Chinese investment is helping the Australian economy to shift away from mining
China is pushing hard on its overseas investment strategy, which will also advance the internationalisation of the renminbi. Australia is well positioned to reap the benefits.
China is seeking expansion abroad and a transformation of its economy at home. Both emphasise higher-value production and services in order to shift towards a consumption-led growth model. Australia is in pole position to benefit from these changes, both as a trading partner with China and as a recipient of its growing outbound direct investment (ODI).
In 2014, China became the biggest foreign investor in Australia, investing AUD64.5 billion
ODI by China has been increasing at a rapid pace and last year surged to USD116 billion, almost equal to the level of foreign direct investment (FDI) at USD120 billion. While China has historically emphasised FDI rather than ODI, this policy is undergoing a major shift, with policymakers now aggressively encouraging companies to go abroad.
Infrastructure investments in Asia and Europe as envisioned in the One Belt, One Road initiative will be a key feature of the ODI push. As the plan gathers pace in the next few years, China’s ODI will increase and diversify.
In 2014, China became the biggest foreign investor in Australia, investing AUD64.5 billion (USD48.5 billion). Australia was the second-largest destination for Chinese investments, after the United States.
We expect a new wave of ODI by Chinese companies in Australia, shifting from minerals like coal and iron ore towards innovative technologies and high-value, niche goods and services. This shift could also support Australia’s rebalancing from investment-led growth in mining towards the non-mining sectors of the economy.
The two countries entered a new Free Trade Agreement last month to remove barriers to trade and investment in services. This will encourage more Chinese companies to invest in Australia in the coming year. This would not only benefit Australian goods but also boost opportunities for the services sector, in areas such as healthcare, agriculture, education, tourism and financial services.
The globalisation of China’s direct investment capital outflows will become an important factor to promote the use of the renminbi in the offshore market. Not only are outbound flows growing steadily, but the proportion being settled in renminbi has also increased rapidly over a short period.
Renminbi settlement volume in Chinese ODI increased 117.9 per cent in 2014 to RMB186.56 billion, accounting for 26 per cent of total ODI for the year. This is set to grow further as China’s ODI expands.
The renminbi is also firmly established as a trade currency. At the end of 2014, annual renminbi trade settlement reached RMB6.55 trillion, equivalent to 22 per cent of China’s overall trade turnover and up from 12 per cent at the end of 2012. At the current pace of growth, we expect more than 50 per cent of China’s global trade in goods and services will be settled in renminbi by 2020.
Given the extent of the trade and investment flows between Australia and China, Australia is well positioned to develop itself into an offshore renminbi centre and to build up trade financing, investment and other renminbi-denominated financial products over time.
Significant progress has been made. Last year, Australia was allocated a RMB50 billion investment quota under the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, which allows offshore investors to directly purchase Chinese stocks and bonds. In February 2015, a renminbi clearing bank for Australia was launched. In April, Australia also renewed a currency swap agreement worth RMB200 billion with China.
These developments will create the infrastructure needed to facilitate high volumes of renminbi-denominated business in Australia, as well as deepening the renminbi liquidity pool. They will also stimulate stronger demand from Australian companies to use renminbi when doing business with their Chinese counterparts.
The pace and progress of renminbi internationalisation is driven by China’s domestic reform. While this needs to be undertaken steadily and with considerable care, we forecast that China will achieve full capital account convertibility within two years. Over time the renminbi will expand its role in international trade and investment and as a reserve currency.
A version of this article was first published in The Australian on 7 July 2015.