1. Global Dialogue 2014 Wrap Up page 1
AN OVERVIEW OF KEY LEARNINGS
FROM SHANGHAI AND BEIJING
Report prepared by Janet de Silva, AIST’s Executive Manager Media and Communications
Marco Polo’s famously said about his travels to China, “I have
not told you half of what I saw.” Seven hundred years later,
these words still resonate strongly with the experience of
many modern day visitors to China.
Certainly, for delegates attending AIST’s Global Dialogue in
Beijing and Shanghai there was much to absorb and plenty
to be awestruck about.
As Peggy Liu, the founder of the environmental NGO,
JUCCCE and one of China’s leading ‘green’ voices
commented: “China is a new country every five years – even
local Chinese struggle to keep pace.”
It’s one thing to read or hear about the remarkable
transformation that is occurring in China, it’s quite another
thing to see and experience it in person.
Being on the ground – in this case, visiting the first tier cities
of Beijing and Shanghai – provides insights and perspectives
that aren’t possible to get from reading a newspaper or
phoning up a Hong Kong-based fund manager.
Over the eight day Global Dialogue program – that included
a day criss-crossing Shanghai’s vast freeway network to visit
local and international companies - delegates heard from
trade representatives, economists, legal experts, former
ambassadors, business entrepreneurs, fund managers and
many others on how they think super funds can benefit from
the China story and what it means to Australia.
Peggy Liu
Shanghai and Beijing, China
27 May - 3 June, 2014

2. Global Dialogue 2014 Wrap Up page 2
THE BIG NUMBERS
Just about every speaker at the
Dialogue brought along some headline
figures to share; We learnt that China
has plans for 55 new airports and
177 urban train networks over the
next few years. We heard that in the
next 10 years, half of the world’s new
commercial property will be built in
China and the length of new roads
planned could circle the earth 25 times.
Driving this infrastructure development
is a rising Chinese middle class, now
tipped to reach 320 million by 2020.
We were told that while coal use is
set to triple by 2035, China leads the
world in solar, wind and nuclear power
production, with 26 nuclear plants
under construction.
We heard the Government is committed
to greening China. In a matter of
months, a Government directive
succeeded in having 68 billion plastic
bags destroyed. As Ms Liu noted, China
is run like a multi-national company
with KPIs – things get done.
At General Motors’ Shanghai plant,
we observed a well-oiled production
line that spits out 75 new cars every
hour. At Huawei, we learnt that this
company serves one third of the world’s
technology and has spent $24 billion on
research and development in the past
10 years.
Across the road from our hotel, we saw
the world’s second largest building
nearing completion, where just 12
months before there was nothing but a
giant hole in the ground.
We learnt from David Wei, a former
CEO of China’s e-commerce giant,
Alibaba, that the Chinese lead the world
in using mobile phones to access the
Internet and that online retail is growing
at 10 times the pace of traditional retail.
We heard that China’s eBay-equivalent,
Taobao, is now bigger in size than eBay
and Amazon combined. We were told
that the Chinese have embraced texting
to the extent that WeChat, a popular
messaging app, gained 200 million
subscribers within weeks of its launch.
We were reminded that Australia and
China’s investment relationship is
currently well-balanced, with the value
of Australian investment in China worth
about $19 billion, while the value of
China’s investment in Australia stands at
$22 billion.
David Wei
Site visit to General Motors, Shanghai

3. Global Dialogue 2014 Wrap Up page 3
A DIFFERENT WAY OF DOING BUSINESS
China’s business and investment
landscape is equally opaque. Jamie
Allen, from the Asian Corporate
Governance Association, noted that
compared to other Asian markets,
China’s corporate governance is poor,
ranking ninth out of 11 Asian markets.
Mr Allen said State intervention with
company boards is an ongoing problem
and improvements won’t happen
overnight.
Sun Hong, a partner at Norton Rose
Fulbright, told us that China ranks
151 out of 185 countries in the ‘Start a
Business Category’ of the OECD’s latest
‘Doing Business Study”. By contrast,
Australia sits at number 2.
Not surprisingly in a country with no
independent judiciary, the regulatory
system is very different from that of
most Western countries. We were told
that China’s still developing legal system
is vague and that the law enforcement
is weak. One speaker commented that
a contract signed today by a local
government official, might not be
binding tomorrow, particularly if that
official moves on.
Indeed, far more important than
signatures on a contract, are
personal connections or guanxi.
Such connections are seen as critical
at all stages of business, as is using
professional judgement. As Dr Raby,
noted: “It’s a fact of life that in China,
relationships trump contracts every
time.”
A surprising number of speakers spoke
openly of corruption, nepotism and
kickbacks, as well as the Chinese culture
of ‘saving face’ and the influence of the
Communist Party in business dealings.
Several speakers also warned about the
unreliability of Government data.
China’s ‘shadow banking’ market – best
described as an alternative funding
source to commercial banks that largely
restrict their lending to State Owned
Enterprises (SOEs) – is another grey
area for foreign investors to get their
heads around. There were mixed views
about the risks associated with shadow
banking, which accounts for about 27
per cent of lending in China and covers
the full gamut of non-bank loans,
including corporate and trust bonds.
Many speakers felt that concerns about
shadow banking - which plays a key role
in providing finance to entrepreneurial
companies - tend to be over-stated,
particularly by the Western media.
While it was noted that the Central
Government had recently taken steps to
improve oversight of this market, some
speakers expressed concern that the
recent and rapid expansion of this still
largely unregulated market could lead
to a big rise in corporate bankruptcies
and subsequent economic instability.
GROWTH STORY STILL POSITIVE
But ‘big numbers’ and obvious
risks aside, what are the investment
opportunities?
Among economists at the Global
Dialogue, there was general consensus
that while an economic slowdown in
China is inevitable, it’s unlikely to be a
hard landing.
Andrew Batson of Gavekal
Dragonomics described how there are
two sides to China’s economic growth:
the investment side - which is now well
below the 2009 peak resulting from the
Government’s post-GFC credit stimulus
- and the consumption side - which is
holding up reasonably well with the rise
of China’s middle and upper class. But
as most speakers noted, even if China’s
annual growth “slows” to 6 per cent (a
figure below the Chinese Government’s
current target of 7.5%) the size of
China’s economy will still double in 12
years.
Clearly, China’s long-term growth
outlook looks positive. But less clear
is whether now is the right time for
foreign investors, notably Australian
super funds, to fire up investment in
China.
URBANISATION BRINGS NEW CHALLENGES
But not all the numbers about China
are impressive. Nor are some of the
daily life experiences of Chinese
citizens. While China has modernised
at a pace that many of us would never
have expected to see in our lifetimes,
urbanisation has created inequities, as
well as many other challenges.
Dr Geoff Raby, a former Australian
ambassador to China, told us that China
still had a lot of catching up to do, with
per-capita income about 16% of the US.
We heard that China is rapidly ageing –
with almost one third of the population
expected to be over 60 by 2050.
Brendan Mason from Cochlear told
us that this is creating pressures on
aged care and the country’s health
system, which is now so over-crowded
that there is a scalpers’ market for GP
appointments.
Environmental degradation and
pollution are also major issues that have
received a lot of international attention.
During the Global Dialogue week, we
were considered lucky to experience
two ‘blue sky’ days. Our guide at the
Forbidden City said the dusty brown
air can sometimes make it difficult for
visitors to see rooftops that are less
than a 100 metres away.
Dr Geoff Roby

4. Global Dialogue 2014 Wrap Up page 4
EQUITIES EXPLAINED
One obvious way to increase exposure
to China would be to buy more Chinese
equities. While most Australian super
funds already have some exposure to
Chinese stocks through Hong Kong
listings and the emerging markets
index, gaining exposure to domestic
Chinese stocks is not easy and far from
straightforward.
On the plus side, several speakers,
including Stuart Rae, of Alliance
Bernstein, pointed out that the Chinese
mainland markets (home to so-called
A-shares) were currently the cheapest
in Asia, with many mainland stocks
well down from peak levels. Local
companies expected to perform
well include those supplying food,
beverages and consumer goods to
China’s rising middle class; those
providing aged or health care services;
and those focused on clean energy
solutions.
Delegates were provided with an
update on the upcoming launch this
year of the Shanghai-Hong Kong Stock
Connect program. This program will
allow Hong Kong and international
investors to trade a selection of
A-shares listed in Shanghai.
At the same time, changes are afoot
to make it easier for foreign investors –
particularly pension funds - to obtain a
Qualified Foreign Institutional Investors
(QFII) license and access quota that
allows the trading of A-shares on
China’s mainland stock exchanges in
Shanghai and Shenzhen.
But, as several speakers explained,
investing in A-Shares is not for the faint-
hearted. Delegates heard that a typical
A-share investor thrives on volatility
and nanosecond trades. Other risks for
foreign investors include uncertainty
around capital gains tax obligations
and some limits on the repatriation of
profits.
We were also told that another way
to access A-shares will be via MCSI,
which is considering including A-shares
in its China or global emerging index.
Currently, these indexes only provide
access to mainland Chinese companies
listed in Hong Kong or the US. (Since
the Global Dialogue concluded, MCSI
announced that A-shares will not be
included in the China Index, for the time
being at least).
Charles Salvador, from Z-Ben Advisors,
queried whether obtaining a QFII
license is worth the effort for pension
funds starting out in the Chinese equity
markets. He advised that the Shanghai-
Hong Kong Connect might be an easier
option notwithstanding that this route
does not currently provide exposure to
all A-shares.
Funds keen to press ahead and apply
for a QFII license were urged to tap into
the expertise of their custodian or fund
manager to guide them through the
process.
And not everyone was bullish about
A-shares, particularly in the short-
term. Headwinds include a further
deceleration of the Chinese economy,
corporate bankruptcies as a result of
credit drying up and the potential for
further falls in property values.
THE CHALLENGES OF GOING DIRECT
Direct investment into China is also
challenging. While ongoing urbanisation
is creating more private equity and
infrastructure investment opportunities,
much was said about the risks and
unknowns at every stage of the direct
investment process. Equally, we heard
that rewards are there for those
prepared to be patient and put in the
hard yards.
A key message to those contemplating
direct investment was the importance
of tapping into local expertise and
having good contacts on the ground.
We heard that dealing with local
government officials can be tricky and
that the attitude to foreign investment
varies widely from province to province.
We were told that the business
environment is extremely competitive
and insecure and that the Chinese like
to take profits quickly. There was talk of
piracy issues and that the only real way
to protect intellectual property is to
stay ahead of the game and innovate.
There was a mixed view about the
investment potential of SOEs, with
more of these companies expected to
be offered for sale or joint ventures in
the next few years.
Tom Luckock, from AustCham in
Beijing, said it was important for foreign
investors to understand that SOEs
were far from a homogenous group.
Some SOEs were very sophisticated
businesses that operated like private
companies but, again, tapping into local
knowledge was considered vital.
For investors keen on property, some
concerns were raised about oversupply
issues. Haibin Zhu, Chief China
Economist with J.P. Morgan, described
a property slowdown as a “major
macro risk”. Other speakers were more
concerned with rising levels of local
government debt.
On the role of China’s Government and
its impact on the investment landscape,
everyone agreed that you can’t succeed
in China without a clear understanding
of Central Government policy, notably
China’s five year plans. Many speakers
spoke positively about the current
policy settings and of President Xi
Jinping’s reform agenda to stamp out
corruption, improve regulation and
increase foreign inflow into capital
markets. But there were also concerns
that China’s political power is too highly
concentrated – creating potential
for instability – and that the fact that
political debate about economic
reform is now less open than a year
ago. On the plus side, social media has
facilitated greater information sharing
among the general public.
Charles Salvador
Haibin Zhu

5. Global Dialogue 2014 Wrap Up page 5
RICH OPPORTUNITIES FOR AUSTRALIA
Another important aspect of the Global Dialogue was
providing insight into how China’s growth is creating
investment opportunities back in Australia. Ken Morrison,
head of the Tourist & Transport Forum, TTF, was bullish on the
growth of the inbound Chinese tourist market to Australia,
predicting this would create investment opportunities in
aviation, infrastructure, convention facilities, casinos and
hotels. Similarly, Austrade’s Bing Liu, spoke of opportunities
in Australia’s educational sector, with Australia being the third
top destination for Chinese wanting to study abroad.
Delegates were also told there were rich opportunities for
Australian companies that could provide services and export
skills in vocational training, health and aged care, financial
services and clean technology. A case in point is Australian
biotech company, Cochlear, which now has 71 clinics across
China and expects strong growth ahead.
CAUTIOUS OPTIMISM
So what was the general feeling among
delegates about investing in China at
the end of the week-long Dialogue?
An audience straw poll on the last day
indicated most were either neutral
or cautiously optimistic about China
from an investment perspective. At
least one fund which already has
direct investments in China is actively
exploring further direct investments
while other funds are considering
entering the A-share market, and/or
increasing their investment in private
equity funds targeting China.
A few delegates were not convinced
that China – with all its associated
risks and slowing economy - stacks
up favourably against other emerging
markets. As one delegate commented,
the world is a big place and, unlike
many other places, China isn’t begging
for capital or going out of its way to
accommodate foreign investors.
Certainly in regards to direct investing,
some delegates still felt uncomfortable
about the risks associated with China’s
developing legal system, its unregulated
shadow banking sector and the very
different rules by which Chinese
business’ operate. But others felt that
there was too much emphasis on
cultural differences and that, as foreign
investors, we should be less wedded to
Western ways of doing business and
more open to learning how to operate
in a different system.
Everyone agreed that the changing
nature of Chinese consumption would
drive investment opportunities back in
Australia. Having seen clear evidence of
the growth of China’s middle and upper
class, it’s not hard to imagine another
million or so well-heeled Chinese
visiting Australia in the next few years
and the opportunities this will create.
The Dialogue also provided delegates
with a deep understanding about
China from a macro-economic point of
view. As Stephen Joske, who heads up
AustralianSuper’s Beijing office noted,
global asset returns will increasingly
be determined by events in China.
And, Australia, in particular, is far more
exposed to China than it has been in
the past.
Most importantly, the Dialogue
underscored the sheer size and scale of
China and its ability to get things done.
Every delegate returned to Australia
acutely aware that China is too big a
market to ignore for long. Eventually all
super funds will increase their exposure
to China be it directly, indirectly or
through a combination of both. It’s not
a matter of if, but when.
Bing Liu
Site visit to Huawei