One of the constants about China is change – often dramatic and usually unexpected. The world has never before seen an economy of this scale charge towards a market economy with such velocity, so when some parts fly off the machine, perhaps we shouldn’t be surprised.
Take the recent and rather incredulous rise in value of the Shanghai stock exchange, before its equally dramatic decline. In a real sense, both
were entirely predictable once the bubble started expanding. The real surprise is to discover the true depth and the breadth of those affected.
Initially, the western media focused on the ‘ma and pa’ investors who, without the benefit of much financial education, followed the pack and its trend to put their assets on the line. Certainly this happened to a large degree. Perhaps more surprising is that so many highly educated Chinese business people also gambled heavily on rapidly rising stocks. I have heard of some who have lost hotels in the crash – not just local pubs but significant five-star operations.
Campbell Thompson, cofounder and CEO of The Wine Republic (a medium-sized national wine distributor in China), puts the crash into some perspective by comparing its impact to that of the central Government’s austerity program that began two years ago. ‘It’s not so significant. That’s not to deny that those heavily exposed to the stock market have suffered’, he says, ‘but that’s nothing on what might also happen if we saw a 30-40% drop in real estate prices. The spending power of many individuals has been hit pretty hard, but there are still companies like ours that have seen some pretty strong growth over the last quarter, across all price points.’
One very welcome aspect of change in Australia’s relationship with China will be the delayed implementation of the FTA, now it’s finally ratified. One of the several reasons why Chile’s exports of wine into China have overtaken those from Australia are that since 2005 Chile has had a Free Trade Agreement (FTA) with China. Over the last decade the import duty of its wine declined from 14% to zero. In the first nine months of 2014, Chilean imports to China rose a further 50% in volume, compared to an overall import decline of around 7%. By the end of this year, that figure is expected to settle down around 45%. In China, Chile is now running second only to France with a market share of 24.6%, double what it was five years ago.
With the Australian wine industry still shackled by the same forces that have seen it struggle for profit and survival over the last decade, the Winemakers’ Federation of Australia (WFA) considered any move to slow down Australia’s signing of the arduously prepared FTA with China as sheer economic negligence. Paul Evans, the WFA’s CEO, estimated that delays in implementation could have cost the Australian wine industry over $50 million, which right now, Australian wine doesn’t have in the pocket to lose. It is inevitable that the political delay in the Australian ratification of the FTA will indeed cost the industry money.
Citing the $242 million in value that China represents to Australian wine each year (in the 12 months to March), Evans said that removing tariff barriers would open the door for growth and puts Australia on par with countries like Chile. New Zealand’s wine is more competitive in China than Australia’s. It has not been subject to a tariff since 2012.
Campbell Thompson warns against overly optimistic expectations in the first year or so of implementation. ‘In practical terms the difference in landed costs is actually pretty small. Wines that were over-priced will not suddenly become competitive’, he says. ‘In terms of hard-nosed numbers, a fluctuation in the AUD could have a bigger impact on costs than the first year’s impact of the FTA.’
The FTA with China stipulates that the import tariffs for Australian wine (14% for bottled wine and 20% for bulk) wine will be phased out over four years. By this time it’s a fair assumption that wine consumption in China will have at least doubled. It’s doubled twice in the last five years and wine is becoming more a part of the Chinese lifestyle. Take into account that the Chinese government’s crackdown on excessive consumption, corruption and governmental largesse has occurred in that very same time and the potential for very significant future growth remains alive and real. ‘China is expected to overtake the US as the world’s largest consumer of wine in 2016’, says Evans.
Australia has never been able to afford to give competing exporter nations a free kick, and it certainly can’t now. Evans believes it’s essential we can compete on the same terms as other major wine producing nations. Furthermore, with the opportunities presented by the devalued AUD and expected increases in wine consumption, the WFA is standing by its position that more funds must become available to promote Australian wine in China. I could not agree more, although the industry will need to come closer on an agreed strategy and vehicle for any such increase. From Campbell Thompson’s perspective, the FTA will deliver just as much to Australia by simply bringing the two countries closer together.
Exports of Australian wine to China grew by 45% by volume and 32% by value in the year ended June 30 2015. How much more would they have increased by if we had the same deal as Chile or New Zealand?
