CHINA'S MARKET SLUMP 'MAY BE GOOD FOR AUSTRALIA'

Written on the 15 July 2015 by Laura Daquino

CHINA'S MARKET SLUMP 'MAY BE GOOD FOR AUSTRALIA'

DON'T pull out the stops on China - it's still a boom market and needs to stay on your radar, says Holding Redlich Brisbane partner Carl Hinze.

While the Shanghai Composite Index keeps sliding, Hinze says it's important to keep a long-term view and assess the problem with a discerning eye. He even sees the latest pullback in the Chinese bourse actually working in Australia's favour.

"I have seen dramatic swings in China's equity markets over the years, so I am not so inclined to be too worried about this one," he says.

"The market has lost a lot of value, but still nothing like the value which was lost in the previous slump.

"The problem seems to have been caused by margin calls on the lending that took place for retail investors to buy stocks. Margin lending is only a fairly recent phenomenon to the Chinese stock markets, so it is not surprising that it is at the heart of a serious sell-off."

Hinze worked in China for 10 years in the fields of investment banking and law before returning to Australia to work in corporate and commercial law, and mergers and acquisitions.

He is also a recognised expert in the field of Chinese sociolinguistics and politeness research, so can readily pinpoint the fundamental differences between Chinese and Australian cultures.

Hinze is of the view that China is a goldmine, and despite Australians traditionally being keen to put on the hard hats, we just don't know how to tap into its force. 

Two-way investment between China and Australia measured at $75.3 billion in 2013-14, according to the Australian Bureau of Statistic, just under the $75.6 billion recorded between Australia and the US.

He says the latest Chinese market sell-off may actually work in favour of Australia.

"There are several reasons why I am not too worried about the market sell-off," he says.

"Chinese households have a lot of savings, which act as a buffer to rapid swings in the equity markets. These swings tend to transfer wealth, rather than create or destroy it.

"While many retail investors will have suffered from the slump, many others will have profited from it.

"To the extent that those whose wealth has been spooked by the slump, it will stoke their desire to shift their wealth to markets like Australia.

"Closing our eyes to this means we neglect the commercial and cultural impact. We need to be prepared and properly understand the legal, regulatory, cultural and linguistic issues at play."

Hinze says most cultural differences funnel from China operating a socialist civil law system and Australia a common law system.

This invites Chinese to negotiate business through government, while Australians are happy keeping private enterprise private.

"There is a pervasive sense of government in China and it is involved in almost every aspect of business - you can't do very much at all without the assistance of authorities," says Hinze.

"Chinese businesspeople must develop legitimate and solid relationships with government authorities to develop their business.

"Therefore, when doing business here, they think that anyone with a good relationship to government will be able to resolve any issues - a misunderstanding we often see when Chinese companies encounter challenges with development applications here in Australia.

"The reality is that the rule of law is paramount here."

When doing business in China, Hinze says Australians should first understand the different timeframe they will have to follow and, from there, never lose sight of where their interests lie.

"Australian investors going to China don't generally understand the long lead time to market, complexity of approval and issues that arise from joint-venture agreements. Australian investors have an unrealistic expectation of timeframe to market," says Hinze.

"Also, don't be so willing to put all your cards on the table to expose yourself to exploitation.

"Chinese follow a concept like win-win but it doesn't have the same connotation as it does here. In China, win-win means you lose - but not so badly that you don't want to continue doing business with me."

Hinze says for Australian businesses that are open to understanding these principles, the best opportunities exist in food, beverage, agribusiness, transport and logistics, green technologies, and healthcare (aged care and vitamins in particular).

"If you want to do business in China, you have to be doing it for one of two reasons: your product or service is in high demand over there, or you are operating a sourcing and distribution model," says Hinze.

"You essentially need a reliable and trustworthy intermediary on the ground with you too, and be confident they actually have the level of connections they propose, or haven't made these connections illegitimately by dabbling in corruption."

 


Author: Laura Daquino Connect via: Twitter LinkedIn

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