China’s rich & upper middle classes are disrupting asset values and consumption in Australia.
As one of the world’s newest, largest and fastest growing wealth markets in recent history, they have attracted international…
• governments offering investor & entrepreneur visas,
• asset owners selling property & businesses,
• professional service providers, fund managers, private bankers and wealth managers providing investment expertise, and
• purveyors of premium consumer goods, culture, art, travel and ‘experiences.’
Their disruption is not static and Australia is not alone in seeking new opportunities from China’s HNW.
As demand from China rises, so does supply (where available) from providers and their competitors.
Where supply does not rise, prices (and alternatives) rise as we have seen in the ultra-premium property and food markets in in Australia.
Demand from China can fluctuate due to government influences (such as new Chinese import protocols) and ‘social media’ influences accentuated by the ‘momentum driven’ nature of Chinese demand.
So who are the Chinese rich, and how are they influencing Australia and how will they continue to impact Australia?
Chinese ‘new rich’
According to a multitude of research reports issued by Chinese and international private banks and consultancies, China’s new rich…
• Number between 1.1 to 1.4 million high-net-worth (HNW) defined as having more than CNY10m (A$2m) in net assets outside the family home. (In comparison, there are around 200,000 Australian HNW with US$1.4m+ each)
• They are growing by 10-15% per year in number and in combined wealth. This means the Chinese HNW market will double in 4-7 years time, a much faster rate than the global rich.
• They mostly have assets tied up in their businesses.
• Many are first generation wealth compared to global rich, which means a huge inter-generation wealth transfer is coming.
• For money invested outside their business, many are focusing on preserving wealth and less so on growing wealth (since it is their business that is growing wealth).
• They don’t have a lot invested in overseas markets (around 5-15% vs 20+% for global rich according to some surveys) but this is increasing.
• There are around 100-120 million upper middle class Chinese, meaning there are 1.3 million middle class or poor, (of whom around 70 million are in ‘poverty’ according to Chinese media). Note: references to Chinese ‘upper middle class’ usually suggests they can afford overseas holidays and buy investment property…but ‘middle class’ definations suggest they cannot afford overseas holidays/buy investment property)
Significant Investor Visa (SIV)
Australia’s SIV scheme was designed to attract Chinese and Asian HNW migrants based on them investing $5 million into certain complying investments over a 4 year period to gain PR.
45-50 SIVs are being issued each month (up to 30 Nov 2016 which is the latest data available). Around 10 SIVs are under the new scheme implemented 1 July 2016, and the rest under the previous scheme. ~90% are to mainland Chinese.
In the five months to Nov 2016, there were 164 SIV applications lodged, equating to nearly 400 SIVs per year under the new investment regime if all are approved.
We believe the Department of Immigration and Border Protection (DIBP) has limited staff resources in conducting due diligence on the applicants –hence they can only process 45-50 per month, even though there were ~2,000 SIV applicants as at June 2015.
It will take 3 years to process all 2,000 SIVs assuming a 75% approval rate. The SIV industry is railing at this slow process but we don’t see any changes coming from DIBP to speed this up.
The Productivity Commission has recommended that the SIV scheme be closed on their conclusion that it was not in the national interest.
However, we are forecasting the scheme will not be closed on the basis that:
• It was a Labor government initiative that was carried on by the present Coalition government.
• Positive comments by the Federal Treasurer Scott Morrison at a recent Lowy Institute speech in Sydney about the need for immigration and foreign investment suggests he is favourable to the scheme.
• Mr Morrison’s comments, when he was Immigration Minister, about the SIV scheme helping attract global investors who will transfer their wealth, families, and business IP and connectivity to Australia.
• The Productivity Commissions conclusions can be argued to be based on inaccurate arguments.
Insights on the SIV
As of 30 Nov 2016, (the latest data available) 1,657 SIVs have been granted since the scheme commenced on 24 Nov 2012, resulting in ~$8.3b invested in complying investments.
1,657 SIV is equivalent to a new BRW 200 Rich list, particularly in their impact on prestige property.
Most of the SIV are believed to have wealth in the $50m – $100m range, although there are reportedly several billionaires in this mix. This coompares to the ~$300m cut off for inclusion in the BRW Rich List.
Most are heading to Melbourne or Sydney, so their impact on premium property is all the more concentrated.
The result is a widening gap between premium and average priced homes in Sydney and Melbourne, and will lead to increased local community concerns about a ‘rich-poor’ divide partly driven by China’s rich.
China’s upper middle classes
In addition to China’s HNW, China’s upper middle classes are influencing Australia via their:
• off-the-plan property purchases
• their permanent migration (~16,000 per year past 3 years),
• their children’s education (60,000 per year –cumulative of 200,000+)
• their temporary migration (457 visas – 6,000 per year)
• their tourism visits (1+ million per year, growing at 20%)—many of whom are long-stay tourists visiting their relatives
• their buying of Australian foods via the daigou, online or traditional export channels
Five Australian boomlets
They and China’s rich have been a catalyst for five Australian boomlets. Importantly, these mini-booms are spread more evenly throughout the country and involve many more SMEs and service providers, compared to the mining boom which benefited fewer companies.
The five Australian sectors booming are the:
1. Tourism boom & hotel & casino construction boom (linked to tourism)
2. Overseas education and related student accommodation boom
3. Agribusiness & premium food and ‘wellness’ boom
4. Real estate boom
5. Revitalization of retail and dining precincts in Australian suburbs with a large Chinese population
However it is the Chinese ‘critical mass’ of investment or expenditure that is the key to these booms.
An example of critical mass is the large number of Chinese developers who:
• Began entering the Australian market predominantly from 2010
• Initiated off-the-plan sales to offshore and onshore buyers, and in doing so…
• Helped trigger a construction boom as other developers, investors and buyers re-entered the market following a moribund development period in the mid-late 2000s (and helped by falling interest rates)
This critical mass of investment / consumption is being repeated in the other four booming markets, with examples such as the sales surge in Australian premium food and wellness products by China’s rich and middle classes.
These booms will grow due to the Chinese consumer predilection…
• For jumping on the bandwagon as evidenced by their tendency for ‘momentum trading’ in their stock markets and in their residential property investment markets.
• Keeping up with the Jones (or in this case, the Jiangs) and a fear of missing out (FOMO) psyche. (see our 2016 article on the modern Chinese psyche)
• For generating and acting upon ‘word of mouth’ and social media (e.g. Wechat) trends (which unfortunately is why Ponzi schemes are more likely in China to gain traction).
China’s ‘niche speed’ economy and its new five-year plan
Over 2016, there has been much commentary about China’s slowing economy.
However we have coined the term ‘niche-speed’ economy (taking from the commonly used ‘two-speed’ in Australia) to describe economic conditions in China.
Yes, the economy is slowing (5 years ago, the commentary was that China was growing too fast at 10%+ growth rates) but niche speed is to remind readers that China is a vast market. For example, Shenzhen recorded 8.9% growth last year due mainly to its booming tech sector, while China’s ‘old heavy industry’ sector continued to struggle and national GDP growth is around 6.5%.
For Australian businesses looking ahead at 2017, the key is to target your Chinese buyers/investors who are doing well.
China’s 13th 5-year plan (2016 -2020), the first under President Xi Jinping, was formally approved in March 2016.
The plan will boost demand for services and products in:
• ‘Professional’ farming, environmental protection, pollution curbs, & technology-related supply chains
• A ‘green’ and internet based economy particularly in energy and transport sectors
• Opening up of financial markets, pensions and insurance, eventual RMB convertibility to capital account
• Development and opening up of healthcare, aged care, and education sectors
• Improvements to rule of law and ‘judicial credibility,’ audit, governance and performance measurement of SOEs and government
Themes that can be expected over the next 5 years are:
• Mass entrepreneurship
• “Made in China 2025” (i.e moving up the manufacturing chain)
• Economy needs a Rule of Law
• Continued Urbanization
• Two-child policy