In the first part of this post, I discussed the drivers of China’s expanding economic impact on Asia. In the following post, I discuss specific business opportunities in several key industry sectors.
Basic Materials and Energy
In basic materials and energy, China continues its push to develop additional energy suppliers closer to home. Central Asia and eastern Russia are becoming very important sources of gas, with China funding much of the infrastructure needed to carry the gas to China. As I wrote earlier, Putin’s visit to Beijing in May was a milestone in China’s pivot to sourcing energy from its neighbors, with the signing of a supply contract of potentially US$400 billion in size.
Alongside Australia, Indonesia is becoming an increasingly important source of coal and minerals for China, with CIC recently committing more than US$1 billion to infrastructure to enable mines to transport their output to China. Many more of these investments are minority stakes. There has been much learning from investments in Africa that controlling ownership is not needed and may often be a disadvantage. Increasingly, China’s state-owned enterprises, who make most of these investments, prefer to invest in Asia over Africa as they find the context more familiar.
In coming years, China is likely to become a much larger exporter of energy technology to the rest of Asia. China’s nuclear power industry is actively seeking opportunities to sell power stations in Asia. Chinese manufacturers have enormous scale in solar panels and are leaders in parts of the wind turbine industry. As Asian countries ramp up their investment in solar and wind generation, they will be buying product produced in China. For example, as India’s new government is committing several billion dollars to expand deployment of solar, Indian companies are turning to China for supply.
Investment in agriculture across Asia to meet growing demand in China is a well-worn investment theme pursued today both by corporations and private equity funds, but it is still only in the first stage of its development. China’s potential demand for imports over the next decade could rise to levels that exceed the total current cross border global trade today in certain products. Demand exists for a very broad range of products from many countries.
New Zealand is seeing its exports to China growing 35% annually on the back of milk sales, India is supplying growing volumes of beef, rice is coming from Thailand, wheat from Russia and Australia, fish from Indonesia and Malaysia. Future growth will be driven by several factors – the growing demand for protein in China, growing demand for quality food, loss of land to farm on, relatively high yields already achieved and many of China’s food imports today come from beyond Asia. Supply from closer by is seen as more secure.
Infrastructure and Real Estate
China’s investments in infrastructure are shifting from Africa to Asia. Perhaps the best example is Xi Jinping’s commitment in October 2013 to provide nearly $30 billion of infrastructure to Indonesia over the next 5 years. Investments will range from public transport systems to railways and ports, and will mostly be delivered by state-owned enterprises. Similarly, Pakistan will see a new public transport system built in Lahore and a new airport in Gwadar to go with the existing port and pipeline investments. Sri Lanka has received nearly $4 billion to expand Colombo’s port. Indochina has other examples. Most of these projects have an economic objective, for the receiving country and for China, a shift away from the “vanity projects” sometimes seen in Africa. Chinese banks, especially China Development Bank, play a key role both in funding these public sector projects but also in private sector projects with APP and Reliance.
In contrast, China’s fast growing real estate investments in Asia are largely by private sector. Projects are visible from Sydney to Kuala Lumpur to Hyderabad. In Malaysia, for example, Country Garden, R&F and others have invested over US$3 billion in residential projects that they market to mainland Chinese customers, who recognize the brand and who are very keen to diversify their investments internationally. Individual Chinese buyers have bought tens of billions of dollars of property internationally in the last 5 years as it has become much easier for them to take money out of the country. The impact on Hong Kong, Sydney and Singapore is often discussed, the growing impact in Thailand, Malaysia and Japan less so.
The coming growth of China’s digital industry leaders across Asia could become a highly disruptive factor for local retail industries . We are just at the start of this change with early indicators visible – the majority of small packages going into Russia today are already from Taobao vendors and has led to the introduction of new taxes. Alibaba has launched dedicated sites for Southeast Asia, is investing in the Singaporean Postal Service and is partnering with local banks to simplify payment by local consumers. Tencent has offices in Malaysia and Singapore and has invested in a Thai portal and a Korean social network and gaming company. Baidu has an R&D hub in Singapore for Asian language processing. In ecommerce, the China “giants” have the potential to substantially undercut local retailers, big and small. It is not clear that local businesses and government will let this happen. The financial scale of the “giants” also means they, theoretically, could buy any local players that start to scale.
This deepening of business and investment connections between China and the rest of Asia requires a corresponding growth in people movement between countries. Outbound travellers from China to Asia are growing 20% annually, with more than 3 million to Thailand and 4 million to South Korea in 2012. However, inbound travellers from South Korea and Japan have been flat for 5 years and there are some obvious gaps in where people are moving to and from – in 2012 more outbound travellers from China visited New Zealand than India. There are more than 85,000 flights a year between China and South Korea. This compares to 8,000 with Indonesia and 4,000 with India.
There are more than 90,000 Chinese students in Australia (25% of all international students in Australia) and, in a quiet development, 80,000 Chinese students in Japan (60% of all international students in Japan and a great source of talent for McKinsey). China hosts 60,000 students from South Korea, 15,000 from Indonesia and even 9,000 from India (mainly in medical areas).
The deepening of business connections between China and the rest of Asia will accelerate. Chinese manufacturers will increasingly have a fuller presence in many Asian markets going beyond sales to include marketing, manufacturing and even R&D. India is in some ways the biggest market opportunity, but Chinese companies are starting so far behind there it is not certain they will catch up. China will continue to support the development of infrastructure across Asia and will create demand for Asian agricultural output that could drive up prices over time across the region. The impact of China’s digital champions across Asia could be enormous but they will need to tread carefully to avoid a local backlash. Growth in people flows is an incredibly important underpinning to these business connections – the emergence of a new generation of Asians with experiences in multiple Asian countries is an essential talent pool for the new generation of multinational Chinese businesses.
You can read more of my views on China on my blog, Gordon’s View. And please follow me on Twitter @gordonorr
Image credit: Miles Willis