What China giveth, China can also taketh away. This is the rather straitening lesson learnt by a number Australian listed companies this week when China’s government, struggling for answers to the nation’s ongoing economic malaise, suddenly sprung tax changes on cross-border e-commerce.
It’s not quite the message that the 300-strong delegation on the Australia Week in China: Premium Food and Beverage Program were wanting to hear. It’s by far the most popular stream in the eight being attended by almost 1000 Australian business and government representatives.
Last Thursday, the Chinese government published a “positive list” of goods allowed through cross-border trade in piloted free-trade zones. It didn’t include some dairy products, and the status of many health supplement products was unclear.
Companies such as Blackmores, Bellamy’s Organic, Bega Cheese and Murray Goulburn all use Chinese e-commerce platforms such as Alibaba’s T Mall and JD.com to sell their wares. Indeed, when the F&B delegates visited Alibaba’s headquarters in Hangzhou, yesterday, there was doubtless plenty of questions.
All these companies and others were caught up in a fair degree of carnage on the Australian bourse. Let’s use sharemarket darling Blackmores, the health supplements (aka vitamin pills) maker whose shares soared more than 500% during 2015 on the back of cracking the Asian — and particularly Chinese — markets as an example. Its shares fell 6.67% Tuesday, and the stock has now fallen from $204 last Friday to $165 in early morning trading today. Shares in dairy groups have fallen by similar amounts.
And there’s potentially more trouble looming for companies like Blackmores, with new restrictions aimed at levying border taxes on Chinese tourists who travel to other countries to stock up on Western brand-name goods. Name-branded goods are all, to a product, more expensive in the People’s Republic of China than anywhere else. For years people have been arriving in droves to Hong Kong for the purpose of taking as much as they can carry back to the mainland for resale.
For example, there has been, for almost a decade, a healthy grey market in iPhones bought in Hong Kong (or Taiwan or elsewhere) and readily available in Chinese electronic malls at discounted prices.
In the same way, Chinese tourists come to Australia and pack their bags with Blackmores products or milk powder, to use the two main examples, for resale online. Australian and New Zealand milk powder, infant formula and UHT dairy products are particularly valued in a country where there have been — and continue to be — serial health scares in the dairy sector.
Blackmores chief executive Christine Holgate told Crikey when she was in Bangkok recently that there were organised pharmacy tours. Chinese tourists travel from pharmacy to pharmacy, emptying the shelves and loading up the luggage.
It’s all about keeping money and tax revenues inside the country for the Chinese government. For Blackmores, Holgate has estimated about 90% of the company’s sales can be attributed to China. Infant formula makers see similar trends. Still, just how big a dent this will put in the company’s revenues is unclear; Chinese customs police have traditionally been very much hands-off compared with the Australian Border Force. But as we have seen this week, changes in China can happen without warning and literally overnight.
All of this makes something of a mockery of the Australian government’s trumpeting of the China-Australia Free Trade Agreement, one that it insisted would help Australian companies get to the “front of the queue” in accessing China’s growing consumer and services markets.
It’s a very public and clear example of what the government is not telling business about doing business in China, and with Malcolm Turnbull readying to fly into Shanghai this morning to give a speech to the trade delegation about the great opportunities in China, it couldn’t come at a more apposite time.
Then there are the “old” markets — and nothing is older, in terms of Australia’s trade with China, than steel.
There’s no small irony, either, in the collapse of South Australian steelmaker Arrium being helped very much on its way by the financially destructive race to preserve market share by Australia’ biggest mining companies over the past three years.
It is the massive increase in supply of iron ore that has helped to drive prices for the commodity to be, today, less than 30% of its 2011 peak, and that has kept the marginal end of China’s steel sector — which can make 300 million tonnes more than its market needs — in business.
Cheap iron ore has helped to keep Chinese steel mills afloat as they continue to produce steel that is necessary for the cash merry-go-round that is propping up huge swathes of China’s otherwise redundant heavy manufacturing and processing industries.
Arrium’s story, in some form, is being mirrored across the Western world where steelmakers are in trouble. Only a week before the company admitted defeat, the Indian steel conglomerate announced that it would sell off its business in the United Kingdom. The gnashing of teeth in the UK, the home of steelmaking and the industrial revolution, has been at least as great as the wailing from Whyalla.
China is now exporting more of its cut-price steel than ever, as domestic demand has slowed in recent years. This has triggered dumping actions from an increasing number of countries including the US and Europe.
Arrium and others such as Bluescope have been complaining about cheap Chinese steel for some years, publicly warning of the potentially dire consequences that, for Arrium, have come to pass. Yet Australia has sat on its hands, not wanting to upset the Chinese during the ChAFTA negotiations and, if reports are correct, Turnbull won’t raise the issue in his meetings with Premier Li Keqiang in Beijing night or with President Xi Jinping the next day.
Still, the PM — who knows first hand the difficulties of doing business in China — was very keen for his trip to the Middle Kingdom to be very much about business and not strategic considerations around the problematic issues of the South China Sea and possible Japanese-made submarines.
Now he has his wish.