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The investor’s guide to the China free trade agreement

Cheese dairy

Last week marked the signing of a ‘monumental’ free trade agreement between Australia and China. A declaration of intent was signed by Australian Trade and Investment Minister Andrew Robb and Chinese Commerce Minister Gao Hucheng and will take effect in around two months after a viewing period of 20 days at parliament house and 30 days of inquiries in the two respective countries.

Every analyst around the country has expressed a view on the agreement and what it will mean for Australia’s listed companies. Almost every analyst agrees that the signing of the agreement is a great development for Australia, but how great an impact will it have on the bottom line of Australia?

Background

Australia now has free trade agreements with four of its largest five export partners. An agreement was signed with the USA around 10 years ago and agreements have been struck with both Korea and Japan over the last 12 months. Only India remains and it is believed that negotiations are underway to make it happen.

The difference between the existing FTAs and the one with China is that China is currently our largest trading partner, accounting for $151 billion of trade last year.

Key Beneficiaries

The big beneficiaries, in terms of sectors, are agriculture, resources, human services, financial services and outsourcing.

The agriculture industry will benefit from a reduction in tariffs for dairy, beef, sheep meat, wool, seafood, wine, and fruit exports. There are many listed opportunities in this space, particularly Australian Agricultural Company Ltd (ASX: AAC) and Bega Cheese Ltd (ASX: BGA).

Resources companies will benefit from a 3% reduction in coking coal tariffs and a 6% reduction in thermal coal tariffs. This will benefit the main coal producers Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and WHITEHAVEN COAL LIMITED (ASX: WHC).

Health and aged care providers will now be allowed to establish healthcare facilities in China. Ramsay Health Care Limited (ASX: RHC) is already present in many Asian countries and has flagged a new joint venture in China.

Financial and construction companies will have greater flexibility to work in China. Australia and New Zealand Banking Group (ASX: ANZ) and Lend Lease Group (ASX: LLC) are two companies that already have a presence in the country and will be a step ahead of competitors.

Finally, it will be interesting to see if many Australian companies utilise Chinese labour more than they have in the past.

Where to Invest?

The most important factor to remember here is that the free trade agreement is not going to suddenly cause a poor company to become a quality company. Many of the concessions will be phased in over two to three years, and the companies that are already market leaders will benefit the most.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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