Australia in China's century

Good morning everyone. Friends of Australia, friends of China.

I'm delighted to be here at this second conference on Australia in China's Century.

I think it's important that we keep talking about what Asia's economic rise, and most particularly China's rise, means for Australia and the way we do business.

Australia must not fall into the trap of thinking that we are simply in the right place at the right time - that because of our favourable geography, the spoils of Asia's economic rise will automatically fall to us - that our trade relations with Asia will only grow - that more than twenty consecutive years of Australian economic growth will automatically continue into the future.

We must work to create our own success – as we have always done. We must compete in a tough global marketplace – as we have always done. And that's why I welcome the fact that so many China-watchers are gathered here at this conference today brought together by The Australian and the Wall Street Journal

Discussing and debating China's rise and Australia's place in a world with evolving power centres, both economic and strategic, is an important part of Australia's forward planning as a nation.

Now let me turn specifically to China's rise as it is so often called. It is true that history provides context and a guide to the future. And for China, it would be wrong to forget its past.

China is one of the world's great civilisations. Its economy has been the largest in the world for 18 of the past 20 centuries. In reality, China's rise is simply a return to the historical status quo. And its rise has been spectacular.

It is on track to again become the world's largest economy within the next decade.

China's economic growth has lifted millions and millions out of poverty. The emergence of the Chinese middle class within one generation is probably the most remarkable economic transformation in history. It has created the largest market in the world.

In 2013, China surpassed the United States to become the world's biggest trading nation in goods. Today, around 124 countries count China as their largest trading partner. China's economy is now an integral part of the global value chain and the international trading system.

Chinese companies are investing globally and are becoming global players. Chinese companies will become household names challenging the dominance of Apple, General Electric, Google. The Chinese internet retailer, Alibaba, will be the biggest initial public offering in the United States since Facebook.

China is changing the way we trade. It is changing the way we see the region and the world. But the fact is there is much uncertainty about how it will look, to the extent that uncertainty is certainty. There are some things in our region that are predictable, and we can make some pretty safe assumptions.

For example, Japan's technological base will keep it at the forefront of regional economic powers, although its demographic challenges will slow its rate of economic growth.

Indonesia will become an increasingly influential player in the region as it entrenches democracy and its economy grows.

North Korea's cyclical bouts of engagement and provocations will continue into the future. It will remain a regional and global strategic threat.

Thailand's cycle of coups, 19 in total since 1932, interspersed with elections, has a regrettable regularity to it. I recently read a United States analysis listing presciently the usual stages of a Thai coup, from the coup occurring to the constitution being suspended, Royal endorsement of the coup, the appointment of the interim government, the promulgation of the new constitution, fresh elections and amnesty for the coup leaders, and so it goes on. So from the 80 year history of Thai coups we can sadly predict the current coups direction with some certainty.

But China's rise is unique. We have no precedent to draw upon. In the vast sweep of history, we have not seen the likes of the rise of China. We have never witnessed the emergence of a civilizational power in such a compressed period of time.

In recent history, we have never seen the rise of a power that had a value system so different to that of the West's, an open market oriented economy within a central command, socialist political structure. We have not witnessed the rapid expansion of a military force with advanced capabilities that may contest the maritime regional supremacy of the United States. Where China's rise will lead cannot be predicted accurately.

Now I see my role as Foreign Minister as Australia's relationship manager and I spend time analysing where our relations are at and how they can be improved and I undertake scenario planning - if that happens, then what is our response?

Saying that, let me go out on a limb and outline two divergent scenarios for China and how it might look like in the next few decades and these are at the polar opposites of how the future may unfold.

First, the peaceful rise. If China stays true to former Chinese Premier Wen Jiabao's statement that China is on track for a peaceful rise, I suggest that we may see; the Chinese dream as articulated by President Xi Jinping with a Chinese economy that is fully integrated into the world economy; a Chinese economy that is consumer driven and focused on innovation; the Chinese renminbi becoming a global reserve currency; a Chinese middle class whose interests become more influential; Chinese tourists driving the global tourism industry; a China that is much more concerned about its image in the world and focused on its soft power, engaged in building regional and global alliances; a China that defines more clearly its role in the region and world; and a China that values a global rules-based system, transcending a narrow zero-sum view of the world; a constructive United States-China relationship that is underpinned by bilateral and regional architecture that promotes economic and security cooperation; and a China that is widely regarded by its regional neighbours and beyond as a positive force for good.

But none of this is a given. So let me outline another scenario – one of increased tensions and regional instability. We could see a China that struggles to deal with its major internal and external challenges. We could see a Chinese economy that cannot escape the middle-income trap, weighed down by its debt challenges and investment focus; unable to address corruption and rising inequality, with a GDP per capita plateauing at around $10,000 USD; demographic challenges, where the number of Chinese over 65 in around 30 years will number 300 million, placing significant challenges on social welfare and economic growth; as The Economist has put it a China "that grows old before it grows rich"; territorial disputes and historical enmities leading to deteriorating confidence in regional security and China's intentions; Chinese nationalism used as a card by the Chinese Government to deflect growing internal challenges; a China unable to define what "peaceful rise" means to its own people and the world; a China not addressing the aspirations of its increasingly educated, well-travelled, urbanised middle class; a China preferring unilateral measures, ignoring the benefits of contributing to a global system of rules; a deteriorating United States-China relationship underpinned by mutual suspicions and characterised by increasing tensions; conflict triggered by overreach or miscalculation.

So how do we in Australia ensure the 21st Century is one of peace and prosperity for us and our region?

China will inevitably become more influential as it becomes the world's largest economy. But we simply can't predict the future. I very much doubt that we will see a China that follows a linear path upwards. Its social, economic, political and external challenges will see numerous bumps in its trajectory. I certainly doubt we will see a complete realisation of either scenario I have outlined.

It is on this point that I raise a question mark about the title of this conference. Is calling the 21st century, just 14 years into it, the "China century" premature? Does this not dismiss the potential of other nations or regions? India or Africa?

Does this not also assume the status of the United States will decline? And I fear that too many are predicting the United States decline. I can see the challenges the United States faces economically and politically. But I also see a United States that has an incredible ability to innovate and rejuvenate.

We cannot ignore the transformation that the United States is currently enjoying. The shale gas revolution will make the United States a net energy exporter. 3D printing, advances in biotechnology and the revitalisation of US manufacturing will change the economic trajectory of the United States. And its population is growing.

Over the coming decades the United States will remain the single most powerful global and regional state. China's rise does not mean the eclipse of the United States.

The United States, China, Australia triangle can look very different, depending on which perspective you take. Australia has an independent foreign policy, captive to no one, which we use to further our own national interest. Yes, we want to see a strong United States-China relationship and will do all we can to support that. The way the United States and China engage on common interests and address future challenges will have a large bearing on the future of the Indian Ocean Asia-Pacific.

But we can't fall into a trap of allowing others to dictate the questions that we need to resolve. For our circumstances do differ. Take our economic interests as they relate to China and the United States - they are quite different. China is our largest trading partner, over 33 per cent of our exports go to China, only seven per cent of United States exports go to China. The US is by far our largest investor, eclipsing the level of Chinese investment in Australia.

To be fair, it is not our role to 'solve' any perceived issue with the US-China relationship. Foreign relations is not a zero sum game. Improving our relationship with one nation need not, indeed should not, come at the detriment of another. We don't need to make false choices.

While we must always give primacy to Australia's best interests – that doesn't mean we are a neutral country. Those who fear Australia being 'dragged' into future conflicts should consider whether the 'neutrality' they advocate really serves to protect and promote Australian interests and whether it takes adequate account of the tremendous strategic asset presented by our alliance with the United States. Demands for neutrality might simply reflect the same kind of self-interest they claim to despise in others.

So how do we contribute to the peaceful rise? On balance, I believe that we will see China rising peacefully. We will avoid most, if not all, of the worst case scenario. And as its power grows, China will become integrated into the international system. It does not mean that addressing the challenges and risks will be easy.

In our engagement with China and other regional partners, we have an opportunity to ensure that China's rise as a powerful voice on the world stage happens in a positive, peaceful way. Australia is already playing a role, through the way in which our economic engagement with China has helped solidify its position as the centre of so much global commerce. Trade and economic relationships so often lead the way for trust and co-operation across the breadth of a relationship.

Look at Australia's historical relationship with Japan. In the years immediately after the war, when there was still a great deal of lingering hostility in the public mind, it was the Commerce Agreement with Japan in 1957 that began the process of creating our modern friendship and partnership.

Now, of course, with China we're not emerging from conflict, far from it, but I think it's fair to say that we haven't always understood one another as well as we could and should.

It's been our trade – the iron ore that has helped build China's cities, the LNG that has fuelled its energy needs – that has built a solid foundation for much closer friendship and understanding and increasing mutual respect. That is why our recent Australia Week in Shanghai and the Prime Minister's visit to the Boao Forum, Shanghai and Beijing, accompanied by 700 business delegates from Australia was so important in furthering our relationship.

The relatively recent commitment to formalise an annual leaders' dialogue with China is testament to the increasing trust between our nations.

And we certainly welcome every opportunity to speak face to face with China's leadership – in diplomacy, as in so many other aspects of life, there's no substitute for those personal connections.

A recent example is the work we have done together in the search effort for Malaysian Flight MH370. The co operation between Australia, China and other partners was simply extraordinary.

But this does not mean that we agree with China on all issues. China has at times taken some actions with which we disagree. We will continue to be frank and open in pursuing Australia's national interests.

For there is now an established international order, pinned together by vast, inter-connected webs of commerce, bilateral relationships and post-war institutions like the United Nations and the WTO, and more recently the G20, underpinned by international standards and international law. Australia values this global rules-based order.

It is very clear to China's leadership that China has built its wealth as part of a global economy. The past three decades have proven that China has an immense amount to gain by being part of the global order – and a price to pay if it rejects that order.

An important role in all this is for regional institutions, which are not yet as well established or robust as global organisations. One of the reasons Australia argued so strongly for the United States to become a member of the East Asia Summit is because the East Asia Summit is emerging as the region's premier multilateral security forum. The EAS gives us a framework through which to minimise disputes, communicate effectively and build common understanding. It's our responsibility, Australia's and the other member nations, to build the strength of the East Asia Summit, to ensure it has the capacity and robustness to deal with any future uncertainties, and establish patterns of dialogue and cooperation.

Let me turn to how we can develop our bilateral relationship through creative engagement. While Australia deploys all the foreign policy assets at our fingertips through what I call economic diplomacy, as China rises and expands its influence, we can't define our relationship with China by trade alone or indeed by security alone, although they are certainly vital aspects of it.

We need to broaden and deepen and diversify our relationship with China. Take for example one of my portfolio responsibilities – international development assistance. Emerging donors like China have an important contribution to make – especially as budget restraint by developed nations limits the capacity of traditional aid donors.

China's overseas aid budget is now around the same size as Australia's. And China has expertise to share in areas like disaster responses in urban areas and mobilising mass resources for disaster relief. And so we can capitalise on our respective strengths to address development challenges in areas of importance to us like the Pacific.

Just one example is in Papua New Guinea. We have established a tri-lateral agreement among the Australian, Chinese and PNG Governments to work together to target malaria. China has an impressive track record of combating malaria domestically, so through this project we're working with China to help PNB tackle malaria, by strengthening laboratory and testing systems. So we are combining Chinese technical expertise with Australian experience of delivering effective aid programs targeting malaria in the Pacific. I welcome China's willingness to engage on this important regional health issue and I truly hope that we can partner in other areas of 'soft power'.

Education for example is another area where our interests are complementary and we can work together. And as a former education minister this is especially close to my heart. Chinese students are by far the biggest single nationality of foreign students studying in Australia, making up about a quarter of the total number. There are around 150 thousand enrolments by Chinese students at Australian universities and other institutions.

And so I'm excited that the Coalition Government's New Colombo Plan will help increase numbers of Australian students to study in China as we award scholarships and grants to Australian undergraduates to undertake study and internships in the region. Now this dovetails with China's own objective to increase its overseas student numbers to half a million by 2020.

Our New Colombo Plan is where the Coalition Government's foreign policy of deeper engagement in the region best finds its expression. Hong Kong was involved in this year's pilot program, and I'm thrilled that we have Chinese government support to expand the program to mainland China in 2015.

It means that even more Australian students will look to China as their destination of choice for overseas study. This program will open new doors for young Australians. It will give them insight and understanding into China and other regional countries and that knowledge will be invaluable to Australia in the decades ahead. These are the young people that are Australia's next generation of leaders.

And two decades from now they'll be armed with the skills to address economic and security challenges with an understanding of China and other Asian nations, with connections and friendships with their Chinese contemporaries, friendships that I hope will last a lifetime. They'll understand modern, thriving, contemporary China, its goals and ambitions, as well as the centuries of history that have enriched the world. And young Chinese will know more about us too. It's that sort of intellectual and personal exchange that is so vital for an enduring relationship between nations.

China is the fastest rising power of our time. Whether the 21st century will be China's century can't be assumed at this point, and that is why this conference has been convened and should continue to be convened. Australia will be working through the implications of China's rise for at least a generation. Some anxiety about change will be inevitable – but conflict and disorder are not.

Nothing will affect Asia's economic rise more dramatically than strategic instability or the shadow of conflict. It is within the region's power to effect an orderly transition from the power structures of the past and ensure the people of the Indian Ocean Asia-Pacific continue to live in peace and ever-increasing prosperity.

We all want to ensure that by the middle of this century we will live in a world where China's rise has been successfully integrated into the global order – a world where a powerful China plays the role of a leading global citizen.

China's influence will be larger than it is today – its citizens will be richer, its culture will be more widely understood, and it will, hopefully, be playing an active role in managing the global commons. And that can only be good for all the citizens of the world.

Australia must continue to engage creatively with China to contribute to the realisation of this vision. I hope that this conference continues to stimulate the debate.