Trump Effect on China and Australia

Are we witnessing the start of geopolitical & trade tensions… or just the opening gambit for the US to re-calibrate relationships with the rest of the world?

Will there be ‘collateral disruption’ for Australia including ‘game-changes’ for those companies that compete with the US for Chinese business?

And whose viewpoint can you trust regarding the Trump effect?  Is it the US stock market at record highs… or the mainstream (left-leaning) media who keep demonizing the new president?

Even the Mexican stock market has recovered most of its post-Trump election slump, and is near its all-time record highs again….despite the continuous negative media coverage of Trump.

Money talks? Fake news? Alternative facts? …or is it all a ‘grey area’?

Welcome to the world of ‘grey area’ which Chinese investors are already familiar with on the mainland, particularly in terms of China’s rule of law, business ethics, government directed news and data.

Meanwhile, the Chinese government is likely to be delighted at Trump’s attack on Western mainstream ‘fake news’ media… because from now on, the Chinese government will merely dismiss any negative Western media coverage of China as ‘fake news’ also.   The fact that Western polls routinely place journalists at the bottom of the list of trusted professions does not help the media reputation.

So what now for the Trump effect on the Aus-China relationship?

Here’s our take-aways:

  • Money talks – US equity markets are at record highs.   For every negative media story out there… is another investor placing more money into the market, backing Trump.
  • Trump is a wild-card but also a deal maker.  He has placed his personal brand/ego to ‘make America great again’.   He will do whatever it takes to achieve this…i.e. doing deals which is what he is used to.
  • Fears of apocalyptic endings are unwarranted. Yes, his cabinet appointments suggest tougher times for the US/China relationship…but Trump and his billionaire advisers want to enjoy their wealth, not live in a nuclear fallout shelter with cockroaches.
  • Any trade war with China will see US exporters hurt also – especially those in the agriculture-dominated mid-& south west States –the States that supported him.  It will be a tough call for him to hurt this large voter base.
  • China is becoming a consumer economy.  That’s why Alibaba’s Jack Ma managed to have a meeting with Trump soon after the election.  US SMEs can harness Chinese online platforms to sell US products to China, and thus enable US small businesses and entrepreneurs to create jobs…and this will appeal to his voter base.
  • His weak points?
    • He is a deal-maker, not an industrialist / corporate builder.  He lacks experience in building businesses with hundreds of thousands of employees/dependents, negotiating with hundreds of buyers and supply chains (Which is what a President does).  But many of his cabinet appointments do have this ‘large corporation’ experience
    • He is also not used to dealing with ‘competitors’ ie the Democrats whose 24/7 ‘objective’ is to take him down
    • With a ‘small government, low regulation, & a ‘winners are grinners’ policy, he may not understand the need for an economic and social ‘safety net’ for those who don’t succeed…fueling discontent from the poor
    • He has plenty of enemies within.  Democrats, Hollywood and entertainment celebrities, mainstream left-leaning media, social media influencers (who tend to lean left also)…all who can influence the ‘silent majority.’   Dealing with internal political problems (e.g. delays in getting his Cabinet appointments approved by the US Senate) will delay his plans to influence the world (its hard to do when he can’t even influence his own USA).
  • Black swan risks.
    • In the jungle, the alpha male of the herd fights a younger challenger when the challenger grows into adulthood. Humans can anticipate, so will the alpha male (US) wait for the challenger (China) to grow up and become stronger…or will it anticipate China’s rise and make an ‘preemptive strike’ to take down (‘contain’) the challenger while it is still relatively weaker.  (it may already be too late with likely economic or military losses for both sides too difficult to bear)
    • Trump has 4 years then re-election. And two years to the mid-term elections where Senate control could pass to the Democrats.  Therefore he is forced to have a short-term political horizon —so will he escalate geopolitical tensions just to help secure his domestic future …at the risk of these tensions getting ‘out-of-hand’?
  • Given the above, we don’t expect an escalation of China/US tensions.  However, if it does occur, it will reduce Chinese investment, student demand for uni education, and tourism into the US  – with the money redirected to Australia depending on where Australia sits in the China/US relationship.

Rise of the China-Hub for Australian SMEs

As noted above, for Jack Ma to get an audience with President Trump so soon after the election is significant.  We believe it is because Alibaba and other Chinese B2C platforms are now actively encouraging Western SMEs to sell directly to Chinese consumers, with the promise of creating jobs in the West among small businesses and entrepreneurs in the West, and helping rectify the trade imbalance with US/China.

However, Western SMEs often don’t have the resources to take advantage of this new market.   So a new business model has been established  – what I term China-Hubs.

China-Hubs are firms that form alliances (and/or take equity stakes) with Western SMEs that seek to sell to China but lack the resources to do so. Like a ‘fund of fund’ or an ‘Incubator’, China-Hubs work with SME clients to tailor the marketing & branding, build scale and provide fulfillment services on behalf of the SMEs to better reach the China market.

These hubs are sector specific –e.g. a hub for Australian wines, hubs for Australian premium food producers or manufacturers and a hub for Australian apartment developers.  Some of these industry hubs have been established for several years (e.g. property networks) but the model has been expanding into other sectors such as agribusiness, and I envisage bio/medtech, tourism, among others.

But one early China-hub, an ASX-listed firm, Beston Global Food has struggled to deliver.  After an IPO at 35 cents and an early rise to 57 cents, the stock is down to 24 cents.  The key setback was the non-fulfillment of a major sales contract with one of its major shareholders, Chinese supermarket chain, Dashang Group, leaving a $4.5m hole in its net earnings for 2016/215.  Another setback was delayed sales in China resulting from the various non-tariff barriers and regulatory hurdles which have been introduced in China following the singing of the China Australia Free Trade Agreement.  (which BasisPoint discussed at our recent roadshows in Bris, Melb and Sydney re ‘trade protocols’)   Nevertheless, Beston’s model is to take equity stakes in a range of Australian food companies and to work with them to facilitate ‘quality-assured’ processing, and to secure sales into China and Asia as well as Australia.

BasisPoint has been in contact with a number of China-Hubs and we hope to profile them on our new portal.