The Aus-China honeymoon is over… long live the marriage

Thursday 25 Aug 2016

The Aus-China ‘honeymoon’ is over.  A ‘warts and all’ marriage is developing.

The honeymoon was characterized by the many Chinese-linked deals and investments over the past decade with little public and political influence at the individual deal level.

This is now changing due to:

  • the USA and China are using tensions in the South China Sea to pressure Australia and other countries to ‘pick a side’. Security with the US or economics with China.
  • a growing public disenchantment of the major political parties (both in the USA and Australia) giving more power to minor parties and far-right or far-left viewpoints
  • the 1-seat majority Australian government with no control in the senate that strengthens the influence of populist sentiment and political horse-trading
  • managing an increasing rich and poor divide (winners and losers) – the antithesis of Australia’s egalitarian culture, where ‘winners’ have benefited from a China-driven boom in specific industry sectors (mining, property, education, tourism, agri-foods and the professional & service sectors that supports them.) 
  • an economic slowdown in China coinciding with rising public health, environmental & corruption concerns, and China’s own rich-poor divide.

BUT THIS MARRIAGE ANALOGY HAS EXTRA CHARACTERISTICS

  • A) It’s not a marriage of equals. China’s GDP is nearly 10 times larger than Australia, its population nearly than 60 times larger.  Economically, Australia ‘needs’ China more than the other way around as reflected in the 2-way trade and investment flows.
  • B) There’s polygamy… Aus-China is not the only relationship. There are reportedly 100 nations that, like Australia, describe China is their ‘biggest trading partner.’ China’s One Belt One Road seeks to create an economic bloc along the old Silk Road to Eastern and Central Europe and a maritime ‘road’ to South Asia and South East Asia and eastern Africa, reducing the influence of the ‘West’ in the global economy.
  • C) Opposites attract (or repels?). China’s political and cultural differences are markedly different from Australia’s other main partners, USA, UK, European Union and to some extent Japan. There will be extra effort needed in understanding each other

AUSTRALIA’S MANY CALLS, MANY ACTIONS, CHINA’S ONE CALL, ONE ACTION.  

In every marriage, both sides need to work at it. Emotions are as important as economics, especially given the five catalysts mentioned above, and particularly in Australia where voter sentiment counts.

For our Chinese expat readers, it’s important to remember that social media, traditional media, shock jocks, lobbyists and special interest groups all have powerful influences on sentiment in Australia. And by-elections at the Federal level, given the slim majority, can be game changers. Government ‘stability’ under these conditions is more tenuous.

As a 1-party state, what the Chinese government wants domestically, it gets. It’s ‘One Call, One Action’ in China. (Most of the time. We will expand on this in a subsequent essay) compared to Australia’s democracy where there are ‘Many Calls and Many Actions.’

Australian readers would have read about the instances where China seeks to influence public sentiment – scholarships, foundations, donations, cultural & business associations, institutes, industry bodies.  Increasingly, there is soft power in the form of entertainment assets (‘Hollywood’ movies created by Chinese capital).  But all this is nothing new. The Chinese are great copiers of the US.

WHERE TO NEXT?  IT’S A MARRIAGE, NOT A DIVORCE

Despite the shaky public sentiment at present, the outlook is still ‘all good’ for most in the Aus-China relationship.  The exception is the handful of big ticket deals with national security implications.  For everyone else, it will be business as usual.

Why this view? A and B above are the key drivers. No one wants to lose economically.  Public sentiment softens when the hip pocket is hurt (like people still buying intensively farmed animal proteins – caged eggs, feed-lot cattle – although they want better animal welfare)

However, housing (or lack of it) is the likely to remain a major sensitivity in the Aus-China discourse. It impacts on everyone.   In hedge fund parlance, people are ‘long’ if they have investment property in addition to their home, ‘neutral’ if they own a home, and ‘short’ if they rent…that is, everyone as an economic position when it comes to housing.  This is on top of an emotional position as ‘home is where the heart is.’

It’s a balancing act between keeping the 60%+ of Australians who own their own home (or are paying it off), reassured of that their biggest asset is safe, vs affordability issues for the next generation of home owners and the 40% who rent (or share house).

How this sentiment plays out will be determined as housing supply from the past 2-3 years of frenetic construction comes on stream.

Chinese and Australian developers backed by Chinese capital are creating more housing supply that will eventually lead to lower rents.  To incentivize developers to take the risk of building homes, they need buyers, which is where the Chinese offshore investors have come into the picture in the past 3 years.

For details of the Chinese love affair with Australia property, please read our articleThe View from China on Australian property which also allays worries about settlement risks and also reports on local Chinese-Australian (vs overseas Chinese) buying power.

In property and other industry sectors, jobs creation along the entire supply chain, as a result of Chinese mass market consumption and investment, will ultimately support sentiment. Think of all the recent ASX listed companies’ annual results that are linked to China, and their plans for growth – Blackmore’s expanded factories etc).

Its jobs and growth. China is the catalyst for this.

WARTS AND ALL

To conclude, while the honeymoon is over, and public sentiment is now more influential, the Aus-China relationship is maturing into marriage with its periods of tension and disagreement.

The ‘3rd party’ in this relationship also needs to be factored in.  This 3rd party is the USA, and posturing about the South China Sea by both China and the US will remain just posturing. With nuclear MAD (mutually assured destruction), no one wants to go to war.  And surely no other ‘vassal’ state on either side is naïve enough to enter into a ‘proxy war.’  (well, maybe North Korea might be an exception).   Australia need not be drawn into taking sides.

So yes, the spouse may not be as attractive now since all the warts are being looked at closely.  But a spouse is still a spouse.  There is another MAD – mutually assured development.

 

http://www.propertyobserver.com.au/forward-planning/advice-and-hot-topics/57227-the-aus-china-honeymoon-is-over-long-live-the-marriage.html

- David Chin