Gambling on China market

The Crown arrests may signal a tougher business environment for foreign companies.

The Chinese market is heavily skewed towards supporting locally grown companies. Picture: AFP

The uncertain fate of the 18 Crown employees arrested in China last week for “gambling” ­offences ­raises an uncomfortable question for Australia.

Is Australia — and some sectors of Australian business in particular — putting too many of its eggs in an increasingly unpredictable China basket?

The world’s second-largest economy — some would say the largest by some measures — China has been Australia’s largest trading partner since 2007, its growing middle class now an increasing source of attraction for many businesses.

Australia’s economic ties with China, particularly its sales of iron ore, coal and other commodities, helped sustain the Australian economy in the years following the global financial crisis.

Now with the commodity boom off the boil, a broader range of industries including tourism, food, education and healthcare products are seeking to sell their wares to Chinese customers.

In Crown’s case, the idea of attracting lucrative revenue from big-spending mainland Chinese “whales” has been a focus of its marketing strategy for its existing Australian properties in Melbourne and Perth (and Manila) and its proposed casino development at Sydney’s Barangaroo.

But there are limits to the potential of the China market, particularly for those intent on seeking shorter-term gains.

China’s economy is slowing; its market is becoming highly competitive for players from around the world; there has been a rise of China-based companies in almost every market niche; and the political environment in Beijing is becoming increasingly doctrinaire.

Not only has President Xi Jinping overseen a two-year crackdown on corruption and certain business practices, but he is now pushing for an increasing role for the Communist Party in the economy, with pressure for more party members in state-owned enterprises and even private sector companies.

As some Australian food exporters learned recently, regulations are being tightened and changed with little notice while business laws and the political system itself is still very opaque.

Western executives doing business in China, as well as Crown staff and shareholders, are now anxiously awaiting more details of the future of the 18 arrested in a concerted operation — some say a “sting” — in a country where gambling and the promotion of gambling is officially illegal.

Yet many of the world’s big ­casino companies, including Crown, are increasingly seeing China’s wealthy as a potential source of new business.

The exact nature of the charges to be levelled against the Crown employees has yet to be revealed.

But only Crown’s senior management can really know if its staff were put under pressure, or provided with incentives to look for increasing business from China, that may have seen them overstep — however unwittingly — the boundaries of Chinese laws.

Clearly, Chinese authorities have seen it that way given the extent of the operation against the company. In one sense, there has been no change in China’s official policy on gambling. Chinese officials outlined their opposition to foreign casino companies promoting themselves in China as early as February last year.

China’s Ministry of Public ­Security announced a crackdown on foreign casino operators ­setting up operations to “attract and recruit Chines citizens” to gamble overseas.

The announcement was followed by the arrests of about 13 executives from two South Korean casino companies last October as a part of Operation Chain Break.

It’s hard to see an experienced company such as Crown blatantly ignoring these warnings.

The move to arrest so many executives, from junior staffers to a senior Australian executive, could not have happened without high-level political support and will cause many Western executives to think twice about visiting China. The number of arrests is many times larger than Rio Tinto faced a few years ago with the charges against Stern Hu.

In another country, over­stepping the mark by foreign companies might be addressed by public criticism or even fines.

But suddenly arresting a large group of executives without notice for what may be questionable business practices does not sit well with China’s role as a country that wants to become a player in international commerce.

Much has been made of the potential of Australia’s new free-trade agreement with China.

The sheer size of the Chinese market makes it appealing to foreign companies. And some are arguing it is up to foreign companies wanting to do business in China — or anywhere overseas for that matter — to keep up with changing rules and regulations, including attitudes to the enforcement of those rules.

But as many foreign companies have learned, in practice the Chinese market is heavily skewed towards supporting locally grown companies, which are becoming increasingly competent.

Sudden arrest without notice, including of very junior executives, is a drastic way to enforce business law. To be fair to the federal government it has been pushing for Australian companies to look to other markets in Asia, recently upgrading business ties with Singapore and pushing for a new free-trade agreement with Indonesia. Companies such as Blackmores, which has big sales in China, have long been operating in Asian countries such as Thailand and Malaysia and have recently expanded into Indonesia.

China will continue to be a major Australian trading partner, but the question is how much the Crown arrests turn on the specifics of the case and how much they are a sign of a tougher business environment to come for foreigners.