Sector Update July 2007: Growth in China Creates Capital Opportunities in Australia

Overview: The Chinese economy is rapidly expanding creating many new investment opportunities both in mainland China and throughout the world. Australia and other countries are poised to gain immensely from China’s extraordinary growth. The chart below illustrates the rapid growth in Chinese GDP as a result of more free market policy changes since the late 1970s. This growth is creating an economic ripple effect throughout the world which Australia will uniquely benefit from.

Fig 1

Source: Adapted from Wikipedia

China’s enormous population has allowed it to rapidly expand its manufacturing and service sector industries creating one of the world’s largest economies. Recent data shows that the increase in GDP and the near doubling of those finishing university with a degree has created a nouveau riche middle class with unprecedented buying power.

This would seem contrary to the ideals of a supposedly communist government; however, in recent years the government has unofficially forgotten communist ideals in favour of capitalism, while still maintaining totalitarian control of the country’s economy and population. The Australian and Chinese governments are currently in the process of creating a free trade agreement that would give Australia a significant market advantage in China as well as making it the only country that has full trade agreements with both China and the United States.

Natural Resources:
Both China and Australia have extensive supplies of natural resources at their disposal; however, the Chinese cannot extract enough oil, gas, or iron ore fast enough to maintain their growth. Many of their mines and oil installations are old and inefficient, with poorly trained employees. Comparatively Australian mines and oil and gas installations are newer, more efficient and have better trained staff. Because of this China is importing record amounts of natural resources from Australia and other countries.

China is already Australia’s third largest export market for [natural] resource commodities, after Japan and South Korea, importing some $4.4 billion in mineral and energy exports in 2001. Rationalization of the Chinese resources sector is likely to see the closure of uncompetitive extractive firms and industries and the expansion of minerals processing, pointing to strong growth in demand for commodities such as iron and copper ores, alumina and liquefied natural gas, all of which Australia is well placed to provide.

Australian Chamber of Commerce and Industry, Australia-China free trade agreement, http://www.acci.asn.au/text_files/issues_papers/Trade/Australia- China%20FTA%20_September%202004_.pdf, September 2004, no author

Effect of Industry:
While China has remained the focus for mass production of goods in the Far East, improvements in manufacturing processes and increases in Chinese disposable income levels have led to a rise in production and consumption of durable and luxury goods such as mobile phones, cars and kitchen appliances. Ernst and Young claim that by 2010 around 250 million people in China will have incomes of at least $29,000; up from 13 million people in 2005. Currently only 6% of China’s 1.3bn people own a car, compared to countries such as the United States that have ownership levels nearer 90%. Car makers around the world have recognized this potential market and are pouring resources into it. This potential for future expansion will create even greater demand for natural resources needed to produce these goods; demand which the Chinese will have to supply with imported resources.These are primarily imported from Africa, the Middle East, Indonesia and Australia.

Figure 2 shows The Relative Degree of Trade Complementarity (RDTC); effectively a measure of the supply of Australian export goods and Chinese demand for these goods. An index number for the RDTC of more than 1.0 indicates a good market match, ie. Australia is selling what China wants to buy.

Fig 2

Source: Australian Chamber of Commerce and Industry

Figure 2 clearly shows a strong market match between Australia and China: Source: Adapted from the Australian Chamber of Commerce and Industry In order to accommodate the increase in demand Australia is advancing and improving its infrastructure. Several projects are already in progress including the construction of new ports.

Mansion House Securities believe that Australia’s diplomatic ties, natural resources, and geographic proximity to China creates unique investment opportunities in the oil and gas industries.

Contacts;

Mansion House Securities Limited
8-10 Mansion House Place, London EC4N 8LB
Telephone number: 0207 398 0800

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