Speech to CEDA by Dr Geoff Raby, Australian Ambassador to China
Perth
22 June 2011
Thank you for the introduction, ladies and gentlemen, old friends and new:
I’m delighted to be back in Perth.
And I am equally delighted to note a strong China-focus in Perth in coming weeks, with the Boao Forum meeting here on 11-12 July, under the theme ‘Resources, Environment, Development.
Which I think aptly captures many of Australia’s key interests with China.
And importantly, this will be the first time the Boao Forum will hold a conference in Australia.
The forum has an impressive range of Chinese representatives, including 150 businesspeople, former Vice Premier Zeng Peiyan, and National Energy Agency Head Zhang Guobao.
There really is nowhere in Australia more fitting to speak about China than here in Western Australia.
Last year WA provided 70 percent of all Australian merchandise exports to China.
And, this probably deserves more attention, but WA’s exports to China are just under a half of all US merchandise exports to China. On a per capita basis, WA’s exports to China are now around $20 000/year – a level I believe is unprecedented in Australia.
There have also been encouraging developments at the people-to-people level – in recent months we have seen two WA cities tie up sister city relationships with China.
Equally, WA has an excellent record of high-level engagement with China.
The number of senior delegations sent to China, and the number of delegations from China hosted in WA, is a very good sign of the seriousness with which WA understands the shared interests in promoting closer and stronger ties with China.
And, last but not least, of course I feel like an honorary Western Australian – given that the previous six Australian Ambassadors to China all hailed from here.
I applaud the efforts by CEDA and other key public policy bodies to promote public discourse on China.
And in particular, promoting discussion on the opportunities and challenges facing Australia-China relations.
I have no doubt that in a decade’s time we will look back at this period in history and wonder why there was any doubt about China’s position in Australia’s future.
As my four and half year term as Ambassador to China comes to an end in August, today is a good opportunity to reflect on some observations of China - both during the last four and half years, and more broadly since my very first posting to China in the mid-1980s.
I will also attempt some crystal ball gazing - to make some broad predictions about the future path of the bilateral relationship.
Based on experience, I know this is a risky endeavour.
Fresh in my mind is a prediction I made twenty years ago having visited Guangdong, that Shenzhen would never amount to much.
My engagement with China started in 1986 when I was asked by then-Ambassador Ross Garnaut to leave ONA and start a diplomatic career in Beijing - as the first professional economist posted to an Australian Embassy.
I subsequently established the first Economic Section at the Australian Embassy in Beijing. It is hard to imagine in the context of our current relationship with China, but in the mid-1980s our bilateral engagement was almost entirely focused on political and strategic priorities. And what was supposed to be a one year assignment ended up lasting for the best part of five years.
A key focus for the Chinese Government then was how to manage a partially reformed economy as the economic reform and opening up policies became entrenched.
In an article published at the time on the course of early reform, I termed this “The Neither This Nor That Economy”
It was a time of many unknowns, for both the Chinese Government in trying to work out a future path, and for the limited number of analysts who were studying and researching China’s macro economy in those days.
At the time, the pervading mood among foreign analysts was scepticism about China’s capacity to reform its economy sufficiently to release the inevitable pent up forces for rapid growth and development.
However, the Communist Party didn’t lack the political will to rebuild the country after the destruction, waste and lost decades of previous policy swings. But how to translate this into policy was the big question.
There was a fierce debate internally within the Party about how quickly and in which sectors to wind back central planning. What was to be the balance between directives and incentives? And how to manage the macro economy, especially inflation, when planning instruments were being weakened by the spread of the market?
In the economic debates in the 1980s, Party elder, Chen Yun, father of today’s chairman of the China Development Bank, Chen Yuan, and the brains behind China’s first five-year plan in the mid 50s publicly associated himself with the “bird cage” theory.
This was the notion that the market was a bird which could have some room to fly but only with a space well defined by central planning controls. The more liberal reformers, Hu Yaobang, Zhao Ziyang, wanted a big cage, Chen a small one, and Deng cleverly shifted his positions as political circumstances demanded. None of the prominent policy people wanted to set the bird free in those days.
The partly reformed economy was notoriously difficult to manage, with administrative edicts blunting more conventional economic policy instruments. The brakes were applied when growth surged and then released just as quickly when the pace of growth slackened.
By the late 1980s, inflation had started to take hold but by then political divisions muted policy responses. Dissatisfaction over rising inflation prompted heightened public concerns over corruption and lack of official accountability. June 4 put an end to this period of reform, fast growth and inflation.
Throughout those years leading up to that watershed, I had been viewed by colleagues, fellow economists and the “hard heads” in Canberra as an unbridled optimist with respect to China’s capacity to realise it’s economic growth potential.
I felt my views and assessments were well grounded in my research on and knowledge of the Chinese economy. And the amount of travel to various corners in provincial China I was able to do in my job at the time.
My sunny outlook was, however, sorely tested by the events of June 4 and the immediate aftermath, but at no time did I doubt that China’s economic reforms and open door policies would continue.
In a speech I prepared for my Ambassador in late 1989, we reassured the audience that China’s reforms would continue and measures taken so far would not be rolled back. This speech received wide international coverage at the time.
The Ambassador on return to Beijing was besieged by his colleagues (it was of course a much smaller community in those days), irate that he had the audacity to break with the conventional wisdom that China was retreating into a dark Stalinist corner.
Of course, reform measures and experiments continued throughout those years before Deng made his much publicised trip to Shenzhen in 1992 to again give his imprimatur to these policies.
But from 1992, notwithstanding concerns about, at first, China’s debt burdened state-owned enterprises, and then China’s banking system sagging under a mountain of non-performing loans, and then the country being rent asunder by coastal versus hinterland income inequalities, throughout the 1990s and then the first decade of this century, China continued to grow and grow and grow.
The consistent theme is that the imperative to grow and, by and large to make sure the benefits of growth touch all, to some extent, is so great that poor policy choices (including inaction), when they are made, as inevitably they are at times, are eventually addressed and fixed. This has happened often enough to get the economy to this point - one which was utterly unimaginable back in the late 80s and early 1990s.
Looking back over those years, the irony for me is that no matter how optimistic I may have been, China’s growth performance and all that has come with it in terms of positive social change has far, far, exceed my most optimistic predictions.
China’s leaders have been remarkably adept at steering China’s economy through the reform process of the past thirty years. And in my mind, they have the capacity and ambition to deal with challenges into the future.
Including the medium term challenge of addressing growing imbalances in its economy, with growing consumer and asset price inflation the main symptoms of these imbalances.
China’s macroeconomic levers will need to evolve to ensure the current growth trajectory is sustainable.
Latest data released for May suggest a modest slowing in economic activity in China, as a result of recent policy tightening measures, as well as power shortages and adverse weather conditions.
The most pressing challenge for the leadership is inflation – which hit a 34-month high in May of 5.5%. Of which, food prices rose 11.7% in the year to May, the fifth consecutive month of double digit growth.
The strong CPI figure will increase pressure on authorities to allow for a faster appreciation of the RMB, and is likely to lead to further monetary policy tightening.
But underlying growth momentum remains strong, and a hard landing unlikely.
We expect GDP growth to slow somewhat later this year and next, but to still remain relatively fast.
Arguably, no country has benefited more from China’s rise than Australia. And no country wants to see China’s economic growth sustained more than Australia.
In the last 10 years, two-way trade has increased more than six-fold to just over $100 billion in 2010. China has grown from our fifth largest trading partner to our largest. Our exports to China now account for around 25 percent of total Australian exports – a proportion not seen since Japan in the 1990s. (By way of comparison, Canada is 3% reliant; Japan is 19%; UK is 3% USA is 5%).
Accordingly, China’s adoption of the Twelfth Five Year Plan by the National People’s Congress in March was important, not just for signalling the form of China’s planned development, but also for informing Australia’s engagement with its key trading partner, both now and for the long term.
China’s goal for the 12th Five Year Plan period is to restructure the economy away from today’s vulnerable and unsustainable model of fixed investments and exports towards a domestic consumption model based on more efficient allocation of resources.
The leadership’s objective, as outlined by Premier Wen in his address on the opening day of the Congress, is to pursue the goal of establishing a moderately prosperous society).
Australia has a big role to play in helping China achieve that goal.
Currently China’s household consumption, as a share of GDP, is around 40 percent. This figure reveals what we all know about China’s average consumer: they have low wages, spend little and save a lot.
Most developed countries are the exact opposite. For example, in the United States household consumption makes up around 80 percent of GDP.
The planned transition to a domestic consumer driven economy requires China to:
- increase the number, and change the type, of new jobs created - including by creating more opportunities in the services sector
- lift wages
- and create incentives for Chinese consumers to spend more.
It is interesting to note the emphasis on boosting China’s services sector – and to note that by the end of the 12th Five Year Plan, China’s services sector will have overtaken industry as the largest component of GDP.
Increasing wages will most effectively be achieved by encouraging rural workers to take up urban residence and employment.
A further 100 million people – roughly four times Australia’s total population - will by 2020 have migrated to urban areas, and joined China’s ever-growing middle classes. This will continue to drive demand for new housing, utilities, commercial and social infrastructure, and transport.
The most obvious implication of this for Australia is that China’s demand for our commodities should continue to rise for some 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, notwithstanding the strong services trade.
Our investment relationship will also be a beneficiary.
Over the past three years, more than 230 Chinese investment applications have been approved, worth overA$60 billion, only six with conditions applied. In 2009, China became the 2nd largest source of foreign direct investment applications in Australia, leaping from 6th position previously.
China’s development path over the next 10 years will offer many more opportunities to broaden and deepen our engagement, and it is up to business and government in both countries to seize these opportunities at an early stage.
China in the next five years will increasingly export higher quality, value added products and will also look to import more sophisticated goods and service sector best practice – something for which Australia is renowned.
To some extent we have already moved to supply China’s growing service sector demand
In 2010, China became Australia’s largest services export market (worth A$6 billion)
In 2010 there were more than 150 000 enrolments by Chinese students in Australia. A world away from the 9 000 Chinese that were studying in Australia just ten years earlier.
China has also surpassed the United Kingdom as our most valuable source country for tourism (and fourth overall in absolute visitor numbers).
This growth doesn’t stem only from China’s wealthy eastern seaboard. China’s incredible infrastructure expansion is already multiplying the avenues by which Australia can pursue deeper economic cooperation.
Take for example China’s rapid urbanisation. The geography of this urban transition is extremely important to our understanding of China’s development and what this means for Australia.
The heartland of the next phase of growth is not the wealthy eastern seaboard but inland provinces like Henan; Hubei and Hunan. Most Australians are unfamiliar with these places, but together they represent a combined population of 229 million people and a combined GDP of around $925 billion – roughly the same as Australia’s GDP in 2009.
All of these provincial economies posted double digit growth rates in 2010 and are set to do so again in 2011.
The people living in these provinces are also ‘on the move’, as demonstrated by the 18 million cars sold last year, more than anywhere else in the world. In less than ten years, China’s 175 airports will grow to nearly 250. And 42 new high-speed rail lines are under construction to bring this incredibly efficient form of travel to 90 percent of China’s 1.3 billion people. Including the new Beijing-Shanghai train line, which should be starting operations in the next few days.
My priority as Ambassador has been to foster engagement with decision-makers and businesses in each of China’s 31 provinces as they negotiate the challenges of economic transformation.
And Australia can continue to build on its strengths as China looks overseas for assets, technology and resources to meet both energy demand and environmental targets. As China’s energy consumption and carbon emissions grow, we are building collaboration on clean coal technology to optimise the use of our primary source of energy and minimise its impact on our communities and the global environment.
For example, in 2010, growth in China’s natural gas consumption (18.5%) outstripped that of crude oil (up 12.9%) and coal (up 5.3%). As new projects, including in Queensland’s flourishing coal seam gas sector, come on line, Australia is well placed to supply China’s expanding LNG market. Over the past two years, China’s top three oil and gas companies have in turn struck record-breaking long term contracts with gas projects, providing jobs for thousands of Queenslanders and certainty for the state’s economic development.
In the other direction, 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.
Earlier this year I visited CITIC Heavy Industries in the central province of Henan (a massive province of 100 million people, with about 1 million a year moving from rural to urban areas) to see the manufacturing of huge crushing machines that will be used here in WA.
Indeed, 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.
One of the challenges for us in Australia is to properly grasp the implications of an increasingly prosperous China. To grasp the implications of China’s increased demand for housing, utilities, social and commercial infrastructure and transport.
In essence, the challenge will be for us to think ‘big’.
Next year marks the 40th anniversary of the establishment of diplomatic ties with China.
By the time of our 50th anniversary, China’s economy will be more than twice as big as it is today.
Indeed, China could have overtaken the US as the world’s largest economy.
As I mentioned earlier, around another 100 million people will be living in cities. And for the first time, more Chinese will be living in cities than in rural areas.
Some 100 million Chinese will be travelling overseas each year, and the Chinese tourism market is expected to be worth over $9 billion to Australia (compared to just over $3 billion now).
The RMB could well be a fully convertible international currency.
China will be facing enormous challenges posed by a rapidly ageing society – as the effects of the one-child policy are increasingly felt.
Demand for health services, environmental services, financial services, design and logistics services, to name a few, will be booming.
And our economic engagement with China will have reached new heights.
Having become our largest export market in 2009, no country on earth will now replace China as the largest market for our goods.
Some people nod towards India – but to the extent that India grows, it will redirect some of its current exports – such as iron ore – to its domestic market, creating greater export opportunities for Australia into the Chinese market.
So the challenge for us is how to prepare for this opportunity and emerging reality.
How to become ‘China literate’. We need to be laying the foundations now for the infrastructure that will be needed in a decade’s time.
We need to consider ideas that might have sounded inconceivable a few short years ago, such as the potential for China to undertake downstream processing in Australia’s steel sector, or the potential for Chinese firms to build large infrastructure projects in Australia; high speed rail, ports, airports and roads. Or for Australian companies to settle transactions in RMB, rather than USD. Or for Australian companies to list on the Shanghai stock exchange and have their shares bought and sold by local Chinese.
As I noted in a recent speech in Beijing to the Australian Institute of Company Directors, one of the things that has so surprised me in my time in Beijing has been the number of senior figures in business or public life who were making their very first visit to China only after they had already achieved high office in Australia.
While I would be the first to agree that, in many ways, the more China changes the more it stays the same with respect to social and political organization, nothing can replace the first-hand experience of seeing the tremendous changes in people’s lives of the past decade of super-charged economic growth.
Similarly, we need to view China’s booming provinces with the same respect that we engage with many major economies around the world.
As I mentioned earlier, the heartland of the next phase of growth is not the wealthy eastern seaboard but inland provinces. While once it would have been enough to visit Beijing or Shanghai, today rapid economic growth has spread across the country. It is almost irresponsible these days to zip-in and zip-out of these cities, ignoring what is occurring in places that most people in Australia have not heard of but which are major economic entities in their own right.
During my time as Ambassador, I have made it one of my priorities on behalf of Australia to visit all of China’s 31 provinces in an official capacity. Of course, I’ve visited many frequently, both officially and privately as a tourist.
If a province like Guangdong were a standalone country, it would be one of Australia’s top ten trading partner in the world. About a year ago, I had a meeting and dinner with the Governor of Shandong Province which has a population of some 94 million. Our discussions went well and so did the drinking of the mandatory white spirits during the course of the dinner. In the end we spent over three and half hours together. On our way back to the hotel afterwards I said to my staff this was better than spending this time with a leader of a major European country and – in view of our extensive commercial interests – probably worth more to Australia.
Recent visits by both the Foreign and Trade Ministers have made some important inroads in this direction -with visits to areas outside of Beijing and Shanghai.
And in August, both will lead a joint trade mission to five cities in the space of a week.
I sincerely hope that by the time we celebrate the 50th anniversary of our bilateral relationship that Australia’s diplomatic footprint in China would have expanded considerably from its current size – noting that we haven’t opened a new consulate in China since the mid-1990s.
In conclusion, Australia needs to continue to expand our discourse on China; we need to venture deeper into China’s markets and provinces; we need to broaden our fields of cooperation; and to strengthen the traditional spheres of trade and foster stronger economic ties in emerging sectors.
We have an excellent political relationship with China and a solid foundation for bolstering our future ties.
Provided we boost our China literacy and China readiness, Australia will be able to realise the tremendous opportunities from China’s historic transformation.