After a decade of negotiations and over a year of fine tuning, the much anticipated China-Australia Free Trade Agreement (ChAFTA), which was signed on 17 June 2015, will finally come into force on 20 December 2015, cementing the most favourable trade deal that China has concluded with any developed economy.

Under the agreement, more than 86 per cent of Australia’s goods exports to China (worth more than $86 billion in 2014) will enter duty free, rising to 96 per cent when ChAFTA is fully implemented on 1 January 2016.

The agreement will deliver a range of benefits to Australian and Chinese businesses, including:

  • Removal and reduction of tariff barriers - with the agriculture and resources sectors, in particular, being the big winners along with certain manufactured products;
  • Relaxation of regulatory barriers to cross-border investments;
  • Facilitation of cross-border investments between China and Australia;
  • Relaxation of immigration law requirements to facilitate the movement of labour between China and Australia;
  • Improved access for Australian businesses to establish operations in China; and
  • Investor protections through Investor State Dispute Settlement mechanisms.

We have commented extensively on the steps taken by both the Australian and Chinese governments to date in previous articles (here and here) as well as specific articles relating to the treatment of ISDS mechanisms (here) and the labour mobility provisions (here).

Increased levels of activity

Many Australian and Chinese businesses have already been proactively positioning their businesses to secure the many opportunities that ChAFTA has to offer.

We have experienced a significant uptick in Chinese investments recently, particularly in the sectors heavily promoted by ChAFTA – health, agriculture and property, with the latter driven by the increased levels of demand in education and tourism. Dalian Wanda, Greenland Group, Fosun International, Starryland and a range of other Chinese developers have been active in the residential and commercial real estate market this year.

In health, we have seen Luye Medical acquire Healthecare, Swisse Vitamins acquired by Biostime, Ramsay announcing it is considering a joint venture in China, and AUX in serious talks about Healthscope.

The dairy sector has seen the New Hope investment with the Moxey and Perich families, the Ningbo Dairy project in Victoria and the currently contested acquisition by Lu Xiangfeng of Van Diemen’s Land in Tasmania, Australia’s largest and oldest dairy farm.

In the beef sector, the Kidman sale process is dominated by Chinese bidders, Shandong Delisi invested in Bindaree Beef and Fulida Group entered into a JV with Wellard to build additional supply chain capacity for live cattle export trade between Australia and China.

In the energy sector, State Power Investment Corporation has recently acquired Pacific Hydro from IFM and we expect to see more activity in this market in 2016.

More generally, the recent northern Australia investment conference in Darwin attracted significant Chinese interest in investing in projects which will help support the development of northern Australia.

KWM’s China-Australia predictions

2015 has been the year of the competitive Chinese bid with multiple Chinese companies bidding against each other on Australian assets, including State-Owned Enterprises. Our prediction is that this trend will continue in 2016 and we will see the many 2015 “under bidders” return to the Australian market.

FIRB will continue to scrutinise all foreign government investment into sensitive sectors, including Chinese SOE investment, but we do not expect this to be a significant deterrent. Chinese bidders that understand Australia’s foreign investment framework and anticipate potential barriers will continue to be successful. Good preparation and early advice from experienced advisers is crucial.

While it has been a contentious issue, we believe the labour mobility provisions agreed under ChAFTA will reduce visa complexity and red-tape, easing staff movement between China and Australia. The controversial Investment Facilitation Arrangements may allow Chinese sponsored infrastructure projects to utilise foreign labour to address costly labour shortages with Australian infrastructure developers and businesses potentially partnering with Chinese investors to access those benefits.

Our other sector-based predictions for 2016 are set out below. It is worth acknowledging that not all of them are directly linked to ChAFTA alone, however each signals the growing significance and influence of China on the success of many Australian businesses.

Health

China will become Australia’s largest market for pharmaceuticals and vitamins within 2 years.

The Australian healthcare sector will continue to consolidate as Chinese buyers with deep capital reserves and available, cheap funding acquire or invest into Australian hospital groups and aged care operators with the intention of expanding these operations back into China.

With the rapid boost in internet and smartphone users, we also expect to see Australian start-ups enter the China market and, in collaboration with active healthcare investment funds, develop a new internet + health industry including wearable devices, healthcare applications, online healthcare information services and direct patient care tools.

Australian medical device companies will significantly grow their market share in China as a result of tariff reductions under ChAFTA.

E-commerce

The e-commerce market in China is booming and ChAFTA makes selling online directly to China easier for Australian exporters. We expect the number of Australian brands on China’s e-marketplaces to triple in 2016 following the success of brands such as Bindaree Beef and Suisse/Blackmores.

We anticipate that Chinese internet companies and e-commerce groups will make strategic investments into Australian food processing companies to provide expansion capital to meet demand.

Financial services and FinTech

As a result of ChAFTA, we will see is the emergence of pilot schemes under which the Australian asset management industry could take significant steps to link with a Chinese investor base. One such scheme, the Qualified Domestic Individual Investors program (referred to as “QDII2”) is already in the pipeline. Such an outcome could work well with current policy trajectory in China of developing cross-border financial markets to further internationalise the RMB, which will soon sit alongside the USD as the dominant currency for multi-national trade and FX transactions following its recent inclusion in the basket of currencies which make up the IMF’s Special Drawing Right. For more predictions about the future of RMB, read our RMB 2015+15 10 Forecasts.

With China taking a lead role in FinTech globally, Australian start-ups and established financial services players will increasingly look to China for ideas for their own businesses, acknowledging both that China's FinTech community is racing ahead and also that there are models in China which are wildly successful that Australia doesn't have yet. We also anticipate a number of Australian start-ups and incumbents looking to China for financing and capital.

Food and agribusiness

Demand for Australian powdered infant formula will continue to rise and we expect Australia’s existing exports of infant formula to triple to 15 million tins over the next two years as a result of the 20% reduction in tariffs. The growth opportunity for infant formula is so significant that many companies from outside the dairy sector will be attempting to break into this market.

Beef investment will continue but Chinese bidders will be competing fiercely with many of Australia’s wealthiest business leaders and other international bidders.

Given the technical, supply chain and value challenges with investing in the dairy and beef sectors, we expect that Chinese investors will increasingly diversify into other primary production sectors and processed food and beverages.

There is already significant Chinese investment in the wine sector and we expect it to expand. The farmed aquaculture sector needs additional investment to build supply to meet the demand for safer and cleaner seafood. Investment in specialised grains and oilseeds has also been predicted to meet some niche and specialist opportunities in China and its growing focus on healthy food, including cereals.

Processed food and beverages with a strong Australian brand heritage and healthy and natural appeal may well be the surprise packet for 2016. The newly released www.australianfoodcatalogue.com.au promoted by Food Innovation Australia Limited highlights the large variety of niche food and beverage processors with great Australian providence and innovative offerings.

Protecting your business in China

China has agreed to make its IP databases publicly available on the internet and to provide opportunities to address Chinese IP protection which may have been inappropriately granted to trade mark squatters and copycat products seeking to take advantage of existing Australian brand power. We also expect that Çhina’s new trade mark laws (introduced in 2014) will increasingly facilitate the predictable removal of these bad faith trade mark registrants albeit at a cost.

However, when entering any new market, proactively protecting intellectual property is important. Brand strategy should be well thought out, local brand protection advice sought at early stage and trade mark registrations filed in English and Chinese characters. Any IP developed in the course of doing business in China should be properly protected, including by filing patent and trade mark applications, obtaining copyright assignments and implementing a trade secret management strategy.

While the benefits of ChAFTA will be realised over decades, it will immediately enhance Australia’s competitive position in the world’s second biggest economy and create significant opportunities for Australian business, Australia’s workforce and, Australia’s future.