Financial Standard 24 August 2015
Andrew Robb's China free trade deal provides vast opportunities for Australia's financial services industry. It builds on strong foundations set by former Prime Ministers - Whitlam, Hawke, Howard and Gillard and puts Australia ahead of the USA, Japan and most of Europe in signing an agreement with China.
Make no mistake, the China Australia Free Trade Agreement (CHAFTA) will lead to new jobs, tax collection and economic growth.
In the shrill and misleading debate of recent weeks on free trade, we have barely heard about these considerable benefits.
The implementation of CHAFTA must not be delayed. Indeed the Joint Parliamentary Committee on Treaties should recommend swift commencement.
The stakes are high. A delay would damage Australia economically and would hinder the national desire to become a financial hub.
China is now the world’s largest economy depending on the measure used.
The opportunity is clear and immediate. Today, China has a household savings pool of about $US8 trillion and growing. This is four times the size of our superannuation system.
By 2030, there will be a staggering one billion middle class Chinese.
This middle class will increasingly demand financial services and investment opportunities beyond China’s borders.
Foreign firms cannot service this burgeoning demand unless a regulatory structure such as CHAFTA is in place.
Australia is well positioned. Our $2.5 trillion pool of managed funds is the largest in Asia and the third largest in the world. Our fund managers are highly skilled, competitive and efficient.
This comparative advantage has the potential to become a major export.
However, regulatory architecture is needed to export our services. The free trade agreement will provide this architecture and therefore the access to China.
China has three schemes for trading and investment.
Each has a quota as China is carefully managing the internationalisation of its currency and economy. Australia now has access to all three.
The Qualified Domestic Institutional Investor (QDII) allows Chinese investors to trade offshore - via foreign fund managers.
The deal allows Australian fund managers market access to China to sell to QDII investors. There are currently 132 approved QDII firms in China, which Australian fund managers will now be able to access.
The Renminbi Qualified Foreign Institutional Investor (RQFII) and Qualified Foreign Institutional Investor (QFII) schemes enable foreign investment into China.
Only 12 countries have RQFII quotas, now including Australia.
For example, RQFII allows our fund managers to invest directly into Chinese share and bond markets in Shanghai or Shenzhen. Our managers can then sell products with highly prized Chinese exposure to the world.
Under this agreement we have been granted an RQFII quota of $50 billion Renminbi (RMB) ($11 billion AUD). Already Melbourne's Vanguard announced plans to utilise this quota.
Without these schemes and quotas we cannot serve this strongly growing middle class.
The free trade agreement also broadens ownership access which so far is only available to Australia.
While CHAFTA has not removed all technical barriers to trade for Australian financial services providers, the coveted ‘much favoured nation’ clause provides that future benefits conferred to other countries automatically flow to Australia.
Finally, CHAFTA builds on strong foundations.
China is our number one trading partner. Australia is the 6th largest offshore RMB centre and our regulators and central banks have strong relationships.
CHAFTA provides Australian fund managers with a significant advantage which is not enjoyed by large competitors such as Japan, United States and most of Europe. It gives us a first mover advantage.
This is the regulatory architecture we need to compete in the Asian century.
Swift implementation by the Parliament is now essential.
Andrew Bragg is director of policy at the Financial Services Council