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Get a competitive edge in China’s $510 billion infrastructure package

Get a competitive edge in China’s $510 billion infrastructure package

The China-Australia Free Trade Agreement isn’t the only advantage Australian companies have to participate in China’s latest infrastructure investment package.

To keep China’s economy on a steady growth trajectory, the Chinese government plans to spend billions on road and railway construction, as well as invest an unspecified amount in projects relating to water conservation and power generation and distribution.

At the opening of the annual National People’s Congress meeting on 5 March, the Chinese Premier released the 2016 government work report. Similar to the US President’s State-of-the-Union address, it included the following targets for 2016:

  • $340 billion investment in road construction
  • More than $165 billion investment in railway construction
  • Start construction on 20 water conservation projects
  • Develop hydropower, nuclear power, ultra high-voltage power transmission, smart grids, pipelines for oil and gas transmission and urban rail transit.

Unequalled access to China’s services sector

China’s latest stimulus package is particularly relevant to Australia in light of the China-Australia Free Trade Agreement (ChAFTA) that came into force on 20 December 2015. The ChAFTA gives Australia greater access to China’s services sector than any other country.

While the spotlight has been on the opportunities for Australia’s education, healthcare and tourism sectors, other service providers such as engineers and architects also stand to benefit.

RMB internationalisation

One longstanding strategic objective of the Chinese government is internationalisation of its currency, the Renminbi (RMB). It wants China and the RMB to have a prominent place in the world’s capital and trade flows that corresponds with its standing as the second-largest economy, the world’s largest population and the fact that China has recently overtaken the US as the top destination for foreign direct investment globally.

The RMB is increasingly being used in cross-border trade in goods and services and its use as an investment currency is also growing. Of the RMB9.4 trillion of cross-border settlements in RMB in 2015, direct investment accounted for RMB 1.9 trillion.

Last year foreign direct investment into China settled in RMB totalled RMB 1.35 trillion, up more than 400% from RMB251 billion in 2012.

More expensive for Chinese companies to hedge

A stream of reforms and deregulation makes it easier to manage the foreign exchange exposure of doing business with China in the RMB.

Transacting in RMB brings immediate commercial benefits to Australian and Chinese companies, partly because it is cheaper for Australian companies to hedge RMB exposure than it is for Chinese companies to manage foreign currency exposure in the more regulated Chinese mainland market.

Longer-term, businesses must incorporate the RMB into their strategies to be ready for when transacting in the Chinese currency becomes a minimum requirement of doing business in the Asian Century.

To discuss how we can help you conduct business in China using the RMB contact Sangeeta Venkatesan Head of RMB or RMB Solutions team at the following email address RMBSolutions@cba.com.au.