Apr 21, 2016

Cashing in on rise of China’s big cities

There are 20 cities in China that are bigger than Melbourne and six that are bigger than Sydney and Melbourne combined.
There are 20 cities in China that are bigger than Melbourne and six that are bigger than Sydney and Melbourne combined.
One, Shanghai, has roughly the same number of people as live on the Australian continent. Welcome to China, the economic miracle nation of the 21st century.
Arguably, China is to the early decades of the 21st century what America was to the early decades of the 20th century.
Everyone speaks of China’s middle class, but I am not comfortable with this. Does a middle-class family in China really have the same spending power as a middle-class Australian family? Better to look at urbanisation as a proxy for consumer spending power.
During the first 15 years of the 21st century the population of Shanghai jumped from 14 million to 24 million. No city in history has added this number of people in such a short time.
But it isn’t just Shanghai that has been catapulted into a high rate of growth since 2000. Beijing has added nine million, Chongqing and Guangzhou each added five million. Tianjin and Shenzhen added four million. The largest 20 cities in China have added 73 million residents in 15 years. Not through an excess of births over deaths but through rural-to-urban migration. These are people seeking a better life, a middle-class life.
Since 2000 Shanghai has added 650,000 residents per year; Australia’s fastest-growing city Melbourne added 90,000 last year. Each new resident in both cities requires housing, employment, food, electricity and a proportionate share of urban infrastructure.
It is not so much China’s scale that drives opportunity for Australia as it is China’s transition from agrarian to consumer economy requiring imported resources and expertise. And that is the basis to the China-Australia relationship. We have much of what China needs to facilitate the economic transformation of the nation.
For example, despite its one-child policy China still produces 16 million babies a year. We produce about 300,000 babies a year. Which nation requires baby formula on a grand scale? It is unfortunate that Australia never developed a global agribusiness enterprise like we developed global mining enterprises. As such we perhaps haven’t been able to leverage even better agribusiness connectivity into China.
For further evidence of the rise of China’s middle class, consider the following. In 2005, China’s leading power supply business, State Grid, generated revenue of $US71 billion ($91.2bn) that was roughly the same revenue base as New York’s Verizon telco group. A decade later its revenue jumped almost 80 per cent to $US127bn. State Grid, the supplier of power to an urbanising Chinese middle class, lifted revenue 380 per cent to $US340bn.
There are times in history where one nation gears up such as America in the 20th century and Britain in the 19th century. This century, so far, is China’s century.
The rise of America didn’t initially shape Australian interests, which a century ago were tied to the British economy. The American ascendancy wasn’t apparent to the Australian people until after World War II and then only via the ANZUS military alliance and through trade with the Marshall Plan’s reimagined Japan.
China on the other hand is closer and is more in need of Australian resources and commodities than was America. Iron ore, coal, bauxite, agribusiness including red wine and baby formula as well as services like education and tourism are firm bases for China-Australia trade.
Over the past 12 months new air connections have been established between Australia and China via Sydney-Shenzhen and Coolangatta-Wuhan. Shenzhen is a city of 11 million; it did not exist in 1986; it now contains four Fortune Global 500 businesses. Wuhan is a city of eight million; it contains two Fortune Global 500 businesses, two more than Adelaide or Brisbane. And it probably contains a greater middle-class market than either of these Australian ­cities. These are good air connections for Australia to make and to build upon.
Indeed there is a mad scramble under way by Australian cities and airports to establish connectivity with second-tier Chinese cities. Or there should be a mad scramble. The largest Chinese cities without direct air connectivity into Australia are Tianjin (population 11 million), Dongguan (7 million), Foshan (7 million), Hangzhou (6 million) and Shenyang (6 million). Both Tianjin and Hangzhou have two FortuneGlobal 500 businesses that provide each city with a corporate and a middle-class economic base. Sydney connects into 11 Chinese cities; Melbourne connects into seven; Adelaide connects into just Hong Kong (but with another link planned).
As China shifts up the consumer-spending hierarchy, spending patterns will alter; there could well be a tipping point where demand for, say, tourism services suddenly escalates. That business will be captured by those cities that have well-established trade and flight connectivity and perhaps also familial connections.
Building connectivity with China is evident through the free trade agreement, through the fact that since the global financial crisis China has been Australia’s leading export market, and by the fact that China is now the largest grouping of non-Anglo immigrants. The rising ethnicity connection sets the scene for a later escalation in tourism traffic to visit friends and relatives.
And then there is the military rise of China. A decade ago China spent $US46bn on defence, which was 9 per cent of US defence spending. Today China’s rising defence spending is over one-third of the US’s falling defence spending. But the US still dominates in terms of technology and big-ticket military hardware including 10 active aircraft carriers as compared with China’s one. Superpower America has the unique ability to project its authority globally; China does not and will not until the 2030s at best.
This raises discussion about the disputed Spratly and other islands off the Chinese coast. I understand how Vietnam, The Philippines and Japan might lay claim to contested offshore islands but I cannot see how Australia can proffer commentary or take a position.
After all, we claim Christmas Island that is much closer to Indonesia than to Australia. And this is in addition to our suspended claim to one-third of Antarctica.
Perhaps the best way to illustrate the China ascendancy is via American business magazine ­Forbes’ annual listing of billionaires. The 2016 listing shows that China (including Hong Kong) is now home to 325 billionaires, which is less than the US (540). But the gap is closing. Australia has 25 billionaires. Viewed from another perspective, there is one billionaire per 600,000 Americans and one billionaire per 960,000 Australians. There is one billionaire per 4.3 million people in China. By this measure, the wealthification of China has some way to go.
This is not to say that China’s pathway to future prosperity will be easy. China does not control the land mass or the resources base to deliver a Western quality of life to its residents without the support of a substantial trade base. That is the basis to Australia’s ­special relationship with China. China cannot afford to upset too many suppliers. China must be adept at trade and negotiation; it must protect its supply lines with a strong navy capable of deployment and intimidation; and it must deliver on a social contract whereby individual freedoms are traded off against a rising standard of living.
China will face new threats in the coming decade. Not so much military threats as the possibility of internal dissent. So many visitors, so many migrants, so much connectivity with the West will amp up the terms of the social contract: deliver an even better standard of living or manage dissent.
I see mutual self-interest for China and Australia to build close trade, ethnicity and cultural connections over coming decades. The tricky bit will be to manage the American alliance while we build and prosper from our special relationship with China.
Bernard Salt is a KPMG partner and an adjunct professor at Curtin University Business School. Research by Simon Kuestenmacher.

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