Will the Year of the Fire Monkey Burn Corporate Australia's Ambitions in 2016?

CHINESE PROVERB: THE WIND SWEEPING THROUGH THE TOWER HERALDS A RISING STORM IN THE MOUNTAIN (山雨欲来风满楼)

The rapid growth of China has been a blessing for Australia. A strong demand for resources, an inflow of student and tourist revenue, and a giant consumer prepared to buy almost anything that grows. But what can Australia expect in the next 12 months now that its largest trading partner – a country that places great emphasis on superstitions and omens – has entered ‘the year of the fire monkey’?

THE SIGNIFICANCE OF THE FIRE MONKEY

The ancient Chinese belief is that the characteristics of the prevailing animal and element in a lunar year will heavily influence people’s behaviour and wider events in that year.

A monkey year is believed to reflect monkey traits such as curiosity, cleverness and playfulness. But the combination of the monkey with the fire element this year increases the potential for hot behaviour, making the monkey volatile, aggressive, impulsive and reckless.

Here are our thoughts on what we can expect from China’s year of the fire monkey and what this could mean for Australia.

OUR PREDICTIONS

1. Expect increasing volatility on Chinese stock markets – for better or worse

The rollercoaster ride on Chinese share markets over the last nine months has given us a glimpse of what we can expect this year – volatility, and plenty of it.

The Chinese Government’s attempts to support its markets in 2015 through stock trading restrictions, abridged trading days and the buying of shares by government entities appears to have had the opposite of its intended effect – eroding confidence and placing further downward pressure on stock prices.

How the regulators deal with any increased volatility in the year ahead will be vital on a number of fronts. While a key priority for Chinese regulators will be avoiding any negative social implications that could arise from significant market falls, the reality is that allowing a harder landing may ultimately be necessary to rebuild confidence in the market from the ground up.

2. Global Chinese outbound M&A will be more strategic, and Australia may benefit

We expect President Xi Jinping’s continuing anti-corruption drive – which in late January brought down the head of China’s National Bureau of Statistics, Wang Baoan, just hours after he released China’s 2015 GDP figures – to continue to have an effect on Chinese outbound investment patterns.

Those businesses with key management or directors placed under investigation will seek to maintain a low profile and avoid significant outbound M&A opportunities – particularly in higher risk regions such as Africa – that could attract further unwanted attention.

For other firms not tainted by investigations, outbound M&A will continue to be targeted at opportunities to move up the value curve by acquiring access to technology and foreign know-how (rather than raw resources only). To use an analogy, the monkey will look to pick the tastiest looking fruit which may not be the largest or lowest hanging.

Chinese expectations of a more significant devaluation of the yuan may well prompt increased outbound investments in the early part of the year. It may also encourage more Chinese companies to raise capital and list their shares in Australia, a trend we have been observing in the agriculture sector.

The offer by Chinese SOE ChemChina to buy Swiss agribusiness and biotechnology conglomerate Syngenta for almost A$60 billion on the eve of the new lunar year is the biggest gamble so far by a Chinese company on the global stage. While we don’t expect this to spawn a return of Chinese mega-deals to Australian shores, it may encourage other Chinese investors to use the early part of the year to lock in acquisitions before their foreign exchange costs increase.

We think Australia’s metrics will continue to be attractive to Chinese investors throughout 2016. Click here for our thoughts on opportunities in the construction, innovation and tourism sectors.

3. South-East Asia will be the centre of China’s attention

China’s manufacturing base has migrated south and west in recent years to regional mega-centres such as Chengdu and Chongqing, while countries such as Thailand, Vietnam and Bangladesh that offer lower cost operating environments have become attractive locations for Chinese manufacturers to export excess capacity. Expect China to continue its manufacturing drive in this southerly direction as emerging markets such as Myanmar and Indonesia – key pillars of the ASEAN Economic Community – become new centres for Chinese manufacturing interests.

And with the Asian Infrastructure Investment Bank ready to lend up to US$15 billion a year to support infrastructure projects, and President Xi keen to leave a lasting legacy through the One Belt One Road initiative, 2016 may well be the year Chinese companies begin to unlock the potential of South-East Asia by complementing manufacturing investment with significant infrastructure projects.

With this trend in mind, we see Chinese companies which have acquired Australian targets with operations in South-East Asia using the year of the fire monkey to leverage from their target’s existing footprint. (The China Communications Construction Company-owned John Holland Group, which has deep operating experience in South-East Asia, has already indicated that it will use 2016 to leverage its PPP experience to bid for projects in South-East Asia and beyond.) Similarly, Australian companies with operations in the region – particularly in infrastructure – will be attractive to Chinese acquirers and Chinese companies seeking a joint venture partner with local expertise.

WHERE TO FROM HERE?

While we believe the mixed currents described above are, on balance, positive for Australia, the real elephant in the room is the geopolitical flashpoints which have the potential to cast a dark cloud over China’s relationships with its near neighbours, the US and Australia.

Each of North Korea (recent nuclear and ballistic missile tests), Taiwan (recent election of pro-democracy leader Tsai Ing-wen as President-elect which may herald a cooling in the Beijing-Taipei relationship) and the South China Sea (with the Chinese military poised to begin test flights from the artificial – and disputed – Fiery Cross Reef in the first half of the year) present a number of challenges and risks for China which have the potential to impact Australia’s relationship with China. The message is clear: all players need to tread especially carefully this year to contain the fire monkey within.

With the China-Australia Free Trade Agreement now in effect and Australia’s metrics providing a solid foundation for a strengthening relationship with China, we believe Australia is well placed to weather the storm of challenges presented by the fire monkey year.