Thinking | 23 July 2015
The signing of the ChAFTA – a new chapter of opportunity
On 17 June 2015, the Australian and Chinese governments signed the China-Australia Free Trade Agreement (ChAFTA) heralded by the Government as a ‘landmark’ and ‘history making’ agreement.
The ChAFTA, negotiations for which began in 2005, provides for improved access for a wide range of Australian exports including food products, resources and professional services. With imports from China worth $52.1 billion in 2013-2014, the removal of tariffs on a range of Chinese imports is also likely to reduce the cost of goods for Australian businesses. The full ChAFTA is largely consistent with the summaries provided by DFAT in November 2014.
The ChAFTA will come into force once the agreement has passed through the legislative process in both countries. It is expected that this will occur before the end of the year, with the ChAFTA coming into effect on 1 January 2016.
This presents a new chapter of opportunity for Australian businesses to gain access to the Chinese market. We set out below the major benefits and opportunities.
Foreign Investment Review Board (FIRB)
The FIRB thresholds for Chinese investors have been lifted under the ChAFTA. The general FIRB monetary threshold will increase from $252m to $1,094m, consistent with the thresholds for investors from the USA, Japan and Korea.
Agricultural land and agribusinesses will have lower investment thresholds, with the thresholds being $15 million for agricultural land (on a cumulative basis) and $55 million for agribusiness (expected to commence on 1 December 2015).
The thresholds relating to Chinese government investors, State Owned Enterprises and Sovereign Wealth Funds will be reviewed in the initial 3 year revision period of the ChAFTA.
Access for Australian financial services
For the first time in a free trade agreement, China has undertaken a treaty-level commitment to allow Australian financial services to operate in China. This includes agreeing on provisions relating to transparency, streamlining of financial services licenses, and regulatory decision-making.
This provides an unparalleled opportunity for Australian financial service providers to access the Chinese market. Participants in the sophisticated Australian financial services industry should be able to capitalise upon these opportunities.
Some of the key highlights for the financial services sector include:
|Funds management||Opportunities for Australian fund managers to provide asset management services to Chinese clients and access Chinese investments (including through Australia RMB quota under the RQFII program).
Measures have been enacted to allow Australian domiciled fund managers to invest directly into bonds and securities on Chinese securities exchanges in Shanghai and Shenzhen under a quota system.
Australian financial service providers will have the ability to provide services to Chinese qualified domestic institutional investors (QDII program). However, it should be noted that QDII program is operated under a quota and that only a few large Chinese institutional investors have access to this program.
|Insurance||China is allowing Australian insurance providers to operate in China’s statutory third-party motor vehicle insurance market without the imposition of equity or establishment restrictions.|
Removal of the RMB100 million working capital requirement for subsidiaries of Australian banks.
A reduction on the waiting period from 3 years to 1 year for Australian banks to engage in local currency business.
Streamlined approval for Australian banks seeking to open additional branches if already established in China.
|Securities and futures|| Australian futures firms will be able to have equity of up to 49% through a joint venture arrangement.
The ability for Australian securities firms to underwrite domestic ‘A’, ‘B’, and ‘H’ shares up to 49%.
|Bilateral taxation arrangements||Following implementation of the ChAFTA, China and Australia will review bilateral taxation arrangements, including in areas of double taxation and tax evasion.|
Increased competitiveness for agriculture, food products and agribusiness
There will be a significant reduction of tariffs for some of our largest agricultural exports including sugar, rice, cotton, wheat and canola (amongst others). The proposed timeline for the elimination of tariffs on certain goods is set out below:
|Export product||Current tariff||Time for full
|Wine and spirits||14-20% for wine
up to 65% for spirits
|Live animals||10%||4 years|
|Dairy||10-19% depending on the type of dairy||4-11 years|
|Processed foods (including orange juice,
natural honey and canned fruits)
|7.5-30% depending on the type of processed food||4 years|
In relation to wool, there will be a new Australian only duty free quota of 30,000 tonnes of wool with the quota increasing annually by 5%, in addition to continued access to China’s WTO quotas.
The reduced tariffs, together with the lower Australian dollar and our reputation for high quality agricultural produce make Australian agribusiness an even more attractive investment proposition for Chinese corporate investors. We are likely to see increased partnerships between Chinese investors (who are able to navigate supply in the Chinese market) and Australian investors in this sector.
Opportunities for other sectors
The ChAFTA provides a gateway for other service providers to access the Chinese market. A summary is provided on some relevant key areas:
Under the agreement there will be greater access to China’s higher education market for Australian education providers.
Registered Australian private higher education institutions will be listed on the Chinese Ministry of Education’s website. This will provide Australian private higher education institutions with an improved profile to prospective Chinese students and employers
China is allowing for Australian health service providers to establish aged care facilities throughout China and for wholly owned Australian hospitals to operate in certain parts of China.
There will be reduction in tariffs for pharmaceuticals, health products and medical devices, increasing the competitiveness of these products.
|Tourism and travel services||Allowing for wholly owned Australian hotels and restaurants to operate in China and for Australian travel agencies and tour operators to set up wholly owned subsidiaries in China.|
|Legal services||ChAFTA allows for Australian firms to establish commercial associations with Chinese Laws firms in the Shanghai Free Trade Zone (SFTZ). These commercial associations will allow Australian lawyers to practice Australian and international law.|
|Telecommunications||Guaranteed market access in the SFTZ as well as increased foreign ownership equity limits for Australia companies investing in specified value-added telecommunications services and guaranteed access for Australian-owned enterprises to participate in joint ventures with increased equity participation to 55% Australian ownership.|
The ChAFTA is allowing for Chinese workers to be employed in compliance with Australian labour laws for Chinese companies that are registered in Australia for infrastructure projects with a capital expenditure of more than $150 million. This will still operate within the framework of the existing 457 visa system but will allow for the negotiation of labour flexibilities (such as standards for English language and consolidated sponsored occupations list) for specific projects.
China will also provide guaranteed access to Australian nationals who are intra-corporate transferees for three years and installers, maintainers and business visitors for up to 180 days. Australia will also provide guaranteed access to Chinese nationals who fall into the same categories.
Most favoured nation’ (MFN) clause
The ChAFTA also includes a MFN clause. This means that if China negotiates an agreement with another country which is more favourable than the terms under the ChAFTA, these will automatically change so that Australia can also benefit from these more favourable terms.
Holiday and working visas
With estimates that more than 200 million Chinese people will be travelling globally by 2020, Australia has sought to extend the holiday visa length to ten years, up from the current three year limitation. This will likely increase our competitiveness for Chinese tourists and increase the number of repeat visitors to help boost our tourism sector.
In further recognition of the importance of Chinese tourists, the ChAFTA has also included a ‘Work and Holiday’ visa for Chinese citizens. The Government is to issue up to 5,000 visas annually to allow Chinese nationals to either holiday, or undertake short term work or study in Australia for a period of 12 months.
Implementation and next steps
Now that the agreement has been signed by both parties, the next stage is for the details of the agreement to be implemented into domestic law. Although no official date has been specified as to when the ChAFTA will commence, it is expected that it will be implemented by the end of the year with the first tariff reductions to be introduced on 1 January 2016.
Certain aspects of the ChAFTA, in particular the chapter on investments and the operation of the Invest-State Dispute Settlement (ISDS) mechanism, are yet to be finalised. The details of these areas will need to be finalised following further negotiations between the parties.
The ChAFTA will unlock substantial benefits for both Australian and Chinese businesses and builds upon the co-operation between the two countries. However, businesses will need to act quickly to understand the Chinese market and to capitalise on opportunities as they arise.
Hall & Wilcox has advised a number of clients across various sectors in relation to inbound and outbound China related investments. To speak to one of our Chinese practice lawyers, please contact us.
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