Australia poised to ride the Chinese consumer wave, but foreign firms face ‘rigged game’

AUSTRALIANS are deluding themselves, and we need to radically change our approach to China, an expert says.

Chinese tourists in Phuket, Thailand. Picture: Alex Tilbury

AUSTRALIAN investors are “living on a different planet” thinking Chinese demand for our commodities will rebound, according to one leading expert.

Dong Tao, the Hong Kong-based managing director and chief regional economist at Credit Suisse, says many Australians still somehow believe Chinese government stimulus will bring back demand.

Speaking at The Economist magazine’s Australia’s Asian Future Summit in Sydney on Thursday, Mr Dong said the problem wasn’t “what’s wrong with the Chinese economy”.

“What’s wrong is you,” he said.

“The golden age of China’s infrastructure boom is over. The golden age of China’s housing boom is over. The golden age of China’s export boom is over. The golden age of China’s stimulus is over. So what’s not over? China has a consumption story.”

Mr Dong said people frequently say Chinese lack of demand was a problem. “That’s wrong. What’s happened is Chinese demand has changed,” he said.

As imports for commodities and heavy machinery fall, tourism spending, for example, has boomed — the Chinese now spend $1.2 trillion abroad.

“The Chinese visit Mt Fuji in Japan, and on the way back they bring these funky Japanese toilet lids with all kinds of buttons,” he said. “Ironically, that toilet lid is made in China.”

They travel to Korea for kimchi and cosmetic surgery, send their children to expensive schools in Australia and splash out on organic foods from New Zealand.

“Australia is well positioned to take advantage of the Chinese demand, but the Chinese demand is changing,” Mr Dong said.

“It’s up to you to figure out whether you want to chase the old supply or embrace the new demand and create new supply to accommodate it.

“The market still has a residual memory that China is an industrialising economy and needs lots and lots of steel and so on. If you can settle down and think of China as a 4 per cent growth calibre, you’ll be in a better place to judge Chinese statistics.

“The bottom line is China has passed the age of industrialisation.”

The risk for Australian firms overplaying their hand in China is great, however.

Earlier this week, the chief executive of listed dairy co-operative Murray Goulburn, Gary Helou, was forced to step down after vastly over-estimating the immediate outlook for exports to China.

According to Dominic Ziegler, Asia Editor of The Economist, foreign firms face serious challenges entering the Chinese market.

Customers at a McDonald’s in Shenzhen. Photographer: Brent Lewin/Bloomberg

“The question for Australians is, do you go into what is still a difficult Chinese terrain and set yourself up there trying to break into the market?” he told news.com.au.

“And it’s hard for all sorts of reasons, regulatory, technical, cultural. Or do you instead try to make Australia a better place for Chinese money to come here? Probably the answer is a bit of both.”

Mr Ziegler, pointing out that ironically The Economist is currently blocked in China due to a series of articles critical of President Xi Jinping, said foreign companies have found it difficult for a variety of reasons.

“In the kind of future economy that Dong Tao is describing, the beneficiaries so far have been Chinese companies like Alibaba,” he said. “It is a rigged game in China, it really is.”

Peter Cai, research fellow in the East Asia Program at the Lowy Institute, said the other problem facing Australia was our two biggest export sectors, tourism and education, are nearing saturation already.

“I’m not sure the education sector has the capacity to take more students,” he said.

“Already it has been compromised, and it will be hard to take more Chinese students without damaging Australia’s reputation.

“The question is whether Australia can expand its capacity, but it’s definitely not going to be enough to replace commodities, not in the short to medium term.”

The other elephant in the room is China’s ballooning mountain of debt, which now stands at 260 per cent of GDP. Credit Suisse’s Dong Tao said the prospect of a China managing a “soft landing” was becoming increasingly difficult.

“China desperately needs another supply side breakthrough,” he said. “The first one happened in 1978 when Deng Xiaoping opened the door to connecting a Soviet-style planning economy to the rest of the world.

“The second one happened in 1992, when China set up special economic zones, which set the stage to China becoming the world’s factory. The third happened in 2002, when China joined the World Trade Organisation.

“China desperately needs another supply-side breakthrough, yet we’re seeing policies repeated on the demand side. They’re trying to print money to solve the problem.”

Mark Delaney, deputy chief executive and chief investments officer at AustralianSuper, sounded a grim warning.

“The China credit bubble could well be the biggest problem facing China over the next five years. The data on credit bubbles is all really poor, the policy response is uncertain. No one knows how the issue is going to be sorted out,” he said.

“Let’s say there’s a 30 per cent chance the world's second biggest economy has a financial crisis in the next five years. That’s a really big deal for everybody, and no one has a good handle on it.”

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