Marco Polo or Gina Rinehart?
Global Insights Report 15 April 2015

With China settling down to the “new normal”, that being growth of 7% instead of the heady double digits we had seen, the Government in Beijing is also implementing its plans to develop an "economic belt along the Silk Road"5 – the new Silk Road economic belt and a 21st century maritime Silk Road6. The idea is to connect China with Europe, Asia (including the Indian Ocean ) and Africa, further lifting China’s profile amongst the region’s 4.4 billion people, and providing access to its manufacturing and internationalisation of the renminbi.

These developments were first announced by President Xi Jinping during his visit to Kazakhstan and Indonesia in 2013 and were elaborated upon in a keynote speech on 28 March 2015 at the Boao Forum for Asia stating: “China's firm commitment to building friendship and partnerships with its neighbours to foster an amicable, secure and prosperous neighbourhood” – an evolving Asian power base that would seem to be targeted at excluding the United States. But does China see Australia as part of greater Asia? Certainly joining the newly formed Asian Infrastructure Investment Bank (AIIB) as a founding member will have helped Australia’s cause, but can we also expect the new Silk Road to extend as far as Australia?

The new initiative aims to7:

  • “enhance coordination of macroeconomic policies to prevent negative spill-over effects that may arise from economic policy changes in individual economies”;

  • [formulate plans regarding] “connectivity building in East Asia and Asia at large to advance full integration in infrastructure, policies and institutions and personnel flow” including “maritime connectivity”;

  • “build a free trade cooperation network in Asia and strive to conclude negotiations on an upgraded China-ASEAN FTA [Free Trade Agreement] and on Regional Comprehensive Economic Partnership (RCEP)”, and;

  • “build a community of common destiny”.

The initial outcome of this initiative announcement has seen infrastructure-related stocks rise on the Shanghai and Hong Kong exchanges with investors hoping that they could gain exposure to the intended Silk Road investment.

Australia will no doubt also see a massive benefit from the plans, if not as part of the Silk Road, then certainly by being in the economic belt. Investment made by the AIIB will be investment in regional growth, and Australia as a member can see long-term returns as well as potentially benefit from home-grown infrastructure opportunities. With the new China and regional free trade agreements Australian manufacturing, agriculture and services sectors (including financial services) will be propelled into a region which is expected to generate trade above US$2.5 trillion within a decade.

Finally, and maybe more positively for Australian resource exporters, the building of large-scale infrastructure developments of the size expected are going to require energy and base materials which will keep the coal exporters and the mining firms happy. Gina Rinehart will go down in history with many epithets, but did she ever think she would be the new Marco Polo, and does that make Port Hedland the new Venice?

High projected price multiple or bubble?

On the other side of the country Sydney, unlike most other cities in Australia, is undoubtedly seeing huge rises in residential property valuations. This is not city-wide and could also be attributed to some areas in Melbourne. But is there a logical reason as to why this is happening and will it be a bubble?

Some commentators are saying that low-interest rates and cheap mortgages coupled with retirees and foreign purchasers acquiring second homes are propelling the price growth. However, one should also consider the strong population growth. There were 90,000 newcomers to Sydney alone in 2014. While there has been a lack of direction in planning and under-capacity in building, the increase in population will inevitably see a lack of supply and hike in demand increasing property prices.

Building approvals have picked up and, following the New South Wales State election, the Premier has finally appointed a new planning minister, Rob Stokes. Sydney has a lower unemployment rate than the national average and with the planned poles and wires lease infrastructure spending in the State is expected to increase. Any new road and transport infrastructure will inevitably open up previously under-developed areas.

So while it may appear that Sydney is in a bubble, the other factors around this price growth, and the future expectations show these increased multiples will be justified going forward and will eventually even out.

Best regards,

John James
For La Trobe Financial

     
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5. President Xi Jinping, Nazarbayev University, Astana, Kazakhstan, 7 September 2013.
6. “In 2013, during my visit to Kazakhstan and Indonesia, I put forward the initiatives of building a Silk Road economic belt and a 21st century maritime Silk Road. The "Belt and Road" initiative…” (President Xi Jinping, Boao Forum for Asia, 28 March 2015.
7. Ibid.
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