Presenter: Jim Harrowell AM
President, Australia China Business Council (NSW),

Member, Attorney-General’s China Working Group

Partner, Hunt & Hunt

We walked in slightly late after the lunch and we were not sure what to expect in this session. It seemed like a history lesson on China on initial impression, because it started out with an overview of China in the last 60 years. However, we were pleasantly surprised with the content and its importance to the Australian economy. This was in one of the smaller rooms, with approximately 150 people interested to learn about this powerhouse economy.

Jim was a very credible speaker who had spent a significant amount of time in the country and was there during the period of the Tinanamen Square Massacre, as the tanks rolled into the Square. During that time, he pondered what the future of China would be – it was either going to take a great step forwards or backwards. It was an entertaining session and he highlighted some of the cultural differences of being a gwei-lo (foreigner), and the potential opportunities for Australian businesses.

China is Australia’a largest trading partner and with a population of 1.3billion, that is a market that cannot be ignored! The Chinese are buying our commodities, services, investing into Australia and there’s a growing contingent of Australians working in China now.

History lessons

Jim spoke about the various historic events in China:

• 3 irons
• Great Leap Forward
• Cultural Revolution
• Open Door Policy
• Collapse of Soviet Union
• Go Out policy

The most fascinating for us was the stages of the open door policy. The first stage it was open but there was no infrastructure. It was a cash economy and operated using cash accounting. There was no concept of accruals or depreciation. Accountants, imagine that!

The next stage was the recognition that the country needed the best business infrastructure to move forward. The open door policy of Deng Xiao Ping was the start. In 1996, there was an adoption of International Accounting Standards. They also understood they needed the rule of law. Higher education was given an emphasis and universities were re-established with a focus on business subjects. During the cultural revolution, there were many people sent from the city to the country to work, thus missing the benefit of education. Imagine a class of people in their 55-60 year age bracket that were not educated. It would be the equivalent of our executives in business today not having a tertiary education, which greatly impacts the ability of society to move forward.

One of the interesting points he raised was that in Australia, our politicians are mainly comprised of lawyers. However, in China there are a lot more engineers in politics. In fact there is an astounding number of engineers over there: 4 million engineers and 400,000 lawyers. These are the new architects of China, shaping the country’s operations, enterprises and its interactions with the foreign world.

Introduction of home ownership

An important reform that was introduced was the land reforms that gave citizens home ownership. Citizens were now allowed to have their own property. We were actually not aware of this reform, which was a fundamental change. Compare this with UK land ownership, where this introduced real democracy as you could not vote unless you had land. Once Chinese citizens had a certain level of salary, they no longer had subsidised housing. They were  given loans to purchase real estate. By them owning a piece of land (house or apartment), it gave them a sense of caring about the property, the surrounding environment, transportation. There was now a vested interest. It was points like this that made us really appreciate Jim’s session, and how much we need to learn about our largest trading partner.

Moving to a market economy

There was a transition from State owned enterprises to private enterprise. In the past, even the army was involved in business! Could you imagine the Australian Defence Force running Telstra? Well that was happening in China! The Chinese army was running the second largest Telecom in the country. There was a recognition that the army had to get out of business. A separation of duties and conflict of interest. A decree was laid that the army had to stop operating businesses. It was quite difficult at the time as there was no business reason for doing so, rather it was a policy matter.

Clearly, the country had to learn new ways. In the 80′s and 90′s, there was a move to a market economy. There was concern whether Chinese people would get the benefits of privatisation. The process of  privatisation involved bringing in public shareholders, so this was a whole new mentality for these state owned enterprises. It also resulted in a fundamental shift in the way management operated. Previously, the management style was to do nothing as orders came from above. Now they were put in a position of making decisions and being able to make mistakes – something that we do every day and this was a whole new concept over there.

A point worth noting is that state owned Enterprises are not all bad. Many of Australia’s largest businesses were previously State owned – look no further than QANTAS and Commonwealth Bank

There is also a different attitude in China to understand. People are prepared to trade off freedoms for government decision making if it provides them opportunities. These opportunities include work and getting their children educated.

Perceptions of China

Many people see China as a huge consumer and trader of goods. But its actually changing to an investor outside of China i.e. it is making investments in other countries. Further, the pace of growth is astounding. What a city looked like 6 months is vastly different.

The Chinese are also being educated quickly and have experience dealing with the West, and there is a lot more Chinese business people that have been educated overseas and have returned home to work. We recall when we were studying our business courses at university, there were many foreign Chinese students learning accounting. In a way, this was our introduction to their future accounting industry!

Australia needs to ensure that we balance the trade relationship. We simply cannot just sell commodities (ore, wheat, grains). We needed to be engaging in other business areas as well.

The challenges

• The Chinese economy is opening up for business. They have become very sophisticated with dealing with the West
• We need to be more relaxed about the cultural differences. These are diminishing. Chinese people will understand that we do not know all their customs and culture. So do not be snowed under, just try to appreciate the differences
• Things may be different in China and its not wrong or right. Just understand that it is different.
• Language: Is this a real problem? No. Although it helps, one can still do business and Jim gave us a demonstration of his rudimentary Mandarin. He has won cases where translation was necessary. He also referred to John Howard, who could not speak Mandarin but still had a strong business relationship with China. It was important not to overstate Kevin Rudd’s ability to speak Mandarin. While it is quite useful to be able to pick up the phone and dial the head of State in China and speak, it was not critical.

Other interesting points

When did this relationship start between China & Australia? Gough Whitlam, former Australian Prime Minister made a decision to recognise “One China” . It was symbolic and Australia was one of the first to do so.

The Chinese are looking to take equity in Australian businesses. The reason behind this is price protection.

Free trade agreement is still being negotiated. There is Chinese political pressure not to do so because it would result in unemployment. The current catchcry in China is to maintain social stability. Anything less than 8% economic growth would result in people out of work and create instability. The country has been trying to maintain this pace of growth despite the GFC.

Conclusion

We hope that our readers will have found this blog post as fascinating as we did when we attended the session. There are definitely some real business opportunities and learnings which can be gained from this. We can only forsee more trade relationships being formed, and more professional services being exported into China. As companies start dealing in transactions in China, we need a better understanding of Chinese business.

The Taxabull team is attending the CPA Congress as a guest of CPA Australia.

You can follow us on twitter: twitter.com/austax

Cheers,

Taxabull team.