’s for $1.5 billion and Lion Dairy for $600m last month, sinophiles in the business realm want to brush aside the stories about defecting spies and point to where the two countries are compatible.
Austrade senior advisor Stan Roche tells a story about ‘Chinese freedoms’, where people can go to Starbucks whenever they want or buy Australian cherries and eat them whenever they want, and a rich, ageing population.
“China is really a story of two economies,” he told Stockhead.
“You have 400 million people that are middle class by any standard, you have 800 million that are yet to come through the ranks. As an economy reaches $US10,000 GDP per capita, a lot of magical things happen especially the demand for consumer goods.
“We’ve been beneficiaries of that very high steep growth in the middle income, particularly to a millennial generation.”
Australia has been benefiting from China’s ‘socialism with Chinese characteristics’ since 2000, when trade surged from $7 billion to $195 billion last year.
Initially it was iron ore and coal underpinning that trade. Today, Roche says China’s shifting demographics are boosting new industries.
ASX investors have already felt the pull of China in the milk formula sector, where A2 Milk (ASX:A2M) and Bellamy’s pioneered sales, and their share prices followed upwards.
More recently daigou (‘to buy on behalf of’), experiences and shopping tourism companies such as Aumake (ASX:AU8), Blackmores (ASX:BLK) and Mediland Pharm (ASX:MPH) have tried to tap intense Chinese demand for Australian-grown, made, and branded goods. Australian wine is massively popular in China, which now accounts for 42 per cent of total exports.
“The greatest headline growth has been in the agribusiness sector for high quality goods,” Roche said.
China is investing $21 billion to become a tech and manufacturing titan, so Roche believes the next growth industries for Australia are likely to be aged care, an area where Australia can offer expertise, and medical devices and biotech.
Former Liberal trade minister Andrew Robb would add resources and energy, education, tourism, and agriculture to that list.
At the Allfin Investment Summit last week, Robb said Australia needed to play to its strengths. That means tapping the mining sector and tech and data resources as a potential China trade opportunity, and doing the same with Australia’s third largest export, education.
Jamieson Coote Bonds chairman and former Future Fund chair Mark Burgess says financial services are a potential growth area.
He says the superannuation industry has $3 trillion under management now, and needs to start diversifying outside Australia.
Furthermore, currently only 4-5 per cent of capital invested in Australia comes from China, the country’s largest trade partner for goods, according to the AusTrade annual report, compared to 24 per cent from the US.
Roche says fund managers in China are asking to learn from Australia’s experience in different asset classes, such as real estate investment trusts. He says they’re offering access to China in exchange for access to Australia’s depth of experience in asset management.
“I think we’re at the tip of the iceberg of more investment to come,” he said.
The Australian health and life sciences sector is beginning to feel out how a Chinese future might look for them.
Medical device maker Sirtex was bought in 2018 by Chinese company CDH Genetech and Hong Kong-listed China Grand Pharmaceutical and Healthcare Holdings for $1.87 billion, to gain access to a market it wanted to break into.
Australia’s most successful health companies, CSL (ASX:CSL) and Cochlear (ASX:COH), have found success selling into China.
At the other end of the market, microcap Invion (ASX:IVX) sold 15 per cent of itself in 2017 for $5.5m to Chinese tech investor Cho Group, in exchange for two board seats and access to a prostate cancer treatment using light waves.
Cancer biotech Invitrocue (ASX:IVQ) has partnered with China’s Shanghai Institute for Biological Sciences as a way into that country, while Medical Developments International (ASX:MVP) partnered with Japan’s Daiichi Sankyo to start the registration process to sell its non-opioid painkiller Penthrox in China.
But others are less certain. Visioneering (ASX:VTI) chief Dr Stephen Snowdy says the risk of IP theft, where clever scientists reverse engineer a product and begin making it en masse with impunity, was one reason why the company is yet to start selling its contact lenses in China.
Austrade’s Roche believes a strong local partner can circumvent this risk.
“It’s a reason why you would want to choose a good venture capital partner in somewhere like the US so they can protect you. That’s no different to any country, including China,” he said.
“I think you will see more real biotech deals with China, because you need them as a partner to commercialise in such a large market.
“I believe the timing is right, now, to begin to understand the market, and it is about being patient, it is about making a dedicated effort to understand the market, the players, the potential partners.”