China risks rise for Australian companies

Relations between global superpower China and key trading partner Australia are at a low ebb. In recent years, Australia has moved to curb foreign interference in its political process, banned Chinese tech giant Huawei from its 5G network, and called for an investigation into the outbreak of the Covid-19 pandemic. The actions have angered China and subsequently caused a freezing in relations, trade, and friendly diplomacy between the two nations. 

The row continues to escalate. China has banned Australian journalists, introduced tariffs on Australian barley, told spinning mills to stop buying Australian cotton, and launched an investigation into the nation’s wine producers over “dumping”. China has also held up wine and lobster at customs, and warned tourists and students against travelling to Australia, as relations continue to sour.

On the ground in Australia, businesses are struggling to predict the potential damage and fallout from these rising political risks. China has shown it is willing to hit different sectors without warning, leaving Australian producers scrambling to preserve their revenue at short notice. With no end to the dispute in sight, risk managers in the country face difficulties navigating political risks and mitigating the impact to their organisations.

Australia-based risk analyst Chris Corless believes companies need to get an understanding around their exposure to China: “If there is the potential for a catastrophic change in your business due to uncertainty related to China then its likely time to see how you can hedge this by opening up ties and business relations to other countries preferably ones that are not greatly influenced by China,” he adds.

This may be more difficult in some export industries, he adds: “The challenge with this, of course, is that these sorts of strategic shifts can take time and in some cases might be nearly impossible in the short term. Iron ore being one potentially as not every country has the steel-making capacity that China does.”

Larger companies may wish to engage government and public authorities, Corless adds.

“I suppose if you are big enough, you need to work to help the Australian government understand the implications of frosty trade relations with China and what that means in terms of jobs, taxes and royalties. Making it clear what’s at stake if relationships continue to sour is important.”

Julia Coym, associate director in Control Risks’ global risk analysis practice, based in Shanghai, says risk managers need to focus on variables they can control and affect.

Understand the real source of your risk and understand the interests of your business partners, regulators and other stakeholders. While this sounds obvious, it is easy to be distracted by the headlines and view any incident through that spectrum,” she says.

“When companies assume their risks are political, they often believe there is little they can do to mitigate that risk, when in fact they should be focusing on their regulatory and operational challenges, which in turn would mitigate their political risk exposure.”

Coym expects China-Australia tensions “to remain elevated” in the coming year, with different sectors poised to experience different levels of disruption.

“While agricultural commodities are more likely to face import disruption, technology companies are more likely to face reputational risks linked to the politicisation of data,” she adds.

Coym believes corporate risk managers are beginning to take “a more strategic approach to political risk”, “rather than just responding to disruptions as they occur”: “Companies are increasingly integrating geopolitical scenarios into their five-year business strategies, and reviewing whether the strategy and risk functions they have in place are adequate to forecast, prepare, monitor and respond to the changing realities.”

According to Coym, navigating complex geopolitical risks will become the norm for international businesses, raising operational, legal, and financial challenges.

“Companies will not be able to predict every disruption, but they can prepare to respond more quickly when they do occur, preventing a major crisis. This would include not just ensuring crisis management plans and training are up to date, but also reviewing communications strategies and engagement plans with key stakeholders,” she adds.