The Rise and Rise and Rise of China: Implications for Australia
Speech by Dr Geoff Raby, Australian Ambassador to China
Keynote Address to the Future Summit
24 May 2010
Grand Hyatt, Melbourne
Introduction
It is a great pleasure to be invited to address the Summit Dinner at what is Australia’s premier platform for the discussion of strategic trends and directions.
Looking back at some of the past Summit proceedings, it is interesting to observe how ideas and trends raised in previous years have stood the test of time.
I note, for example, the comments made by the then Shadow Minister for Foreign Affairs and International Security, Kevin Rudd, at the inaugural Future Summit in 2004.
So tonight is a very timely opportunity to continue the policy dialogue on one of, if not the, most important international developments shaping Australia’s future: the continued rise of China as a pre-eminent global economic power within our region.
The last year
But before looking at the future, it is worthwhile looking backing and considering what a difference a year makes!
This time last year we were talking of troubled times, an uncertain future, and doubts about the path to recovery from the GFEC.
Economic growth world-wide had slumped, with the first contraction in global GDP since the 1930s. GDP in the US fell by 6 percent y-on-y in the first quarter of 2009, with 5 million jobs shed in the 12 months following the onset of the GFC.
Even China, coming off five years of turbo-charged growth at rates of between 11 and 13 percent, saw its GDP growth fall sharply to 6.1 percent in the first quarter of 2009, its lowest rate for two decades.
20 million migrant workers were laid off in China’s coastal regions as exports dropped, and industrial output grew by just 2-3 per cent.
So when Premier Wen Jiabao said at the March 2009 National People’s Congress that China would achieve 8 percent growth that year, it was met with considerable scepticism among most foreign economic commentators.
Fast forward a year.
We now know that the GFEC accelerated secular trends, long underway, which were profoundly adjusting the relative weights of the major economies around the world.
Struggling to grasp the extent of China’s transformation
It’s easy to get caught up in the ‘China story’ – how China’s development over the past 30 years has lifted up to 500 million people out of poverty.
How China has recorded an annual average GDP growth of close to 10 per cent for the past three decades.
How China overtook Germany last year as the world’s biggest exporter, and will overtake Japan this year as the world’s second largest economy (if it hasn’t already).
How China has, by market capitalisation, three of the world’s four biggest banks, the world’s two largest insurance companies, and the world’s second largest stock market.
All this is well known. But such has been the speed and scale of China’s Great Transformation that we are struggling to comprehend its implications for us as a country. And in this we’re not alone.
And yet, it is how we as a country come to understand and position ourselves for what is to come as China continues to grow rapidly over the next twenty years and beyond that will be so crucial for Australia’s future.
This evening, I ask you to consider this.
Over the past thirty years, since Deng Xiaoping’s reform and opening policies were adopted, China has had an annual average GDP growth rate of 9.3 per cent.
If, in the next twenty years, China’s GDP grows at an annual rate of 7.7 percent (which, in the absence of either, at this stage, unknown external shocks or the system imploding, is highly likely given China’s still relatively low per capita income) then by 2030 China’s economy will be at least four times the size it is today.
This then should, in my view, be the base-line assumption for corporate and national policy planning – that is, a Chinese economy at least four times the size it is today.
It will then be a China in which hundreds of millions of people will have migrated to the cities, and joined the middle classes. Indeed, nearly half of China’s population is already living in urban areas.
Given the size of China’s mega-cities, it is easy to forget that over half of China’s 1.3 billion people still live in rural areas. Over 10 million of these rural residents enter China’s cities each year, driving demand for new housing, utilities, commercial and social infrastructure, and transport.
The massive infrastructure expansion we are seeing in China today will have spread further throughout the country to include the many third and fourth tier cities – the names of nearly all of which will be unknown to most of tonight’s audience.
Per capita consumption (of protein, energy, services, cars, luxury goods) will have continued to rise, approaching today’s developed-country levels. In terms of size and speed, we will never have witnessed anything like this.
Japan’s post-World War Two growth trajectory was fast and seemingly miraculous.
And the four Asian Tigers – Hong Kong, Singapore, South Korea and Taiwan – all experienced rapid growth in the past.But none was as fast, as big, nor sustained for as long as we are seeing in China. It is not surprising, then, that the size and scale of China’s recent industrialisation is something that we are still struggling to come to terms with conceptually.
We are still viewing China’s current trajectory through the prism of Japan’s post-war path, or that of the Asian Tigers. In the scheme of things, this would not be a major miscalculation if we were only debating the future of an average-sized country. So the views we form today, and the assumptions we make now, will have a huge impact on our future path of engagement with China and by implication Australia’s future.
Of course, there are real and significant potential downside risks to this outlook. Not the least of which are environmental. China is currently 68 per cent dependent on coal for primary energy and will continue to be over 60 per cent dependent in twenty years. At that time, an economy of China’s size which is that heavily dependent on coal will scarcely be sustainable without a breakthrough in clean-coal technologies. It is for this reason, as the world’s biggest coal exporter, that the Australian Government has made cooperation with China on developing clean coal technologies a high priority.
Political reform is another potential risk to the quadrupling growth assumption. It is not the place here this evening to take up this hugely complex and yet too often overly simplified subject. However, it is likely that stable enduring forms of political and social organisation may be emerging based on long-standing traditional arrangements, but with rather dated, quaint, nineteenth-century European labels attached, such as “communism” and “socialism”.
Bilateral trade
When looking back, future historians may well see the past year as a defining moment in Australia’s trade relations with China. For the first time in Australia’s history, China became our number one export market for goods. It had earlier become our biggest two-way merchandise trading partner. But not only is China now our biggest market, it is significantly bigger than our 3rd, 4th and 5th markets combined, namely South Korea, India and the United States, respectively.
Now that the curves have crossed, in the absence of an implosion of China’s economy, no other country will replace China as our single biggest goods market.
Although this prospect has received little public comment thus far, it is no small matter. Whether we are comfortable with this or not, the reality now is that China will be the dominant economic force in our national life. It will by no means be our only significant partner, but it will be the single most important one.For its part, China will continue to rely more and more on imports of Australian iron ore to fuel its steel industry – already, about one quarter of all steel produced in China uses Australian iron ore.
Last year, China produced nearly one half of the world’s steel. As its economy continues to grow and its infrastructure continues to develop to meet the needs of its urbanising people, there is little doubt that, over the next two decades, China’s steel sector will continue to expand rapidly.
Although our trade profile with China is relatively narrow, with 85 percent of our merchandise exports coming from the resources sector, last year China overtook the UK to become Australia’s second most important services market. China is also aware of our importance to it as an economic partner.
Last year, we were China’s seventh largest trading partner, and its sixth largest source of imports. And we are China’s main supplier of several key strategic inputs, such as iron ore, coal, and wool and soon to be LNG.
China’s heavy reliance on Australia’s mineral and, increasingly, energy resources is a significant national asset for Australia in our diplomatic dealings with China. It gives us a level of influence well beyond our size in terms of population or geo-strategic importance.
But it also raises new and challenging issues for our diplomacy. This is seen most clearly with iron ore. While private companies mine and quite properly market their products to maximise shareholder value, for the Chinese Government, iron ore is a strategic resource. The steel industry is a key industry for the Chinese Government yet it finds itself today dependent on international markets and beholden to foreign companies for the industry’s essential input.
Until four years ago, China was about 70 per cent self-sufficient in iron ore. Today it relies on international markets for about 60 per cent of its needs. This greatly troubles China’s leaders. For Australia now and even more so in future, it means that we have trade which is, at should be, conducted on a purely commercial basis, but which for the Chinese leadership raises issues of deep strategic concern.
We have to expect that there will be consequences arising from this. These will range from ongoing political pressure on the Australian Government to reassure China over this trade, to developing wherever it can alternative sources of supply, to investing directly in developing resources in Australia.
Investment
Increasingly, two-way investment is becoming an important element in our bilateral engagement, reflecting the growing integration between our economies.
China’s outbound investment has grown significantly in recent years; in 2009, for example, it invested US$43 billion overseas, compared with just US$2.5 billion in 2002.
China’s need for energy and mineral resources has obviously been a key driver behind this. But other factors have also been at play, such as China’s desire to capture more of the manufacturing value chain and gain access to international brands and technology.
China also needs to find alternative sources of investment for its massive foreign exchange reserves.And as everybody knows, Australia has been a growing focus for Chinese investment.
In recent years, Australia has been ranked as the top destination for Chinese outbound investment; between 2004-2009, we accounted for about one-fifth of China’s total outbound investment.
Last year, there was considerable commentary about Chinese investment proposals in Australia’s resources sector and our openness towards Chinese investment.
I have spent a lot of time in Beijing emphasising the facts, which clearly show Australia’s welcoming attitude towards foreign investment, including from China.
That is, providing, of course, that the investment is in Australia's national interest.
Since November 2007, the Australian Government has approved 160 Chinese investment proposals worth nearly $60 billion.
Of these, only five have been subject to undertakings, amendments or conditions designed to protect the national interest.
These messages are being heard and understood in China. But I believe China needs to do more to communicate better its investment plans to the Australian Government and the Australian public.
I am confident that we will also see a broadening of Chinese investment into new areas beyond the resources sector. Of course, we would also like to see an expansion of Australian investment in China, an issue that we are consistently raising with the Chinese Government, including in our FTA negotiations.
China’s economy
A question I am frequently asked as Ambassador is ‘will it continue’? The question refers of course to China’s remarkable economic story of the past three decades.
The outbreak of the GFEC at first seemed to pose a serious challenge to China’s ability to maintain the rapid rate of economic growth that the leadership knows is vital to its political legitimacy.
The notion that China’s economy had de-coupled from the US and EU was exposed as a fallacy, with China’s export sector hit hard by a drop in US and EU household demand.
China’s large holdings of US dollar-denominated assets also demonstrated the extent to which China and the US had walked lock-step into a dangerous situation of economic imbalances.
Some respected forecasters predicted GDP growth in the range of just 5-6 percent for 2009, and the death knell was sounded on China’s era of double-digit growth.
Yet China has already moved beyond the recovery phase post-GFEC to return to high growth rates.
GDP is very likely to once again expand by over 10 percent in 2010. The key concern facing policy makers for the rest of 2010 is not how to maintain growth, but how to prevent overheating and deal with emerging inflationary pressures and asset bubbles.
These downside risks, along with the fact that China’s aggressive response to the GFEC has in fact worsened structural imbalances that threaten medium-term growth, should not be underestimated. And of course there is always the possibility of external shocks that could impact on China’s economic growth.
Nonetheless, as you have no doubt guessed by now, I personally am optimistic about the prospects for the Chinese economy over the next two decades.This is particularly so when I see the immense growth taking place in China’s booming inland provinces, which is being sustained by the extraordinarily rapid development of infrastructure.
Importance of China’s regions
Trade Minister Simon Crean has been a frequent visitor to China since taking office in late 2007 – just last week making his seventh such visit. Mr Crean invariably includes visits to China’s provinces in his itinerary as part of his second-track trade diplomacy – not just focusing on policy outcomes in Beijing, but pushing for commercial outcomes in the regions.
Just last week, he visited two of China’s many dynamic regions – Tianjin, which boasts China’s second highest GDP growth rate; and Shandong, which itself grew 12 percent last year, and is the second most populous province in China with 94 million people. Australia’s two-way trade with Shandong alone last year would have made it our 15th largest trading partner, bigger than our two-way trade with France.
Both of these destinations are already home to a surprisingly diverse range of companies, from well known brands such as ANZ, Westrac and Murray Goulburn to a host of smaller players building important niches in areas such as urban development and clean energy.
And Australia is particularly well regarded in Shandong through its connection with China’s world-famous Tsingtao Beer. Tsingtao Brewery – visited by Mr Crean last week – sources 75 percent of the barley used in its brewing process from Australia.
Also last week at the Australian Expo pavilion in Shanghai, the Trade Minister took our Second-Track trade diplomacy forwarded when he signed an MOU to promote closer cooperation in the auto sector with the Government of Anhui Province.
And of course the Foreign Minister included the Western gateway cities of Chengdu and Chongqing in his itinerary for his first visit to China as Foreign Minister, early last year.
Mr Smith's visit sent a clear message that Australia understood that China was much more than the coastal cities, and that Australia was eager to explore the considerable potential for Australian business in China's west.
But we have really only scratched the surface in terms of potential cooperation with China’s regions and with second and third tier cities and provinces – which are often home to populations greater than the United Kingdom, France or Germany.
Take Jiangsu and Zhejiang provinces. They are akin to Korean-style NICs which have now emerged within China. They are two economic powerhouses, but with enormous potential for growth well into the next decade and beyond. Jiangsu’s current per capita income (US$3000 in 2009) is at the same level as Singapore was in 1977, and the ROK was in 1986. And Zhejiang’s US$3600 - 2009) is at the same level as Singapore was in 1978 and the ROK in 1987. But of course their populations and therefore growth potential are considerably greater than were the NICs.
It is worth noting as well, that on the political dimension, China’s future leaders are increasingly being groomed by spending time out in the provinces as Party leaders. The provincial leaders whom you meet today, may well be tomorrow’s leaders of the entire country.
Infrastructure
Earlier this month I found myself in Datong – a city of just over three million people in the northern province of Shanxi. I have been going to Datong since the mid-1980s, and up until 2007 a visitor to Datong could have been forgiven for thinking they were stuck in a 1980s time warp – the city had hardly changed.
When I went back earlier this month the city was nearly unrecognisable. Hundreds of cranes filled the skyline, in a rush to build new housing and add high-quality urban infrastructure.
This transformation symbolises the next wave of urbanisation coursing through China. The Datong Locomotive Plant is representative of this transformation.
A little more than 20 years ago it was still making steam engines. Train buffs from around the world flocked there to see the world's last steam engine factory. Today, it only produces electric engines, having stopped making diesel engines ten years ago.
Among its products is the world's most powerful engine used on the Da-Qing line, which around the clock transports vast quantities of coal from China's coal heartland at Datong to the eastern sea port of Qinhuangdao.
The Da-Qing line itself was China's first electrified rail line, built with Japanese aid funds in the mid 1980s. The automatic coal handling terminals at the port were China's first and also built with Japanese aid.
At that time in the mid-80s, as a young ONA officer, I went there to study the electrified Da-Qing line with a view that it posed a very real commercial threat to Australia's coal markets in Japan and South Korea and elsewhere in north Asia. But with China’s rapid growth our worries proved to be unfounded. Last year, Australia supplied 40 percent of China’s record coal imports.
The Da-Qing line is one of many transport routes now linking China’s interior with coastal cities and the world beyond.
Over the past few years, China has undergone an expansion of its expressway system unseen since the US’s interstate highway expansion of the 1950s. Between 2001 and 2008, China’s expressways more than trebled in length to 60,000 km, equal to those of Canada, Germany and France combined and rapidly approaching those of the US.
At the moment, many of these expressways are often relatively free of traffic, as China’s car ownership rate (22 cars per 1000 people) remains very low.
But this is changing quickly - China manufactured and sold the most vehicles in the world in 2009 – just under 14 million units. The industry predicts sales of around 15 or even 16 million in 2010.
In 1991, when I left China at the end of my assignment, Australia was producing more cars than all of China.
Plane travel is also increasingly within reach of China’s emerging middle class. China built another six major airports in 2009, bringing the national total to 166.
Under current planning, there will be 244 airports in China by 2020, with over 80 percent of China’s 1.3 billion people living within 100 km of an airport.
However, the clearest example of China’s rapid transport infrastructure development at present is the large-scale expansion of its high-speed rail network.
China is building 42 new high-speed railway lines – totaling 13,000 additional kilometers of track - over the next three years, accessible to about 90 percent of China’s population. By the end of 2012, China's high-speed railway is expected to account for half of the world's total length.
Once this network is complete, China’s major cities will be increasingly integrated: travel between Beijing and Shanghai will be cut from 12 hours to four, and travel between Shanghai and Hong Kong reduced from 18 hours to six.
It is of course debateable whether such infrastructure spending is sustainable.
However, as I said in my speech to the Australia China Business Council in Perth earlier this year, I don’t believe China is at risk of emulating the “bridges to nowhere” phenomenon some other coutries have experienced.
In view of the size of the country and its population, this huge investment in transport infrastructure will contribute to productivity growth for years to come as transport costs fall. Previously relatively isolated provinces – all with populations much bigger than most European countries are now being integrated with the national economy. This brings tremendous opportunities for regional specialisation and hence economies of scale.
Political Setting
For those who deal with China, understanding China’s political system is essential. But China’s political system is quite unfamiliar to us.
I’m sure many of you have encountered the idiosyncrasies of Chinese politics in your business dealings.
It is difficult for those of us from open, accountable, contestable, political systems, to understand China’s political structures and decision-making processes.
It is evident that, as a society, China is much freer now than at any time in the past sixty years.
We are seeing the beginnings of the recognition and protection of individual rights. But these are still early days.
Chinese people are pretty much free to choose where they live, work and how they lead their lives. The urban, affluent, middle classes can be found now in all major cities of China, busily consuming and travelling, including abroad.
A significant development during my time in China has been the energetic embrace of new means of communication - SMS, blogging, twitter.As cynicism and mainly boredom with state-controlled media grow, the young and educated have embraced the internet.And while the Google flare-up has highlighted some of the limits of this freedom, Chinese people have greater access to information than ever before.
We therefore need to put human rights problems in the context of these overall generally positive trends. But it is still early days and concerns remain.
That said, we are still troubled by many aspects of China’s human rights record. And we raise this regularly with the Chinese Government and will continue to do so.
The Prime Minister, in his recent Morrison speech at speech at the ANU called for a more balanced and sophisticated approach to China.
He suggested this new approach needed to go beyond the old binary concepts of either being anti-China or pro-China, which were conceptual relics of the Cold War.
He said this new approach needed to be based on genuine engagement and frank dialogue. It is this new approach that I think will stand us in good stead for the next twenty years of relations with China.
Political relations
As you are no doubt aware, last year saw some challenges in the Australia-China relationship.
When looking at our bilateral relationship with China, however, we really need to put it in the context of China’s rapid development, and its transition to a major world power.
There has not been a time in recent world history when a global economic power has had a political system which stood so far apart from the mainstream of political systems. And unquestionably, China’s international influence now is greater than anyone would have predicted a short ten years ago. In many respects we have all been, including China, caught by surprise.
It is still unclear how China will respond to its newly acquired (or reluctantly accepted) international influence. China is not only unaccustomed to this role, its entire development strategy over the past three decades has been to keep a low profile internationally, while working on its economic development.
With China now the world’s largest exporter, soon to be the world’s second biggest economy, and now the world’s biggest emitter of greenhouse gases, the world will increasingly demand a greater contribution from China to global governance.
Chinese policy makers are unfamiliar with this new terrain, and the increasing demands by the international community for it to play a greater role in addressing the many challenges facing us today.
As Foreign Minister Stephen Smith said in a speech at Fudan University in Shanghai last week, it is hard to think of a single international issue of importance to Australia where China is not a key player on the world stage.
Against the backdrop of this kind of relationship, then, it is only to be expected that the kind of problems that we encountered last year will pop up from time to time.
The important thing is how we respond and manage these concerns.
A lot of work by both governments last year saw the relationship put back on track.
Late last year Executive Vice Premier Li Keqiang visited and had extensive discussions with the Prime Minister. As a result, a forward looking joint statement on the bilateral relationship was issued.
We have also recently hosted a visit by General Guo Boxiong – China’s most senior uniformed PLA officer, for discussions with counterparts on increasing our cooperation.
As all of you with experience in China know only too well, it is important to nurture and work on relationship building - not just when troubles emerge but on an ongoing basis.
So far, this year we have seen several senior-level visits to China, including last week both the Trade Minister and the Foreign Minister, and earlier this year the Minister for Resources, Energy and Tourism to sign Australia’s largest ever export deal.
And we expect more senior-level visits this year, both to promote Australian interests at the Shanghai World Expo, and also to celebrate the “Year of Australia” cultural promotion in China.
It is in both Australia’s and China’s interests to continue to broaden our relationship – efforts that are starting to pay dividends.
During most of my meetings and travels in China, it is rare to encounter a mid or senior level leader who had not had some interaction with Australia or Australians.
Either their children are studying or have studied in Australia, or they or their relatives have visited Australia.
Overwhelmingly their interaction with Australia has been positive, and they talk highly of our social environment and our quality of life.
There is also an ever-expanding ‘Australian alumni’ in China, who are engaged in numerous sectors and play equally important roles as Ambassadors for this country.
With some 140,000 enrolments by Chinese students in Australia last year – a world away from the 9,000 Chinese that were studying in Australia just ten years earlier – we expect this connection with Australia to continue to deepen.
We also saw more than 350 000 Chinese tourists visit Australia last year. And we have more than 75 sister city/state relationships (including the oldest sister city relationship we enjoy with China – the Melbourne-Tianjin relationship that with remarkable foresight was signed 30 years ago this year). And our most recent one is between Perth and Chendu, the capital of Sichuan Province.
Project the growth in these interactions – students, tourists, people-to-people contact – and imagine how much more socially connected we will be in 20 years times.
Whatever China’s interests in Australia may have been in years past, today and into the future it is about the inputs China needs to sustain its economic development.
This is obviously to our great advantage, as our trade and economic performance over the past year show. But is also presents considerable challenges and risks.
We must be very clear that today China’s interest in Australia is overwhelmingly in our resources and energy. As China continues to grow, and urbanise, and raise its standard of living, its demand for our resources will be tremendous.
It is in our broader interests, however, to take a long-term view to continuing to build on our bilateral ties in areas such as regional security and environment, and to expand and deepen our people-to-people and track two links to provide strong underpinnings for the relationship.
Above all, the biggest challenge for us, as resources and energy trade surges, will be not to take this relationship for granted. And to keep in mind what kind of relationship we wish to have when China’s economy is four times bigger than today.
Conclusion
As I said at the start of my remarks, I warmly encourage the continued dialogue on China’s rise, and the implications this will have for Australia.
The ties we are building with China, and the impact of China’s role on our position in the world, will affect all of us in one way or another.
I believe that Australians are comfortable with the reality of China’s return to its historical status as a great power, understanding that as China grows, so we grow.
Over the 37 years of our diplomatic relations with China, Australia has built a solid base from which to take advantage of China’s re-emergence.
It is up to all of us to drive this potential, to think creatively about what we have to offer, and to position ourselves favourably for China’s future development. Above all, we must be very careful not to take the relationship for granted.
And we should keep asking ourselves the question – what will China in 20 years time when it is four times larger than it is today look like, and what implications will this have for our economy, our society and our regional and international engagement?
If we do that, I am confident that we can build on the existing strong relationship in ways that advance our national interests.
Thank you.