A poll released on 11/10/2016 has found that 1 in 5 Australian companies are using the Renminbi (RMB) to do business with China.
The poll which surveyed 1,600 decisions makers from 14 countries, found that the use of the RMB has risen by 18% since just last year.
“More than 40 percent of Australian companies believe that the RMB to be an international trading currency in the next five years, versus 29 percent in 2015,” HSBC Australia’s Head of Commercial Banking Steve Hughes said.
These findings come on the back of the recently launched joint report entitled “The Renminbi, From the People’s Money to a Global Currency”. The report, prepared in conjunction with the Australia China Business Council, the Commonwealth Bank of Australia, Austrade and PwC provides practical information on how Australian companies can use the RMB for cross- border trade, investment and capital management purposes.
Rmb As A Settlement Currency
True internationalization of the RMB started in 2009 when the People’s Bank of China (PBoC) launched the RMB trade settlement pilot scheme. The aim was to test RMB settlement of merchandise trade transactions with counterparties in neighboring countries. This represented the most significant development in RMB internationalization up to that point, and should be seen against the backdrop of China becoming the world’s largest trading nation.
The impact on the global uptake of the RMB was remarkable – after just three years, it advanced into the top five of the world’s leading payment currencies, according to Society for Worldwide Interbank Financial Telecommunication
(SWIFT) as illustrated in While the trade settlement pilot was initially limited to 365 ‘mainland designated enterprises’ in five mainland cities, the formal scheme was progressively rolled out nationally and internationally, eventually allowing all cross-border merchandise and service trades to be settled in RMB in March 2012.
Despite this progress, there were still too few market instruments – especially for mainland CNY transactions – to satisfy the increased demand for currency hedging and liquidity. Consequently,to deliver significant benefits, building on an established trading relationship that already contributes significantly to the Australian economy. And it lays the groundwork for Australia to keep pace with China’s growth trajectory.
• Allows Australian goods to be exported to China at more competitive tariff rates: This has been achieved via the phased elimination of Chinese import tariffs in almost all Australian product sectors, including pharmaceuticals, agricultural and processed food products, and manufactured products.
• Allows Australian services to be exported to China with greater market access: The agreement improves market access for Australian service providers seeking a commercial presence in China, including those offering legal services, education, telecommunications, financial services, tourism, aged-care and travel-related services.
• Allows Chinese goods to be imported into Australia at more competitive tariff rates: Most tariffs on Chinese imports have been eliminated and remaining Australian import tariffs in sensitive sectors such as steel, aluminum, clothing, footwear and automotive are subject to phased elimination.
The Challenge And Opportunity
Australia’s success in negotiating ChAFTA is only half of the story. Now that ChAFTA is in force, the responsibility shifts to Australian businesses and investors to activate the benefits of the agreement.
Historically, Australian exporters have been relatively slow to act on trade enhancement opportunities presented by the FTAs the government has negotiated. This is partly due to the relatively sheltered and comfortable competitive environment that Australian businesses have historically enjoyed, coupled with a lack of preparedness to deal with structural change as well as perceived barriers to operating effectively in an Asian environment.
However, since ChAFTA’s ratification, there has been a noticeable shift in the Australian business community towards a more proactive approach to exploring the benefits the agreement may offer. This is changing the way Australia uses FTAs to engage more efficiently with Asian markets. It is also helping to dispel the misconceptions that have historically made Australian businesses reluctant to pursue opportunities. Importantly, the business community has a greater appreciation of the comparative commercial advantages of ChAFTA, and how it can be incorporated into supply chain management and market engagement strategies to facilitate trade and create commercial value.
Two-Way Trade In Goods
ChAFTA benefits both sides of international trade transactions. Australian manufacturers have enhanced access to diverse Chinese supplier markets, competitively priced raw materials and finished goods used to make Australian
products. For importers of Chinese finished goods, progressive tariff reductions have reduced the landed cost of many Chinese goods.
Australian exporters are enjoying greater exposure to growing Chinese demand for Australian goods and services, which are sought after for their quality, safety and reliability.
Australian importers and exporters must, however, understand that access to ChAFTA’s benefits depends on meeting specific compliance requirements. These include satisfying productspecific Rules of Origin, which means securing valid documentation certifying the origin of the
goods, adhering to specific restrictions on the trade routes used, and observing limitations on how goods can be handled along international supply pathways between Australia and China. To overcome these issues, businesses in China and Australia in supplier–customer relationships must collaborate on:
• document management to ensure the efficient flow of commercial information needed to secure relevant certificates or declarations of origin.
• supply chain or trade-lane management to standardize the trade routes of goods exported to and from Australia, and the precise management of any cargo shipment eligible for ChAFTA benefits.
Trade In Services – Australia’s Best-Kept Secret
The ChAFTA negotiations occurred at a pivotal time for global trade in services, with growth in this sector outstripping goods trade growth for the first time in 2014.
According to Australia’s Department of Foreign Affairs and Trade statistics for 2014–15, Australia’s service industry is worth AUD$133.9 billion annually, contributing about 70 percent to total Gross Domestic Product (GDP).
China is Australia’s largest services export destination. However, the total value of this trade is only a fraction of the capacity of Australia’s services industries, and smaller still compared to the size of China’s current services demand and the predicted growth of its consumer classes.
ChAFTA includes preferential commitments to Australian service providers. These commitments offer ‘best ever access’ to China’s services market. The benefits offered are underpinned by:
• a broad definition of what constitutes trade in services
• mechanisms for Australian businesses to sell services to Chinese customers
• assurance that, should competitors from other markets receive better treatment through their own future FTA, Australian service providers will be accorded equivalent treatment under ChAFTA’s ‘most-favored nation’ clauses.
ChAFTA has specifically established cross-industry market access commitments and industry-specific benefits, allowing:
• improved movement of people under specific visa classes
• pathways to consider the mutual recognition of qualifications
• the establishment a commercial presence in China
• fewer restrictions on the flow of capital necessary for service delivery.
• ChAFTA also establishes complementary frameworks for market access to the broader Chinese market and a relatively liberalized trade environment in free trade zones.
Australian service providers should consider how these preferential benefits can help achieve their commercial objectives. Some Australian service exporters have started making structural changes to create sustainable service supply chains that integrate ChAFTA’s benefits into their delivery structures, targets, marketing, workforce planning and financial management considerations.
Regulatory Change In A Free Trade Environment
ChAFTA delivers a differentiated trade and regulatory environment for two-way goods and services trade between Australia and China.
The agreement’s commitments slightly modify aspects of domestic regulation that otherwise apply to foreign goods and services. However, Australian companies doing business in China must remember that ChAFTA operates within China’s and Australia’s respective legal and regulatory regimes, which involve diverse sector- specific rules and regulations as well encompassing varying economic regions, such as free trade zones.
Given the pace of regulatory reform in China, Australian companies need to consider the potential impact of rapid changes in China on their commercial operations and supply chains. This dynamic was illustrated in May 2016 when
China refined regulations governing cross-border e-commerce. Limited advance notice was provided, which raised concerns in Australia that the changes would curtail e-commerce. Subsequent guidance from China’s authorities clarified the reforms and the implementation of certain transitional measures. But some Australian exporters remain concerned about the future of e-commerce once the changes are fully enacted.
It is not uncommon for governments to implement regulatory change, but the e-commerce reforms in China illustrate the importance of:
• staying abreast of domestic policy and regulatorychanges
• ensuring that Australian companies can assess and manage risks associated with regulatory change
• ensuring that operational models are resilient and capable of adapting to changing environments
• maintaining or having access to alternative supply chains or routes to export markets in the event of significant structural changes and impediments.
ChAFTA is a significant step forward in the evolution of Australia’s trade relationship with China. Much more than just a political exercise, the agreement has secured access to an extensive range of benefits for Australian and Chinese businesses, presenting unprecedented opportunities to help Australia’s goods and services remain a competitive and preferred choice in China.
ChAFTA includes review mechanisms to ensure that it remains dynamic and keeps pace with the changing global trade environment, which helps Australian businesses retain a competitive edge or at least stay on a level playing field with China’s other trading partners.
It is now up to Australian businesses to understand ChAFTA and examine how it can be effectively integrated into commercial operations as business as usual.