Towards 2020: The Next Decade of
Australia-China Economic Cooperation
Speech by Ambassador: Flinders-Nankai Conference,
Tianjin, Sunday 7 November
Introduction
Vice Mayor Rèn Xuéfēng, Chancellor Stephen Gerlach, Vice Chancellor Michael Barber, Vice President Tóng Jiādòng, other distinguished guests.
Thank you very much for the opportunity to speak at today’s conference.
Having received a guest professorship at Nankai last summer, I am delighted to be back at my university for this very special occasion.
I would first like to congratulate Nankai and Flinders Universities on their cooperation over the past decade. I understand more than 1500 students have graduated from Nankai-Flinders joint Masters programs, an extremely successful model that I hope will be emulated by other universities from our two countries in the years ahead.
I always welcome the opportunity to travel down to Tianjin on the high-speed train, as I did this morning. Departing from the very impressive Beijing South Railway station and then, just 30 minutes later, encountering the ever-changing skyline of Tianjin, one is always reminded of the rapid pace at which China is growing.
As China continues its development and returns to its historical status as a major economic power, the impact on the region and the rest of the world will be significant.
And I would argue that few places will feel this economic impact more than will Australia.
Indeed, the importance Australia places on its relationship with China was demonstrated clearly last week, when four senior Cabinet Ministers visited the country in the space of just five days.
What I would like to do today is outline how I see the Australia-China trade and investment relationship developing over the next decade, and identify some opportunities for integrating with an economy that, by 2020, will be at least two to three times larger than it is today.
The past 10 years
But first, a quick look back at what has happened to Australia’s commercial relationship with China over the past 10 years.
At the beginning of this decade, Australia’s total trade with China was worth A$14 billion, making it our fifth largest trading partner behind Japan, the US, UK and even New Zealand.
In just 10 years two-way trade has increased six-fold to $A85 billion, making China by far our largest trading partner.
More significantly than that, China overtook Japan to become for the first time our largest export market, a status it will retain for all time. There is not one country on earth that will overtake China as our largest export market in the future.
As you would be aware, much of the rapid growth in the bilateral relationship has centred around Australia’s ability to supply the raw materials needed for China’s double-digit growth over the past ten years.
For example, Australia’s coal exports to China increased from A$116 million in 2000 to A$5.6 billion last year, while our exports of iron ore to China increased from just A$1 billion to A$22 billion over the same period.
Australia now provides about 40 percent of the iron ore used in China’s ever-expanding steel industry, and we are the largest supplier of other key strategic inputs such as coal, wool and LNG.
China’s economic importance to Australia can be seen in the fact that, over the first eight months of this year, China had taken 24 percent of Australia’s total merchandise exports.
On the safe assumption that China will continue growing at a faster rate than our other major trading partners, we could by 2020 be looking at a situation where China takes a proportion of our exports not seen since the 1950s when the UK, before joining the European Common Market, regularly accounted for one-third of our merchandise exports.
The growth in Australia’s services exports to China has been similarly impressive. Last year, China overtook the UK to become Australia’s second-largest services export market.
Ten years ago, 15,000 Chinese students were enrolled in Australian tertiary institutions – that was fewer than came from countries such as Singapore, Malaysia and Indonesia. Last year, over 150,000 Chinese students enrolled to study in our country – making China easily the most important source of foreign students in Australia.
And finally, the Australia-China investment relationship has grown rapidly over the past decade, with Australia an ever-growing focus for investment from Chinese enterprises.
Between 2004-2009, Australia accounted for about 20 percent of China’s total outbound investment.
And in the past three years alone, Australia has approved over 200 Chinese investment applications worth about A$60 billion.
Towards 2020 – the next 10 years
Therefore, the reality is that China has already become by far the dominant external economic force in Australia’s national life.
While there is a growing awareness within Australia of China’s rise – even a casual observer could not fail to notice the increasing number of China-related stories in our news media – I am not sure that it is fully understood just how transformative China’s rise will be for Australia and the broader international community.
We tend to view China’s current growth trajectory through the prism of Japan’s post-war growth, or that of the Asian Tigers of Hong Kong, Singapore, South Korea and Taiwan.
But China is a different case because of the sheer scale involved in its economic development.
This size not only means that we struggle to come to terms conceptually with China’s economic rise, but also that miscalculations which we might make now about its economic development, and how best to engage with China, can have significant long-term consequences for Australia.
At present, China’s economy is approximately one-third the size of the US’, while its per capita income about one-tenth that of the US.
But this gap is closing quickly. Based on a relatively conservative forecast of average real GDP growth of 7.5 percent over the next decade, by 2020 China’s economy will be almost three times the size it is today, and closing in on the US as world’s largest.
Therefore, the base-line assumption for corporate and national policy planning over the next decade should be a Chinese economy about three times the size it is today.
By 2020, the massive infrastructure expansion we are seeing in China today will have spread further throughout the country to include many third and fourth-tier cities.
A further 100 million people – or five times the total population of Australia - will by 2020 have migrated to urban areas, and joined China’s ever-growing middle classes. This will continue to drive demand for housing, utilities, commercial and social infrastructure, and of course transport.
The most obvious implication of this for Australia is that China’s demand for our commodities will continue to rise for a very long time to come.
And just as it has for the past decade, resources will continue to underpin the bilateral trade and investment relationship in the decade ahead.
But we must not use our natural complementarities in this sector as an excuse to rest on our laurels and let the next decade of Australia-China relations take care of itself.
China’s development path over the next 10 years will offer many opportunities to broaden and deepen the bilateral relationship, and it is up to business and government in both countries to lock in these gains at an early stage.
I would like to now outline some areas in which we can boost bilateral economic cooperation in the decade ahead, and offer a few specific examples of how this might be done.
FTA
The first, and perhaps most obvious, step we can take to strengthen bilateral trade and investment over the next 10 years is through conclusion of the Free Trade Agreement negotiations that have been underway since 2005.
Australian and Chinese Leaders remain publicly committed to concluding a high quality and mutually beneficial agreement.
Yet this high-level political will has unfortunately rarely translated into breakthroughs at the level of negotiating officials.
This reflects the tough nature of such negotiations – both countries have their areas of sensitivity, and movement in such areas will be difficult.
Yet if both sides can show the necessary flexibility for an agreement to be concluded, the benefits are obvious.
With bilateral trade growing at an already impressive rate, it might be tempting to think an FTA is unnecessary. But I think such an approach is wrong-headed.
There remain many, many examples in which greater market access for Australian goods and services in China – be it our high quality agricultural goods such as dairy products and wine, our mining services, our financial products – which will benefit people in both our countries.
And I’m sure Chinese officials can make similar arguments regarding entry into the Australian market.
Importantly, an FTA can also provide a foundation for the establishment of a long-term, mutually beneficial investment relationship, providing greater certainty for investors from our two countries.
As I mentioned before, since November 2007, the Australian Government has approved over 200 Chinese investment applications.
Of these, only six have been subject to undertakings, amendments or conditions designed to protect the national interest.
These numbers are well known to Chinese officials. But there nonetheless remains a perception that barriers exist. An investment framework as part of an FTA could play an important role in clarifying and resolving this issue to both countries’ long-term benefit.
Of course, we would also seek under such a framework opportunities for an expansion of Australian investment in China, which today still faces many substantial regulatory barriers.
Integrated iron ore & steel trade
Another goal we should aim for over the next decade is a more integrated iron ore and steel trade between our two countries.
This trade has been a success story of the Australia-China relationship, reflected in the first Chinese investment ever to be made in Australia, the Channar Iron Ore Joint Venture in the Pilbara, which we entered into in 1987.
But it also occasionally presents challenges for the bilateral relationship. This is primarily because, while Australia’s iron ore companies mine and quite properly market their products to maximise shareholder value, the Chinese Government views iron ore as an essential strategic resource.
One way of dealing with this challenge is to look at ways this trade – already mutually beneficial – can be made even more so.
For example, the expansion of Australia’s mining industry and the corresponding increase in demand for mining equipment and infrastructure is helping to put China’s heavy industry manufacturers on the world map.
All of Australia’s major mining companies source mining, processing and infrastructure equipment from China. This market is worth billions of dollars in total, and is growing strongly.
Indeed Australia is now one of, if not the biggest, markets in the world for resources and energy machinery and equipment. I hope this is something that manufacturers in Tianjin are looking at.
Rio Tinto, for example, completed an order of 2,500 railcars from the Qiqihar Railway Company in 2009. This order was one of Rio Tinto’s largest from anywhere in the world.
And Fortescue Metals Group , also based in the Pilbara region of Australia, purchased iron ore stacking equipment from the Dalian Heavy Metals Company worth A$300 million, and rail steel from Ansteel to service the heaviest haul railway line in the world.
The importance of creating a shared value chain between our two economies in the iron ore and steel trade is why, at the China Iron & Steel Association national conference in Dalian in September, I raised the prospect of China one day developing steel production in Australia.
Now that Chinese companies have begun to invest in magnetite projects in Australia, there should be scope to consider the potential of going a step further into downstream processing.
While Australia does have higher labour costs than China, which would impact mainly on the capital cost during construction phase, we can offer potential savings on the energy side and greenhouse gas side.
This would fit well with the overall restructuring of China’s steel sector, and offer the potential for China to gain access to new steel export markets in Asia.
Alternative steel making technologies, and shipping steel, rather than iron ore, would also lead to lower carbon emissions, an important consideration given the likelihood of an increasingly carbon-constrained world in the future.
Of course, this process raises a number of challenges, and there are many other issues which would need to be taken into account. But I think it should be raised in order to provide food for thought about possible next steps in the development and integration of the Australian and Chinese iron ore and steel industries.
And with two major steel producers of our own in Australia, a sophisticated steel distribution channel and a highly capable fabrication and engineering sector, there may also be opportunities to pursue collaboration between China and Australia’s steel industries in a range of other value-added areas.
Services sector and bilateral RMB trade settlement
As I noted earlier, bilateral trade in services has grown strongly over the past decade, to the point that China is now Australia’s second largest services export market.
But the trade still tends to be concentrated around education and tourism.
There are in fact many more opportunities to expand and integrate the services trade between our countries.
This fits in with Australia’s overarching goal of making services a key focus of our international trade diplomacy efforts, as outlined this week by Australia’s new Trade Minister Craig Emerson, when he visited China.
Just as there are deep complementarities in our bilateral merchandise trade, so there are in our services trade.
The need to develop a dynamic, modern services sector has been identified by China’s leadership as central to its next phase of economic and social development, and will feature prominently in the 12th Five Year Plan now being formulated, and to be released at the National People’s Congres in March next year.
Australia has world-class expertise in areas such as financial services – seen here through ANZ’s 20 percent stake in Tianjin City Commercial Bank - legal and professional services, and architecture and urban planning. Australian companies can bring these skills to China for the benefit of partner companies and consumers, yet – unlike some US, European and Japanese giants - are not of a size or scale to threaten the market position of China’s own companies.
But numerous regulatory barriers still stand in the way of such cooperation.
We are working hard to see if such restrictions can be eased as part of a future FTA.
At the same time, China may wish to consider improved access for Australian companies looking to invest in certain provinces, for example as part of the overarching Western Development Strategy.
Certainly, when I have visited China’s western provinces, officials there have expressed great interest in attracting investment from Australian financial institutions. They realise that the expertise of Australian firms in areas such as agricultural banking, small and medium enterprise finance and household wealth creation and management would provide valuable support for economic development efforts in China’s less wealthy areas.
A recent development which potentially paves the way for more seamless integration of our financial services sectors, and indeed our trading relationship more broadly, is increased international use of the Chinese currency, particularly the use of renminbi for trade settlement.
This presents exciting opportunities for Australian companies who do substantial business with China.
For example, there is now no regulatory barrier stopping an Australian mining company receiving payments in RMB from a Chinese customer- or raising RMB capital in Hong Kong - and using this to pay for RMB purchases of mining equipment from Chinese companies.
This reduces foreign exchange risks and currency transaction costs. It would also provide new business opportunities not just for Australian banks in China, but also for Chinese banks in Australia.
Again, costs and benefits of moving towards full AUD-RMB convertibility need to be worked through by regulators and the companies themselves. But it is a conversation that I think should begin now, so that we are well placed to take advantage of steady march of the RMB towards full convertibility.
Conclusion
So these are just a few areas in which Australia and China can seek to expand and benefit bilateral economic cooperation in the years ahead, bringing benefits to Australia while also supporting China’s re-emergence as a global economic power.
I am conscious that today – for reasons of time - I have not touched on the possibilities for bilateral cooperation in the area of clean energy and environment, another realm in which I foresee increased interdependence in the next decade. Perhaps that can be a topic for my next speech at Nankai.
The key point I hope to leave with you today is that, first, Australians are comfortable with the reality of China’s return to its historical status as a great power. There is an understanding in the Australian community that China’s rapid economic development has brought substantial benefits to Australia, and that as China grows into the future, so do we in Australia.
Second, we need to think in an innovative way now about how to position ourselves favourably for China’s development over the next 10 years, as well as avoid any pitfalls from miscalculations surrounding China’s rise.
If we keep asking ourselves the question – what will China look like in 2020? - and use this as the starting point for our relationship over the next decade, I am very confident that we can build on the existing strong relationship in ways that advance the national interests of both countries.
Thank you.