Niesche: Regulation hampers Aus-China trade

When the Australia-China free trade deal came in to effect in December 2015, it was supposed to ease the way for Aussie food makers.

But the woes of dairy producers Bellamy's Organic and Parmalat over the past week have demonstrated trading with China is anything but easy and that more than falling tariffs are needed to make it in China.

More than anything, the suspension of the import licences for parts of the Bellamy's and Parmalat businesses demonstrates the capriciousness of Chinese regulators and underscores that regulation is the biggest risk for any foreigner doing business in China.

It's a point made by Kahtmandu founder and Bellamy's largest shareholders Jan Cameron, who last week bemoaned the power Chinese authorities had over the fate of local businesses, saying: "It is concerning the Chinese can really be in a such a powerful position over our economy that they can turn things on and off seemingly at random."

Bellamy's problems began with the suspension by Chinese regulators of the licence its Camperdown Powder canning facility in Victoria needed to export product to China.

The suspension came just three days after Bellamy's acquired the facility and apparently is the result of an anonymous compliant, but exactly why the all-powerful Certification and Accreditation Administration of the People's Republic of China (CNCA) has suspended it is a mystery.

Global dairy company Parmalat has also suffered at the whim of Chinese regulators, having the export licence for its fresh milk factory in South Australia suspended.

At least it knows why. CNCA said Parmalat was overheating its milk during pasteurisation. Little matter that the heating meets standards accepted everywhere else in the world, China has decided to apply its own standards.

As we are always being told, Chinese consumers have a huge desire for Western foods. This applies especially to infant formula in the wake of the 2008 scandal in which Chinese milk was deliberately adulterated with the coal by-product melamine, leaving 300,000 infants ill and six dead. Beijing has progressively tightened its food safety requirements, but many Chinese consumers don't want to risk feeding their babies the local product.

Australia and New Zealand have the produce to meet the demand, but as tariffs on agricultural and food products exported to China are being progressively reduced, regulators are throwing up non-tariff barriers.

It's not at all clear what is underlying these decisions.

One possibility for the licence suspensions is to give Chinese companies a bit of help.
Another possibility is that there is no overarching plan by Chinese regulators, instead they are merely operating haphazardly. Certainly, foreigners who export to China say rules can change overnight for no apparent reason and are applied differently depending on which port a company uses to import products.

In fact, it's not just food exporters who are being hit by changing rules. The American Chamber of Commerce in Shanghai's 2017 China Business Report released earlier this month found that while most US exporters to China were making more money, there were becoming increasingly concerned about market access, industrial policies and basic fairness. The report said 56 per cent of respondents believe Chinese government policy favours local companies over foreign companies and 60 per cent believe the regulatory environment lacks transparency.

In fact, some were rethinking their investments in China.

This isn't the first time Bellamy's has been caught out by Chinese regulators. Its sales and shares fell sharply last year after it was taken by surprise the laws governing the imports of baby formula suddenly changed.

The A$28.5 million (NZ$30.4m) Camperdown acquisition wasn't huge in terms of money, and sales relying on the suspended licence account for only 16 per cent of the company's total sales.

Importantly, the suspension does not affect the sale of the company's organic baby and toddler formula products, which are manufactured by Fonterra and Tatura Milk under their respective CNCA licences.

Nonetheless Camperdown plays a key role in Bellamy's turnaround strategy.

The company was hoping to leverage off Camperdown's CNCA licence to achieve registration of some of its own products, mitigate the risk of not owning and being fully in control of parts of the supply chain, and create opportunities to expand into other areas such as foods.

Certainly the suspension of the licence will further undermine confidence in Bellamy's, whose shares had already been pummelled in the past few months as investors wondered if the company was on top of Chinese regulations. The company's shares are currently suspended, so we don't know yet how harshly investors will view this latest setback.

It will also damage confidence in China, and in Australian companies' ability to make a success of exporting to the world's most populous nation. And ultimately, if as a result some Australian companies decide they will hold back, and just paddle around in Australia and New Zealand and not have a go at China, that damages Australia too.