Australia-China 2.0, the next stage in our economic partnership

Guangdong University of Foreign Studies

Guangdong, China

Speech. Check against delivery, E&OE

22 May 2011

Yesterday, driving into Guangzhou and past the strikingly beautiful new Opera House, I was reminded of how much China has changed since I first came here.

At that time, just as China's economic reform and open door policies of 1978 were starting to take effect, it was unthinkable that a foreign company could play a part in designing such an important and cutting-edge building in China.

The Opera House, whose acoustics were designed by Australian firm Marshall Day, is a symbol of how far China has come in just 30 years, from the inward looking China of the Cultural Revolution, to the outward looking China of the 21st century.

30 years ago, most China watchers were skeptical about China's capacity for large scale economic reform.

But China has proven the skeptics wrong. My purpose today is not just to reflect on the last 30 years of China's economic growth but also to reflect on the next 30 — as China changes its growth model for the future.

Because if we think the changes of the last 30 years have been dramatic, this I believe is only a foretaste of what is to come.

And I want to reflect on what this means for the future of the Australia-China economic relationship.

It's what I call "China 2.0".

It's what I call "Australia-China 2.0".

And the test is whether we share the economic vision to translate these ideas into reality.

China's Record So Far

The figures tell the story so far.

Since 1980, China's real GDP has grown at an average annual rate of 10%.

This has seen China's per capita GDP grow from US$205 in 1980 to US$4,382 in nominal terms today.

The share of China's population living below the World Bank's poverty line of $1.25 per day has fallen from 84 per cent in 1981 to 20 per cent today.

Around 500 million people have been lifted out of poverty.

By world standards, this is a truly remarkable achievement.

Within thirty years China has transformed itself from an impoverished, isolated and mostly agrarian economy to the increasingly wealthy, internationalized and urban economy we see today.

China's economic achievements over the last thirty years have been driven by its biggest competitive advantage, an abundant supply of low-cost labour.

Year after year, we see more and more rural migrants from China's countryside moving to its manufacturing hubs like the Pearl and Yangtze River deltas to participate in China's booming manufacturing sector. In 1980, China's rate of urbanization was only 19 per cent. Fewer than 1 in 5 Chinese citizens lived in cities.

By 2010, this had increased to 47 per cent.

In other words, China's urban population has increased by 446 million over the past 30 years.

Over this time, China has also been able to rely on its high savings and low household-consumption rates to fund investment in urban infrastructure and productive capacity.

Household consumption as a percentage of GDP in China fell from 48.9 per cent in 1982 to just 34.9 per cent in 2009.

Correspondingly, China's gross savings as a percentage of GDP increased from 36.3 per cent in 1982 to 53.6 per cent in 2009.

These radical economic transformations over the last three decades have also resulted in the transformation of China's economic significance.

China's Global Economic Size

China now stands tall as the second-largest economy in the world.

Last year, China's GDP grew by around 10.3 per cent to reach US$5.9 trillion.

By 2016, the IMF predicts that China's economy will almost double again in size, with a forecast GDP of over US$11.2 trillion.

While this will still be well short of the size of the US economy with forecast GDP of US$18.8 trillion in 2016, China has closed the gap very fast.

Remember, in 1980, China's GDP was just 7.3 per cent the size of the US economy.

When China will actually overtake the US economy in terms of absolute size is hotly debated.

But what isn't in debate is that on current projections, China's economy is likely to be the largest in the world before the end of the third decade of this century.

On a significant number of measures, China already stands well above the rest.

In 2010, China was the world's largest merchandise exporter (US$1,578bn) with a 10.4 per cent share of world merchandise exports, ahead of the US (US$1,278bn) and Germany (US$1.269bn).

China was the world's second-largest merchandise importer in 2010 (US$1,395bn) behind the US (US$1,968bn).

China is also home to the world's largest automotive market. In 2010, 18 million automobiles were sold in the Chinese market, an increase of 32 per cent year on year.

But perhaps even more significant, and a harbinger of things to come, is that in 2010 China was the fourth-largest exporter of commercial services — worth US$170bn, a 32 per cent year-on-year increase compared with 2009.

As well, it was the third-largest importer of commercial services at US$192bn; a 22 per cent increase year-on-year.

Eight Chinese cities have a population of more than 10 million, and 93 have more than 5 million. By 2020, China will have six provinces with an annual GDP of more than US$1 trillion, equal to six countries the size of Russia or Spain or Canada.

China's emergence has, of course, been massively resource intensive.

In 2009, China overtook the US to become the world's largest energy consumer, consuming around 2,000 million tonnes of oil equivalent. Between 2008 and 2035, China's per year energy demand is forecast to increase by 75 per cent as forecast by the International Energy Agency, World Energy Outlook 2010.

On the mineral resource side, China is also in first place on many fronts.

It is now the world's largest consumer of aluminium, copper, nickel, zinc, lead, tin, iron ore and coal. China's appetite for steel and coal is particularly striking.

In 2009, China consumed around 3.2 billion tonnes of coal domestically. To put this into perspective, Australia, the world's largest exporter of coal, exported 275 million tonnes of coal in 2009, less than 10 per cent of what China consumed.

Last year, China was the world's largest user of steel, consuming 616 million tonnes of crude steel, around 46 per cent of global consumption.

By 2016, China's crude steel consumption is forecast to total just under 1 billion tonnes, over 52 per cent of forecast world consumption and almost nine times the volume of the world's second largest forecast consumer, India.

China's Changing Growth Model - The Shift to Domestic Consumption

China's capital intensive export led growth model has served it very well.

But it has also led to the creation of a number of imbalances which the Chinese Government rightly recognises as requiring attention.

The first of these is social inequality.

China's efforts to raise hundreds of millions of its citizens out of poverty, rapidly increasing the per capita GDP of its citizens, is impressive and commendable.

However, the benefits of China's massive growth have not been shared by all.

The Gini coefficient — a measure of overall income inequality — has increased from around 0.3 in the mid-1980s to 0.47 now.

Since the late 1980s, the gap in urban income between the top 10 per cent and the bottom 10 per cent has widened from seven times to more than 20 times.

Average per capita income is now more than three times that of rural areas.

Australia warmly welcomes the Chinese Government's announcement of a range of key targets to tackle this inequality.

Among them are: pension schemes to cover all rural residents and 357 million urban residents; an increase in the minimum wage by no less than 13 per cent per year; and in housing, the construction and renovation of 36 million apartments for low-income families.

Education spending will remain a priority, while the parmaceuticals and healthcare system will be broadened to cover more of the population.

These policies will help to ease the problems of income inequality in China.

But they will also reduce the need for China's citizens to maintain such a high rate of saving to compensate for inadequacies in the social-welfare system.

Efforts to improve China's system of income redistribution, access to social housing and health care and the wages of China's lowest-income earners, coupled with the rapid growth in the size of China's urban middle class, will certainly assist China to make the transition towards a consumption-led model of growth.

China's Changing Growth Model - Factoring in the Environment Cost

Another challenge China faces as a consequence of its phenomenal economic growth has been the environmental cost.

China's emergence as the ‘world factory' has seen it become a net exporter of energy intensive goods such as steel and aluminium.

According to the 2010 Environmental Performance Index compiled by Yale University and Columbia University, China ranks 121st internationally for its performance against environmental policy goals such as climate change, air pollution and water access.

To address these problems, the Chinese Government has announced far-reaching plans: to increase the share of non-fossil fuels in China's energy mix to 11.4 per cent of primary energy consumption; to cut energy consumption per unit of GDP by 16 per cent; to cut carbon dioxide emission per unit of GDP by 17 per cent; and to reduce water consumption per unit of value-added industrial output by 30 per cent.

These policies complement existing efforts by the Chinese Government to increase the contribution to its energy mix of nuclear and gas-fired power generation, which are less carbon-intensive than coal.

These will help underpin China's efforts to transition China towards a more sustainable growth path — and to contribute to the global response to climate change.

China's 7 per cent GDP growth target over the next five years, announced as part of the 12th 5-year plan, is probably on the conservative side. For example, Chinese GDP growth was 10.3 per cent last year.

But importantly, it shows that China is willing to accept a lower rate of growth in order to rebalance its economy, alleviate inequalities and improve sustainability.

In other words, China is now looking to prioritise the quality of growth over the quantity of growth.

China's Changing Growth Model - R&D Investment

The government is also trying to move China further up the value chain.

China's R&D spending as a share of GDP is still relatively low — around 1.4 per cent, well below global R&D spending of 1.9 per cent.

As part of the 12th five-year plan, the Chinese Government is seeking to boost expenditure on research and development to 2.2 per cent of GDP. It is also targeting the registration of 3.3 patents per annum for each 10,000 head of population.

This is on top of existing efforts to encourage internationally-based Chinese researchers to return to China and to recruit 2,000 foreign experts to work in national laboratories.

While China's R&D expenditure per capita remains low, its total spending on R&D is eclipsing many countries.

China's gross domestic expenditure on R&D is already far ahead of advanced economies like Germany, the Republic of Korea and the United Kingdom.

The Rise of New Chinese cities: New Centres of Growth

As noted above, China's new economic growth is not simply being driven out of China's mega cities.

I repeat - by 2020, China will have six provinces with an annual GDP of more than US$1 trillion, equal to six countries the size of Russia (or Spain or Canada).

I repeat - eight Chinese cities have a population of more than 10 million.

I repeat - 93 have more than 5 million.

I have witnessed personally the extraordinary growth in eastern seaboard cities like Guangzhou, and am now seeing the incredible pace of development in second tier cities in China's booming inland provinces.

The Economic Intelligence Unit recently undertook an analysis of China's top twenty emerging cities and found that over the next decade, the population of these cities will grow by 27 per cent.

By contrast, the population of China's twenty richest cities will grow by 19 per cent.

It also found that in 2009, average incomes in China's twenty richest cities were 42 per cent higher than the top twenty emerging cities.

By 2020, that gap is forecast to fall to just 15 per cent.

China is entering a period where economic growth in inland regions is overtaking that of coastal regions.

While the eastern seaboard growth engines like Shanghai, Beijing and Guangdong grew at rates well in excess of 10 per cent during the mid 1990s and again during the mid 2000s, growth rates in these provinces/municipalities are now much closer to 10 per cent.

In comparison, lesser-developed provinces like Sichuan, Inner Mongolia, Liaoning, Hunan and Chongqing have been growing at between 10 and 15 per cent annually over the past five years.

In the case of Inner Mongolia, growth has been closer to 20 per cent.

This shifting of growth to inland regions reflects the Chinese Government's new incentives for industry to invest and establish operations in China's inland provinces.

These efforts are replicated at a provincial level here in Guangdong by the Double Transfer policy.

Manufacturers are also seeking alternatives to the rising costs of labour and land on the eastern seaboard.

This development has opened up opportunities for other centres. Chongqing is one impressive example.

A province-sized "city" with a population of 30 million, Chongqing's per capita GDP was US$623 in 2000, or 66 per cent of national average. It's now US$4,049 or 92 per cent of national average ofUS$4,382.

In 2009, Chongqing made a move towards becoming a high-tech manufacturing base. Chongqing's laptop production capacity is set to hit 100 million units by 2015, turning the city into the largest laptop-production base in China and Asia.

The world's leading IT companies have a presence in Chongqing.

HP has production capacity of around 20 million laptops in Chongqing, while Acer Inc has just announced a plan to invest USD 150m in Chongqing to build its biggest global IT manufacturing centre.

The competitiveness of China's emerging cities will be boosted by improvements in transport infrastructure and logistics. China is already well-serviced by a 7,000 km high-speed rail network, which will increase to 16,000 by 2020.

As the high-speed network develops, even cities like Chongqing, 1,400 km by air from Shanghai will be accessible from the coast within half a day.

China's flagship high-speed rail line, also the world's fastest train service, connects Guangzhou with the fast-growing second-tier cities of Wuhan and Changsha.

Implications for the Australian Economy and Australian Business

In summary, the Chinese economy is changing rapidly, not only in terms of its absolute size — but also in terms of the composition of its growth.

  • China is on track to become the world's largest economy;
  • Its growth model of the last 30 years (driven by labour intensive manufacturing exports) is changing to one based on domestic consumption, underpinned in part by domestic social security reform;
  • Manufacturing will remain strong on the back of continuing rapid urbanisation and associated domestic demand;
  • But the services sector, including imports and exports, is growing rapidly.
  • Environmental constraints are emerging — creating new markets for clean energy goods and services;
  • R&D investment is also moving China rapidly up the value chain; and
  • A necessary proportion of the above growth is by and large out of China's so-called ‘second tier' cities and emerging provinces.

These economic ‘change drivers' are also changing the pattern of China's economic engagement with the rest of the world.

So what does all this mean for the Australian economy?

Australia is the 4th largest economy in Asia.

Australia is the 13th largest economy in the world.

Australia is an energy superpower. We are the world's ninth largest energy producer and with net energy exports accounting for around two-thirds of energy we produce. Since 1988-89, the value of Australia's energy export has increased by an average of 10 per cent per year.

Australia also has sophisticated agricultural, manufacturing and services sectors.

Australia also has as many world class universities as China.

Australia's financial services sector is strong, robust, well managed and well regulated — and survived the Global Financial Crisis intact.

We have the 4th largest funds management industry in the world.

Australia is, therefore, well positioned to meet China's traditional economy needs as well as those now generated by the great economic transformation now underway.

For example, the McKinsey Global Institute, the business and economics research arm of McKinsey and Co, estimates that over the next 15 years, up to 50,000 new skyscrapers will be needed in China's cities.

This mass urban migration is supporting large-scale investment in new housing, commercial buildings, transport infrastructure and electricity networks. It is also driving demand among urban consumers for cars and appliances.

The sheer amount of iron ore, copper, zinc, nickel and aluminium needed to sustain this investment will keep underpinning the resources boom. China's demand for steel is likely to grow by almost 40 per cent growth in the next 10 years and there will be similarly strong growth in energy demand.

All this bodes well for the future of Australia's traditional relationship with China in minerals and fuels, which accounted for over 80 per cent of Australia's merchandise exports to China last year. Australia is well-placed to meet the range of China's future energy needs.

But Australia has more to offer China than just minerals and fuels, as important as this may be. China's rapidly urbanising population — whose income is on average 3 times that of rural areas — is demanding more sophisticated services, in areas such as in education services, banking, financial and wealth management services, architecture and design, green technologies, as well as tourism.

These are areas where further collaboration between Australia and China can bring great mutual benefit.

For example, China has an excellent education system. However, China's domestic education system struggles to expand to meet demand. Currently there are only 2,000 Chinese institutions of higher education shared by a population of 1.3 billion people. The shortage of places remains one of the key reasons why an increasing number of Chinese students are seeking high quality education overseas.

In 2010, a total of 284,700 Chinese went to study abroad, an increase of 55,400 over last year.

Australian education enjoys a good reputation among Chinese students in terms of the global university rankings and it is not surprising that China is Australia's largest source of overseas students with more than 130,000 students studying at Australian education institutions in 2010.

Another area for collaboration is in financial services.

Australia financial sector is the largest contributor to Australia's national output, employment and economic growth, generating 10.8 per cent or A$121bn of real gross value added.

And Australia-China 2.0 represents a new approach to driving this relationship into a new future — one which fully harnesses the potential China's new economic growth model.

Australia emerged from the GFC in robust good health, underpinned by a world best practice regulatory system.

Australia is home to the world's fourth largest pool of contestable funds under management. The funds management sector has grown five-fold since 1995, at a compound annual growth rate of 12 per cent, and now has A$1.7 trillion in funds under management.

Australian financial service providers are already active in China in banking, insurance, funds management, securities and consultancies.

Further involvement by global financial services companies will help China to increase the sophistication of, and internationalise, its own financial services market.

Architecture and design is another area where Australia does well.

We are a world leader in innovative technology and designs that reduce the carbon footprint building.

China is the most rapidly urbanising country in the most rapidly urbanising region in the world, Asia.

There are great opportunities for Australian companies to provide assistance and mentorship in many areas, including sustainable building.

The Green Building Council of Australia is working with the China Green Building Council under a MOU signed in 2008 focused on investigating how enhanced co-operation could accelerate the uptake of green buildings in China for the economic, environmental and social benefit of both countries.

This will have lasting benefits for both countries long into the future, providing leadership in transforming the built environment towards sustainability.

Australia is a world leader in green building technologies and systems. China is a world leader in developing ecocities. The synergies are clear.

China and Australia can also collaborate well in green technology.

Decades of rapid economic growth and urbanisation has had the unfortunate consequence of environmental degradation in China.

It is estimated that environmental damage costs up to 8 per cent of China's GDP each year. China's environmental protection industry has developed strongly in response.

However, in some areas, the technology levels are low and below international standard.

Australia has some of the most stringent environmental protection and biodiversity standards in the world.

Australian citizens accept no less.

We are also one of the driest countries in the world.

In this context, many companies and research institutes have developed solutions and capabilities in Australia to allow industry to operate successfully and cost effectively in a way that minimises environmental impact, including on our precious water resources.

We are not just delivering solutions domestically.

Australian companies are already helping China to deal with its environmental challenges.

In Hunan, Austrade is leading clusters of Australian companies to deliver rural waste water treatment solutions and remediation activities to deal with contamination in river-ways.

Our Cooperative Research Centre on Contamination Assessment and Remediation of the Environment is also working with partners in China to develop cost effective and sustainable technologies to help China remediate contaminated sites and better manage wastes.

Tourism is another growth area in our bilateral relations.

China is becoming an increasingly important tourism market for the world.

Between 2000 and 2009, total outbound travel from China increased from 9.2 million trips to 25.8 million.

China is Australia's 4th largest inbound tourism market, with 453,800 arrivals in 2010 and has recently overtaken the UK to be our number one ranked market for total spend (worth $3.1 billion in 2010).

The Tourism Forecasting Committee forecasts that Chinese visitor arrivals to Australia will increase at an average annual rate of 8.5 per cent to reach 897,000 in 2020.

To further our engagement with China in tourism, the Prime Minister recently witnessed the signing of a new MOU under which Australia and China will identify new areas of cooperation, building upon over a decade of successful cooperation on the Approved Destination Status program.

Just as we have been a reliable partner in China's first great economic transformation over the last 30 years, so too are we positioned to be reliable partners in the next phase of China's growth stages into the mid-century.

The Australia China Relationship

Australia is a significant, strong, and stable global economy — and with China is a member of the G20.

Australia, like China, is deeply engaged with all the great institutes of our region — including the EAS and APEC.

Australia has a strong bilateral relationship with China which has deepened and broadened over the last 40 years and there are no significant bilateral problems.

Australia is already one of China's top 10 trading partners.

And we have one of the most open investment regimes in the world. At the end of 2010, the total stock of foreign investment in Australia was $2 trillion. Of this, the total stock of direct investment (investments involving a controlling stake) was $474 billion.

Since 2001, the Australian Government has only rejected two foreign investment proposals in the business sector, Shell's proposed takeover of Woodside and the Singapore Stock Exchange's proposed takeover of the Australian Stock Exchange. It's worth noting that these rejections happened one decade apart.

There are no business sectors that are closed off to foreign investment and we only maintain foreign equity limits in a small number of companies.

We welcome and encourage foreign investment because of the benefits it provides our economy and we work hard to ensure that we remain a globally competitive location to do business which offers a wealth of opportunities for businesses to succeed.

Australia's reputation as an attractive business destination was confirmed in the 2011 Index of Economic Freedom.

The Index, produced by The Wall Street Journal and Washington's Heritage Foundation, ranks countries on 10 measures of economic openness, including business freedom, trade barriers, tax burden, government spending, price stability, investment openness, banking efficiency, property rights, freedom from corruption and labour freedom.

How did we fare? Australia was again ranked 3rd overall (behind only Hong Kong and Singapore).

Conclusions

This, therefore, is the potential strength of ‘Australia — China 2.0', a new phase of mutual economic engagement.

One which recognizes, anticipates and prepares for the impact of China's changing economic growth model.

One which recognizes Australia's record of being a significant and reliable economic partner over the decades past.

One which is based on mutual economic advantage.

At the government level, we can play our part — getting the policy setting right, ensuring the success of the conclusion of the Australia-China FTA.

But ultimately it depends on business.

For Australia, it means our corporate community fully geared up for the impact of the new Chinese economic development model.

It means being ahead of the curve.

It means investing time and effort.

It means employing bilingual Australians who understand business to further enhance the interests of your business.

It means being on the front foot.

It means not resting on our laurels.

Above all, it means being here. Not just being in Beijing. Being across the country, including in the emerging second tier cities of the future, where much of the future growth will occur.

Over the past week in Beijing we've made a good start with more than 400 hundred Australian businesses as part of Australian Institute of Company Directors delegation to China - the largest in years.

But it's only a start.

Back in Australia, the Trade Minister and I will be going on the road to state capitals to argue what China 2.0 is all about.

And later in the year, we intend to be back, leading a trade and investment mission to some of the provinces and rising urban centres that will drive this country's future.

I have always been an optimist about China's future.

I've always been an optimist about the future of the Australia-China economic relationship.

END

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