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Exporters Hit Chinese wall

John Lee

Foreign Minister Bob Carr is in China to deepen Australia’s relationship. While it is true that improving the bilateral relationship will not harm economic relations with China, neither will it guarantee significantly more opportunities for Australian companies.

In fact, the prospects for local companies gaining a greater foothold in the potentially vast Chinese market are largely out of our hands.

Of the approximately $65 billion of Australian exports to China in 2010-11, more than $47 billion was in commodities from beneath the ground.

Export of services increased to about $5.7 billion over the same period but $4.8 billion of this was education and tourism. Beyond commodities, we sell very little of our goods and services to consumers inside China.

Australian firms—and our diplomats—will need to work harder to gain significant penetration in lucrative manufacturing and services markets within China.

Half of the equation is to obviously have the products and services that Chinese consumers want and need. The other half is to gain actual market access. This is where Chinese domestic politics is decisive.

In December 2006, the state-owned Assets Supervision and Administration Commission (SASAC) of the State Council issued a guiding opinion on the role of state-owned enterprises (SOEs) in key economic sectors.

In it, defence, energy refining and infrastructure, petroleum and petrochemicals, telecommunications, civil aviation and shipping were formally designated “strategic industries” in which the state would maintain sole ownership or absolute control over any significant company operating in these sectors.

Equipment manufacturing, high-end automation, information technology, construction, iron and steel, non-ferrous metals, chemicals, surveying and industrial design, architecture and vehicles were designated “pillar” industries in which SOEs were to maintain a dominant presence.

These sectors were added to banking and finance, insurance, media and domestic education, which already had SOE dominance. And in the most recent Five-Year Plan (2011-15), released in March 2011, so-called “national champions” were to take the lead in “strategic” emerging industries such as healthcare, renewable technology and applications, biotechnology, high-end equipment manufacturing, energy-efficient vehicles and emerging IT sectors such as cloud storage technologies.

Bank loans on preferential terms were to be made available to Chinese SOEs to establish a dominant presence in these domestic sectors. The State Council also agreed that domestic private and foreign firms were to be constrained or even excluded from gaining a foothold in strategic and pillar industries.

Where indigenous SOE technology and know-how was lacking, foreign firms were to be selectively allowed to form joint ventures with SOEs in order to hasten technology transfer.

Since 2002 government agencies and entities (including SOEs) must purchase Chinese-owned and produced goods, works and services.

The only exception is when foreign firms can supply these goods and services at a cost of at least 20 per cent cheaper, in effect excluding the vast majority of foreign firms from developed economies, unless these firms are willing to accept a massive loss to enter the Chinese market.

Australian firms need to understand that these policies were put in place in order to ensure that the economic entities controlled by the Chinese Communist Party (CCP) remain the dominant commercial players in key sectors, and that the CCP remains the dominant dispenser of economic, commercial and career opportunity in the country.

The interests of China’s SOEs have largely been conflated with the interests of one of the two dominant factions within the CCP–the so-called princelings of which the incoming president, Xi Jinping, is a member.

It is therefore unlikely that the next generation of leaders who will assume power in early 2013 will change these policies. Despite Chinese protestations to the contrary, Australian firms with value-added products and services will find it difficult to penetrate the Chinese domestic market. No amount of deft diplomacy will change Beijing’s mindset.

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