On 17 November 2014, the Australian and Chinese governments announced the conclusion of negotiations on the China-Australia Free Trade Agreement (ChAFTA). Australian financial services providers should consider the opportunities which the deal presents.
Reducing barriers to trade in services
At the date of publication, the text of the ChAFTA has not been made public. However, the Department of Foreign Affairs and Trade (DFAT) has released 'Fact Sheets' summarising the outcomes in key sectors, including financial services.
According to DFAT, China's financial services commitments under the ChAFTA represent the most substantial market access undertakings China has agreed to with any FTA partner (other than in its agreements with Hong Kong and Macau).
The agreement is reported to include the following concessions:
- Removal of the minimum working capital requirement for Australia bank branches (RMB100 million per branch).
- Reduction in the waiting period for Australian banks to engage in RMB business from three years to one year.
- Removal of the two-year profit-making requirement as a precondition to provision of local currency services in China.
- Australian bank subsidiaries in China will be eligible to engage in credit asset securitisation transactions.
- The Chinese central bank and the RBA have also signed a Memorandum of Understanding facilitating the establishment of an official RMB clearing bank in Sydney that will provide a 'more direct means of facilitating cross-border RMB transactions between Australian and Chinese entities than was previously available, and will improve the efficiency of cross-border RMB transactions.'
- Allow Australian insurance companies to access the Chinese third-party motor vehicle insurance market.
- Improved treatment of the establishment of internal branches of Australian insurers in China.
Funds management and securities
- Australian securities brokerage and advisory firms will be able to provide a broad range of services to Chinese investors who are permitted to invest offshore. The services will include cross-border securities trading accounts, custody, advice and portfolio management.
- Increased foreign equity participation by Australian investors in securities firms, allowing Australian ownership of up to 49 per cent.
A financial services committee will be established to facilitate regular engagement between Chinese and Australian financial regulators on issues of mutual interest.
Andrew Robb, the Minister for Trade and Investment, attended a breakfast event in Beijing last Friday 5 December 2014, also attended by Kate Axup of Allens. The Minister said that the committee would meet once a year to see how much further the ChAFTA can go in terms of financial services access. The ChAFTA will also be reviewed every three years to see what further access arrangements might be possible (generally).
The financial services regulators in the two countries have also agreed to 'strengthen cooperation and improve mutual understanding'.
The two countries have also agreed to review bilateral taxation arrangements.
Encouraging Chinese foreign direct investment
FIRB approval thresholds for Chinese private investments in Australia in non-sensitive sectors will be significantly increased, from A$248 million to A$1.078 billion, in line with the thresholds applicable to private investors from the United States, New Zealand, Japan, Korea and Chile. (Sensitive sectors include media, telecommunications and defence-related industries.)
Investments by Chinese state-owned enterprises (SOEs) will remain subject to FIRB approval regardless of the value of the investment. Chinese SOE investors account for a significant proportion of the total value of Chinese investment into Australia. For this reason, it remains to be seen whether the increased thresholds will result in any material benefit for the largest class of Chinese investors in Australia.
Opportunities for financial services providers
The concessions reportedly included in the ChAFTA will open the door for significantly increased participation by Australian financial services providers in the immense Chinese market. Of particular interest are the opportunities that may become available to insurers and fund managers as a result of the ChAFTA.
With an increasingly affluent middle class and pockets of extreme wealth, China affords great growth potential to all financial services providers and, for Australian financial services providers, potentially the chance to benefit from the advantage of being 'first through the door'.
According to the DFAT, official translations of the ChAFTA will now be prepared and the draft treaty will undergo a final legal review before being signed. Formal treaty-adoption processes must then be followed in both Australia and China, and diplomatic notes exchanged, before the ChAFTA will become effective (we anticipate at some stage in 2015).
In the meantime, financial services providers should consider how they may be able to take advantage of the opportunities offered by the ChAFTA.