This year marks the 50th year of bilateral relations between Australia and the People's Republic of China. It's not quite a "life begins at 50" situation, but many business people are calling for a reset in the Australia-China relationship.
Since the start of the COVID-19 pandemic just over two years ago, unrelenting challenges have impacted cross-border trade and investment with China, with the pressures of strategic competition and geopolitical issues driving tensions in the Asia-Pacific region. This has prolonged the standoff between the Australian and Chinese governments.
The last 50 years have seen China's journey from navigating trade with Western nations for the first time post-Cultural Revolution to becoming the world's second-largest economy. China's continuing economic significance has been highlighted by Australian companies with business in and with China making substantial modifications to their business models or creating joint ventures and alternative business structures to adapt to major regulatory and policy changes in China throughout 2020 and 2021. The desire to adapt to the Chinese market comes as China remains Australia's largest trading partner and is predicted to become the world's largest economy by 2028.
While there is great uncertainty as to how China will navigate its economic interests in 2022, when a reset in Australian-Chinese relations will take place and how that might look, it is important for Australian businesses to understand key regulatory and policy changes in China that will be sure to impact commercial relationships and opportunities as we embark upon the next 50 years of the Australia-China bilateral relationship.
Recurring themes throughout major Chinese policy announcements have included the principles of 'indigenous innovation' (自主创新), 'common prosperity' (共同富裕) and 'dual circulation' (双循环). Each was mentioned in China's 14th Five-Year Plan (14th FYP) released in 2021, a blueprint for China's economic plans between 2021-2025, as well as many other policy updates. These three strategies are at the core of the next phase of China's economic development, and understanding them is key to navigating the challenges and opportunities for China-related business and investment.
China's dual circulation strategy seeks to rely increasingly on the domestic market (internal circulation) while also remaining open to export-oriented development (external circulation). This is complemented by promoting indigenous innovation, which seeks to enhance China's domestic scientific and technological innovation. These strategies are linked by an aim to increase self-reliance and common prosperity, which China hopes will mitigate the impact of global volatility and international vulnerabilities.
Common prosperity policies seek to narrow the increasing wealth gap in China. These policies have targeted large and growing companies, impacting their access to foreign capital and, by extension, the way they conduct business. Global concerns about billions of dollars being wiped off from large Chinese companies prompted China's President Xi Jinping to address claims of volatility at the World Economic Forum in January 2022, stating, "China welcomes all kinds of capital to operate in China legally and in accordance with regulations, so as to play an active part in China's development." He added that, "As a rising tide lifts all boats, everyone will get a fair share from development, and development gains will benefit all our people in a more substantial and equitable way."
These strategies will continue to drive two key sectors in particular - clean energy and technology/innovation.
Greening the economy is a top priority of China. Five of the eight binding targets in the 14th FYP relate to clean energy. At the UN Climate Change Conference (COP26) late last year, China reiterated its target to peak carbon emissions by 2030 and to be carbon neutral by 2060.
China has actively reinforced its focus on energy transition through various policies. China launched its emissions trading scheme (ETS) covering power generation companies in mid-2021. The ETS is expected to expand in 2022 to include steel, building materials and non-ferrous metal industries. Further, the Leaders Group for Carbon Neutrality was established in mid-2021. Such groups are generally established to handle primary government priorities in China. While these initiatives are very much at the preliminary stage, they hint at significant development in the clean energy sector well beyond the next few years.
China is also experiencing a greening of its finance sector. Last year saw the first time China's Belt and Road Initiative did not fund coal projects. China's central bank, the People's Bank of China, also recently undertook wide-ranging initiatives to support green projects through preferential interest rates and cheaper loans.
China's powerful National Development and Reform Commission recently released its Action Plan for Carbon Dioxide Peaking Before 2030. The Action Plan states that the total installed generation capacity of solar and wind power will be more than 1,200 gigawatts by 2030, almost double the current capacity. However, many believe this will likely be reached by 2025.
China's prioritising of renewables coincides with increasing its energy security, as China becomes less reliant on foreign oil and gas, reducing the threat of future carbon tariffs. Prioritising a lower carbon environment is also driven by the emphasis on common prosperity, as decarbonising China raises the standard of living of low-income members of the population, who tend to live in areas of poor environmental development.
While China's end goal is self-reliance, there are opportunities for Australian companies to collaborate with Chinese partners in managing the shared global risk of climate change. Climate change is a key area of commonality between China and the West. This was underscored by the US-China Glasgow Joint Declaration made at the COP26, which pledged to cooperatively enhance climate action between the two countries. As a participant of the Regional Comprehensive Economic Partnership and given our significant renewable energy resources, Australia is well-positioned to collaborate with Chinese companies on green investment and green finance. However, before diving in, Australian companies must carefully consider whether their products are easily replicated or replaced and factor in such risks accordingly.
Digitisation, technology and innovation
In the past 50 years, China's expertise in mass low-end manufacturing has been a significant part of its economy. Transforming this economy into one based on innovation, technology and high-end manufacturing has been identified as a key factor to China expanding its middle class and reaching its target of being a 'moderately prosperous society' in the coming years. The 14th FYP sets targets of (i) increasing research and development spending by more than 7 per cent annually and (ii) having national strategic industries constitute over 17 per cent of GDP. Central to China's focus on tech and innovation is the theme of self-sufficiency by reducing reliance on foreign technology. However, China is still reliant on foreign technology for advanced materials, semiconductors, biotechnology and aircraft components (currently 'chokepoint' technologies).
Technology and innovation will play a fundamental role in China's transition to green energy, as outlined in the Action Plan for Carbon Dioxide Peaking Before 2030 (referred to above). The strive towards digitisation presents opportunities for cross-border collaboration, but Australian companies need to be aware that the tech space is becoming more heavily regulated in China and should consider how China's self-reliance goals may impact their business in the long-term.
China's focus on innovation and digitisation is directly related to notable updates to China's laws relating to IP, data security and national security.
In September 2021, the Central Committee and State Council issued the Guidelines for Building a Powerful Country with Intellectual Property Rights (2021-2035), a 15-year plan to significantly improve the innovative environment in China, including accelerating IP rights legislation in sectors such as big data, AI and genetic technology. There has been a trend of increased regulation of China's IP laws, including the application of steeper penalties for non-compliance being introduced and a greater willingness to award damages for non-compliance.
The 14th FYP Notice of the National Intellectual Property Protection and Utilisation Plan, which China's State Council released at the end of 2021, reinforced a commitment to strengthening IP protection and set a goal of more than doubling the number of foreign patents by 2025 from 40,000 to 90,000. A surge in patents has sparked 'quality vs quantity' concerns, with lower-quality patents possibly being unable to stand up to international scrutiny. Companies must, therefore, carefully consider the IP landscape in China before patenting inventions.
While the IP environment in China is improving, foreign companies doing business in and with China should still place greater emphasis on managing their IP rights in China and be aware of IP risks.
Data security and personal information protection laws
The Data Security Law of the PRC (Data Security Law) and the Personal Information Protection Law of the PRC (Personal Information Protection Law), which came into effect towards the end of 2021, establish significant new compliance frameworks for companies with business in China.
The Data Security Law applies to a broad definition of data to expand data localisation and prohibitions on transferring data stored in China to foreign judicial or law enforcement agencies. Companies must be aware that there is significant ambiguity as to what type of data is subject to this legislation. Companies that acquire or store information in China will need to be mindful of the regulatory risks that this creates.
The Personal Information Protection Law implements increased consent requirements in relation to individuals whose personal information is collected, additional protection requirements and requirements before transferring personal information to third parties or overseas.
These new laws pose significant challenges for companies with business in China to manage their compliance with the legislation. Companies doing business in China should seek advice on how to improve governance over acquired and generated information and review internal guidelines about handling personal information.
Australia's national security policies
In recent years, Australia's national security concerns about Chinese companies have significantly impacted tech collaboration between the two nations. In fact, the vapor trails of the strain on the Australia-China relationship trace back to Australia being the first country to ban Huawei from its 5G network in 2018 after raising national security concerns, a decision made by Prime Minister Scott Morrison when he was the Treasurer.
The Australian government has since frequently expressed concern about the security of critical infrastructure and subsequently made wide-reaching amendments to the Security of Critical Infrastructure Act 2018 and enacted the Foreign Investment Reform (Protecting Australia's National Security) Act 2020 and its accompanying regulations. Such reforms create difficulties and uncertainties for tech collaborations, particularly in cloud computing, AI and software as a service. Companies hoping to collaborate in sectors possibly subject to national security concerns should exercise additional caution and seek expert advice.
China is fundamentally changing. The changes now rapidly taking place will shape the next 50 years of Australia-China relations, and any kind of reset that may take place. In the context of the principles of self-reliance, companies wishing to conduct business in China must consider whether they offer a product or service that is required by China in the foreseeable future and that cannot be easily replaced or replicated in China. While the iron ore, green technologies, healthcare, education and agribusiness sectors all present opportunities for Australian businesses doing business in and with China, such businesses must be cautious of the significant changes that are taking place in the legal and regulatory landscape, both here and in China.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.