Dr Geoff Raby, Australian Ambassador to China
Speech to WA Chamber of Commerce and Industry
Tuesday 9 February 2010, Perth
Salutations
Thank you for that kind introduction David (David MacLennan)
Mr Peter Hood (President WA CCI), Professor Robson (Vice Chancellor UWA), Consul-General Chern (USA), Consul-General Bastari (Indonesia), distinguished guests, ladies and gentlemen.
Introduction
It gives me great pleasure to be back in Western Australia again.
The last time I was in Perth was in October 2008.
At that time, the world was sliding rapidly into economic recession, and even China was not immune to the impact of the global financial crisis.
At that time, to this very group, I said that China would achieve growth in the order of 8 percent in 2009.
We were confident in our assessment then and did not modify it even when the IMF and World Bank substantially lowered their forecasts in January 2009.
I said at the time that China had the means and political will and necessity to do whatever it would take to stimulate its economy.
Soon after, China implemented a massive stimulus package, unleashing a huge amount of liquidity into its economy, and lifting GDP growth to 8.7 percent in 2009, year-on-year.
This, of course, has been good news for Australia and especially Western Australia, which, perhaps more than any other Australian state, has benefitted enormously from China’s rapid economic growth.
Macro update and medium-term outlook
But it is worth turning the clock back and recalling just how much China had been affected by the global recession.
China’s export-led growth engine faltered, with exports falling 17.5 percent year-on-year in January 2009.
Industrial output in the opening two months of last year fell from 15 % in 2008 to just four percent, and the purchasing managers’ index for China’s manufacturing sector - an indicator of economic activity - was sitting near historic lows (38 in November 2008).
First quarter growth was down to 6.1 percent, the lowest Q1 growth since quarterly GDP figures started to be compiled in 1992.
And the Chinese Government estimated that over 20 million rural migrant workers had lost their jobs in coastal cities as result of the GFEC.
So when Premier Wen told the National People’s Congress last March that China would achieve 8 percent GDP growth in 2009, his forecast appeared optimistic to many observers.
Fast forward a year and China’s short-term growth prospects appear sound.
Half of the central government’s fiscal stimulus is still to be rolled out and the country is awash in liquidity thanks to RMB 9.6 trillion in new bank loans issued by China’s state-owned banks in 2009.
China is again likely to achieve GDP growth of between 8-9 percent in 2010. Growth should be particularly robust in the first half of this year, with a moderation to be expected in the second half as stimulus is drawn down and monetary policy is tightened.
That is not to say that the stimulus package has been without its critics.
Concerns have been raised about the advance of the state-sector at the expense of private firms, and the consequences this will have for innovation and productivity in China.
Others worry about the impact of China’s huge credit surge, including that it has been directed at unproductive investments, and could result in a jump in non-performing loans.
China is faced with significant industrial overcapacity in a range of sectors. In the steel sector, for example, it is estimated that China has over 100 million tonnes of excess capacity.
Indeed, with such a rapid expansion of credit, the challenge for China in 2010 is not that growth will be too slow, but rather that it might be too rapid.
Inflation may emerge as an issue in 2010, with CPI reaching a higher than expected 1.9 percent in December.
Asset price bubbles may be appearing, particularly in China’s surging property and stock markets.
The government has already begun taking steps to address concerns over inflation and excess liquidity, using measures such as increased reserve requirement ratios to soak up excessive liquidity.
A number of commentators, both within and outside of China, are concerned that these tightening measures are too little and believe there are more to come.
Others worry that monetary and fiscal policy instruments are still too weak on their own and will need to be bolstered by more direct interventions through administrative means.
Resort to such measures can be expected if inflation rises too sharply, particularly above the Government’s target of 3-4 percent.
The risk here is that such measures tend to be blunt instruments. In the past such interventions have led to overshooting on the downside.
Looking forward, a number of challenges have emerged which complicate the outlook for China’s economy over the medium term.
On the one hand, China’s ongoing processes of industrialisation and urbanisation still have a long time to run – this is obvious to any visitor who ventures beyond Beijing, Shanghai and other developed eastern cities.
This will continue to unleash pent up demand and drive productivity gains over the next decade or more.
But on the other hand, as acknowledged by China’s Government, economic growth has become quite unbalanced.
This trend has been exacerbated by the massive amounts of government investment pumped into the economy through the stimulus package.
Investment (primarily by the government) accounted for 8 percentage points of China’s 8.7 percent GDP growth in 2009 – 92 percent of final growth.
China’s leaders now talk frequently of the need to transfer to a more consumption-driven model of economic growth.
But tackling the structural reasons behind these imbalances is proving difficult.
The government has increased substantially investment in social security under the Eleventh Five Year Plan (2006-10), and announced last year further important reforms to boost health insurance coverage and make pensions portable across provincial borders.
These will feature prominently in China’s Twelfth Five Year Plan, which is now being formulated.
But this is only part of the solution, and such policy reforms will take effect only slowly.
Lifting China’s household consumption as a share of GDP will also require reforms to increase wages relative to corporate profits, and liberalising China’s services sector by allowing more foreign competition and reducing the privileged position of China’s SOEs.
It will also require financial sector, including capital market reform, to provide more liquid forms of savings that yield attractive returns, and a greater variety of flexible consumer credit instruments.
And ultimately allowing the RMB to appreciate, making it easier for China’s growing middle-class to purchase imported goods and services.
Until this rebalancing is begun in earnest, China will remain dependent on shifting combinations of high levels of government investment – which admittedly can probably continue for some time given the government’s strong fiscal position – and the rest of the world continuing to buy its exports.
But keeping these very real challenges in mind, the sheer tenacity of China’s economic story to date is striking.
China’s leaders have been remarkably adept at steering China’s economy through the reform process of the past thirty years, and have a formidable array of tools at their disposal to manage problems as they arise.
So while China’s policy-makers will certainly be tested as they seek to shape the next phase of China’s growth, the challenges they face are well within the range of those previously faced and surmounted.
And all this, of course, is now of the utmost importance for Australia.
Bilateral trade and investment
China today is Australia’s most significant commercial relationship.
It is our largest trading partner, and last year it became our largest export market, based on goods exports over the calendar year.
Our two-way trade may reach $100 billion this year, almost doubling what it was when I first started as Ambassador.
And a far cry from ten years ago, when two-way trade was worth just $10 billion.
China’s thirst for Australia’s mineral and energy resources is seemingly unquenchable.
This has led China to become increasingly active as an investor Australia’s resources sector, which is something that we welcome and encourage.
Australian firms, too, are keen to increase their presence in China.
We hope that we can bring our two economies even closer together through the conclusion of a bilateral FTA.
Progress on the FTA has been difficult, but both sides have clearly stated their desire to conclude a comprehensive, high-quality agreement.
In the meantime, there is much we can do to promote closer integration through pursuing what Minister Crean has termed a ‘second track’ commercial strategy, aimed at fostering business-to-business cooperation.
In Yunnan province, for example, we have signed an agreement for cooperation on agribusiness.
This presents great opportunities for Australia to showcase its expertise in a range of areas, including horticulture, dairy, beef and wool.
And in Hubei province, we have agreed to support expanded cooperation in the urban development sector, including in green building.
China’s ‘green sector’ is poised to grow rapidly in coming years, and is estimated to be worth US$500 billion to $1 trillion by 2013.
This opens up possibilities in a range of sectors, including clean and renewable energy, transportation, and waste and water management.
And there are many other sectors where Australia has much to offer, such as mining, autos, wine, financial services, and education and training.
Closer to home, Perth and Chengdu have recently agreed on a sister-city relationship.
Chengdu is the capital city of Sichuan, a province of 88 million people, currently growing at 14.5 percent per annum.
This relationship will provide a framework for Western Australian businesses to position themselves in this big, dynamic region of China.
It is noteworthy that the Australian Foreign Minister, himself a proud Western Australian, began his first official visit to China as Foreign Minister last year in Chengdu.
Conclusion
My key message today is that the outlook for China’s economy remains robust.
But global economic conditions are still uncertain and fluid.
And like any rapidly developing economy, both short and medium term economic management must constantly deal with significant and hard challenges.
China’s track record in doing so is remarkable.
In the face of such difficulties, this augurs well for Australia in view of our ever deepening ties to China’s economy.
But we need to be mindful not to take this for granted.
Now that growth and rapid industrialisation have spread to the far corners of this vast and complex country, we need to work even harder at building at all levels the relationships that will advance our interests into the future.
That is why, for example, I encourage Australian ministers, officials, and business executives to travel widely to see what is happening in China for themselves.
We must also remember that the rest of the world is beating a path to China’s doors.
So the Shanghai Expo this year will provide an important opportunity to showcase Australia and what we have to offer.
We can be proud of the excellent facility the Australian Government has built, acknowledged personally by President Hu Jintao on an inspection tour there just three weeks ago.
Through activities such as the Expo and the upcoming year of Australian Culture in Culture, we can build on the strong people-to-people links we already have, and find new ways of working together that will advance Australia’s interests in China.