Australia-China Services Trade: Opportunities and Challenges of a Free Trade Agreement
Beijing, 24 April 2006
Session One: Financial Services
Presentation by Hon Warwick Smith, Executive Director, Macquarie Bank
Ministers, distinguished guests, ladies and gentlemen…
It is with enthusiasm that I join you today as anyone who has observed Australia-China relations is cognisant of the sheer significance of this event.
As the immediate Past Chairman of the Australia China Business Council, I have long been witness to the rapid transformation and acceleration of the relationship between our two countries.
If, over three years ago, when I accepted the position of Chair, I had been asked whether an event such as this would have been possible, I would have been sceptical.
As everyone here knows, China’s growth is unparalleled in history and Australia has firmly positioned itself as a friend and partner.
Australia is, most notably, a significant contributor of natural resources to aid China’s rise and a significant receiver of an impressive array of manufactured goods.
Over time, in every good relationship, a maturity and sophistication develops between partners whereby respect and understanding underpins every interaction.
When a partnership moves to this stage, it is the challenge of both parties to recognise this change, to adapt and then capitalise on the benefits of any such change.
The negotiation of a Free Trade Agreement is the embodiment of the trust that has emerged in this fascinating relationship.
And while resources and manufactured goods account for a significant proportion of our trading relationship, the negotiation of an FTA provides us with the opportunity to investigate other areas where our strengths can be maximised.
Services will be a key part of the way forward. Services account for nearly 70% of the Australian economy and will be a crucial component of future development for China.
We have made such an impressive leap in our level of engagement that the time to forge ahead in the services sector is definitely now.
Today I join you as an Executive Director of the Central Executive Group for Macquarie Bank, along with my responsibilities as Chair of the Telecommunications, Media and Entertainment Technology Group of Macquarie’s Investment Banking Group.
Allow me to provide you with an overview of Macquarie’s engagement with China so far, noting particularly our successes, our struggles and areas for closer interaction.
Broadly speaking, Australia’s banking and financial services sector has made a significant impact on the Australian Stock Market over the last twenty years.
While Macquarie’s activities are significantly different to our colleagues within the retail banking sector, such as the Commonwealth Bank of Australia or Australia New Zealand Banking Group, the combined impact that this sector has had on the modernisation and internationalisation of the Australian economy cannot be underestimated
Macquarie Bank is Australia’s leading investment bank.
We are a diversified financial services provider, specialising in investment banking; asset and wealth management; financial markets; and lending services.
The diversity of our activities has been possible as a result of the selective expansion and application of our financial expertise where we perceive value, both domestically and offshore.
Macquarie has reported successive years of record profits and growth since 1992.
In Australia, our operations began in 1969 with just three staff, under licence from Hill Samuel UK.
In 1985, Macquarie Bank came into existence following the application by Hill Samuel Australia for an Australian banking licence.
This banking licence was made possible as a result of significant changes to the financial sector implemented by the Government of the time.
In 1996, Macquarie listed on the Australian Stock Exchange and in 10 years has become Australia’s 12th largest company (dependant on market capitalisation).
If Macquarie’s market capitalisation were to include the larger Macquarie Group family of companies, including the infrastructure and specialised funds, Macquarie would be the third largest company in Australia.
Macquarie employs over 7,600 employees worldwide, an increase in staff of 16% from March 2005.
These employees are located in 23 locations across the globe and include offices in Beijing, Shanghai, Tianjin with the regional headquarters located in Hong Kong.
Interestingly, given the limited international scope of the Bank’s operations prior to listing in 1996, over 2,300 staff are now located in overseas offices, which is an increase of 32% from March 2005.
Reflecting this internationalisation is that while the Australian operations continues to make a substantial contribution to income, at the end of the first half of financial year 2006, over 46% of all income is derived from our international operations.
One area of Macquarie’s activities in which we are increasingly well known and respected around the globe is as a significant investor in the infrastructure sector.
Macquarie and its funds currently own assets as diverse as Rome Airport and the Chicago Skyway, the Isle of Wight Ferrylink, Incheon Grand Bridge and Arqiva broadcast towers.
This has been possible as a result of applying expertise developed in Australia and applying it in a global setting.
Macquarie’s activities in China cover a range of advisory, equity capital raising and property investment activities.
Over the last twelve months, Macquarie has increased the number of Chinese nationals working in its Beijing, Shanghai and Tianjin offices.
By other companies’ standards, Macquarie’s association with China has been significant with an office in Tianjin established in 1995 providing funds management for residential and retail property development.
Our Shanghai property development office was established in 1996 to undertake both development management and funds management.
The First China Property Group was formed in 2002 in a joint venture with Schroder Asian Properties LP.
In Shanghai and Beijing, First China is the only non-Asian developer of residential real estate with local buyers as its target market, and it has a number of substantial completed and ongoing projects in a number of Chinese locations.
Macquarie established the Macquarie Investment Advisory (Beijing) Co. Ltd in 2004 to provide investment advisory services to Chinese and international clients.
The range of specialist advisory services include domestic and cross-border mergers and acquisitions, project financing, divestments, takeover responses and other corporate, strategic and financial advice.
Macquarie has acted as financial adviser for: Guangxi Dameng Manganese Industrial Co. Ltd for the restructuring of a state-owned enterprise through a joint venture with CITIC Resources Holdings Ltd; Beijing Mei Da Coffee Co. Ltd and its valuation of Starbucks Beijing and Tianjin franchisee; and also a global food and beverage company in an acquisition.
With the acquisition of the ING stock trading businesses we now have a sales team for Chinese stocks, operating as Macquarie Securities.
Our research team also covers 45 listed Chinese companies (including A-shares and H-shares) representing nearly 80% of the total market capitalisation by value.
Macquarie has had syndicate roles in the capital raisings for Air China, China Netcomm and China Shineway and the equity capital markets business is growing rapidly, particularly in sectors like resources, infrastructure and property in which Macquarie is a global and regional leader.
Macquarie Global Property Advisors Limited announced in January 2005, the acquisition of CapitaLand’s 95 per cent interest in Shanghai Xin Mao Property Development Co. Ltd for US$98 million.
This acquisition is seen as an expansion of Macquarie property investment portfolio in China from residential real estate development to the commercial market, the latter being considered less risky and having more solid fundamentals.
The Macquarie International Infrastructure Fund, listed on the Singapore Stock Exchange, completed its acquisition of a 38% effective equity interest in the Changshu Xinghua Port Co. Ltd in December 2005. The interest is in a multi-purpose cargo port located within a high-growth industrial zone along the Yangtze River, 90 km upstream from Shanghai.
Finally, in July 2005, a company indirectly owned by Macquarie Bank Limited with a syndicate of institutional investors have purchased a portfolio of nine retail malls from a significant local property owner.
The properties are located in major shopping precincts and are underpinned by long-term leases to a strong mix of tenants.
We would like to advise Chinese companies and governments on our areas of strength: infrastructure, resources, TMET, and property from our Beijing WFOE (wholly owned foreign enterprise), which at the moment is under the jurisdiction of MOFCOM and has technically limited scope of operation.
The developments of the domestic capital markets must not be put on hold while restructuring securities industry continues. For us to be able to help you develop your capital markets in the mean time, at a pace that is palatable to China, we would like to introduce our global infrastructure knowledge, offshore REITS, and securitised product structuring expertise to help adapt to the A-share market.
We can do that by either enlarging the scope of our existing wholly foreign owned enterprise (WFOE) or allow for pure advisory joint ventures with local securities firms in the interim until distribution and trading agreements to the mutual benefits of partners can be sorted out through ongoing reforms.
We are in a joint venture with CITIC to create a platform to bring in our global infrastructure expertise and 12 years of infrastructure specialty fund management into China; To share experiences from countries such as Korea where we have successfully helped facilitate private sector/pension fund/insurance fund monies investments into infrastructure needs of the country through specialty funds management and drafting regulations
As mentioned earlier in my presentation, the level of respect and understanding between our two countries is apparent in many ways.
For Macquarie it is most evident in the diversity of our activities in which we are able to participate within the Chinese market.
We believe strongly that China is to be commended on the rapid rate at which it has adhered to WTO accession requirements and then pursued reform independently of any international stipulations.
This work must continue.
Many of the following comments were initially raised during the visit of Chairman Wu Bangguo and also Mr Liu Mingkang in May 2005 as areas where reform was required.
Macquarie’s Beijing office is a locally registered Wholly Owned Foreign Enterprise (WOFE).
Australian institutions like Macquarie are currently precluded from fully assisting Chinese companies by restrictions in what their Chinese subsidiaries can do. If for example the WFOE entities of Australian investment banks were allowed to provide advice to listed companies and to underwrite securities, the latter perhaps in partnership with local securities houses, then both countries would benefit substantially. China would be richer both in its corporates getting access to expertise and in developing the capital markets.
At present, we are only permitted to participate in advisory services, and both onshore and offshore listings work are not permitted.
Offshore listings on the HK and Singapore exchanges have to be done by Macquarie’s Hong Kong and Singapore entities.
Under current legislation, we are prevented from having a domestic securities licence.
This should in time be addressed.
I strongly believe that the “right vision” for China is to focus on building a domestic capital market.
The outsourcing to Hong Kong and Singapore is but a supplement.
Australia has one of the world’s most sophisticated capital markets.
Macquarie believes there is substantial benefit for China in allowing greater participation by Australian banks in providing the capacity to underwrite or trade in Chinese A-Shares.
This would help to strengthen China’s own capital markets in product development and risk management.
Macquarie’s international businesses have been significantly enhanced by the development of effective and synergistic alliances - evident in our 25 successful joint ventures around the world. Unlike other international investment firms, whose global strategy is to conquer new markets and replicate their platforms, Macquarie expands selectively, seeking only to enter markets where its particular skills and expertise deliver a real advantage to clients.
We understand the unique value of combining local market knowledge and expertise with international experience. In the process, we also aim to improve the communities we enter, help to develop the capital markets through our services in new product technology, and global know-how and aid in the drafting of regulation (e.g.: Korea experience)
You have the capital, the assets and the market - all you need is a long term, like-minded ally with aligned interests. A country with the required supporting infrastructure, global expertise, corporate governance, people talent, resources and shared interests to put it to work. No better partner than Australia - a country of complementary strengths with China.
Macquarie is the world’s leader in private sector funding of infrastructure funding.
Our family of funds manage over 93 assets in 20 countries with more than $US69bn in assets under management on behalf of retail and institutional investors.
China has a great opportunity to develop its infrastructure and its capital markets simultaneously by permitting Macquarie to establish a pilot project to allow infrastructure trusts to be developed and marketed in China by selected managers.
As a long-term property investor and manager of trusts on behalf of institutions and retail money, Macquarie is helping China to substitute private sector equity for bank loans in the property sector, thereby reducing risk.
It must be noted that these activities are distinguished from the short-term activities of those institutions who may be looking to participate in property and\or currency speculation.
Measures taken by regulatory bodies to stop such activities do not inadvertently harm long-term investors like Macquarie who are keen to encourage the stability of the economic environment.
The final area where Macquarie is disadvantaged is under current regulations for the Qualified Foreign Institutional Investor, or QFII.
China may also benefit from reviewing the current qualifications for QFII investment. There is much to gain by permitting smaller but technically advanced institutions from friendly countries like Australia to support the Shanghai and Shenzhen markets rather than have all of China's foreign investment in listed securities concentrated among large American and European institutions.
The minimum standards for the scheme are designed for the largest ten to fifteen investment banks.
The interests of Australian investment banks/ fund managers are prejudiced by overly burdensome capitalisation and threshold requirements under the Qualified Institutional Investor (QFII) scheme.
For example, fund managers must have a minimum of $US10 billion in securities assets under management and must have a minimum 30-year business history, in order to qualify to engage in A share trading under the scheme.
Foreign equity ownership in securities firms is limited to one third of total equity for stock traders and 49% for funds managers.
Macquarie’s feeling is that this is overly restrictive and does not allow foreign securities firms to have sufficient control to feel comfortable about the transfer of management skills, technology and intellectual property.
The deregulated environment in which Macquarie operates within Australia provides a positive example for China for the liberalisation of its financial services.
By exposing all sectors of the Australian economy to the international markets, it has encouraged the likes of Macquarie to develop international best practice wherever possible.
We have been forced to develop and implement processes as part of our operations that enables every facet of the process, whether it be our people or the systems designed to support them, to exist at their most efficient.
Such changes are obviously not beyond a country such as China.
For many within the financial markets of Australia, the current environment would have been inconceivable 30 years ago.
But China has made more monumental and significant leaps within this period.
By expanding the Chinese financial markets capacities to match those of other international financial cities, in the continued measured fashion adopted by the Government, can only aid the stability that is desired in a country of this size.
Whilst Macquarie is good at what it does – and all proud Australian organisations attending today will tell you the same thing about themselves – we do not pose a threat to the aim of stability.
Our operations are, for the majority, small by global standards and seek to complement existing activities within the Chinese market and provide specialist skills in niches rather than dominate sectors.
We offer a platform for Chinese companies to experience world-class operations without the threat to any emerging competencies of the Chinese market.
Macquarie is a unique Australian company.
Aside from being world-class operators in the infrastructure sector, we operate in a manner significantly different to many of our international competitors.
Our experiences within a range of countries suggests that the greatest way of ensuring success comes from participating as part of the local economy in the manner of an integrated international organisation.
That, in order to succeed, Macquarie must adopt Chinese characteristics.
Through the recruitment of Chinese nationals with domestic and international work and educational experience.
By conforming and adapting to the local market conditions.
By constantly analysing and investigating the opportunities available within the current framework and using forums such as this one to advance our case for market improvements wherever possible.
At Macquarie, we are firm believers in developing the two-way links between our countries, in an open, frank and transparent manner.
My work as the Chair of the Australia China Business Council was supported within the Central Executive as a means of looking beyond the Bank’s individual gain but rather developing longer lasting links.
That by hosting and arranging delegations to China of senior Australian and Chinese business people we are opening the channels of communication.
Hu Jintao, Wu Bangguo and, most recently, Wen Jiabao, have all contributed greatly to this dialogue.
That in order to do business better, we must understand each other’s interests and perspectives.
As one of the inaugural members of Boao, from where many of our colleagues join us today, it was always apparent that there is a real need for continued and ongoing discussion.
Australia and China both have a lot to gain from a close association, particularly one that gives greater focus to the services area.
A comprehensive FTA that includes the services sector will allow mutually beneficial outcomes that are in both of our interests.
There are many opportunities in the services sector that are waiting to be realized.
I hope my comments today have proven this.
Thank you.