PARTNERSHIP FOR CHANGE - ANU Presspress-files.anu.edu.au/downloads/press/n2068/pdf/book.pdf ·...
Transcript of PARTNERSHIP FOR CHANGE - ANU Presspress-files.anu.edu.au/downloads/press/n2068/pdf/book.pdf ·...
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EAST ASIAN BUREAU OF ECONOMIC RESEARCH | CHINA CENTER FOR INTERNATIONAL ECONOMIC EXCHANGES
PARTNERSHIP FOR CHANGE
2016Australia–China Joint Economic Report
PAR
TNER
SHIP
FOR
CH
AN
GE A
ustralia–China Joint Economic R
eport 2016
4606487817609
ISBN 9781760460648
WHH Aus China_cover vChinese.indd 1 21/07/2016 4:02 PM
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PARTNERSHIP FOR CHANGEAustralia–China Joint Economic Report
ANU Press
East Asian Bureau of Economic Research, ANU, Canberra
China Center for International Economic Exchanges, Beijing
August 2016
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Published by the ANU Press, East Asian Bureau of Economic Research and the China Center for International Economic Exchanges
© East Asian Bureau of Economic Research, China Center for International Economic Exchanges 2016
ISBN 9781760460648 (print) ISBN 9781760460655 (ebook)
A CiP catalogue record of this book is available from the National Library of Australia
Creative commons licence
This report is published under a Creative Commons Attribution Non-Commercial NoDerivs 3.0 Unported Licence.
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Contact
Inquiries regarding the licence and requests to use material in this document for commercial purposes are welcome at:
East Asian Bureau of Economic ResearchCrawford School of Public PolicyThe Australian National University Acton ACT 2601 Phone: +61 2 6125 6411 Email: [email protected]
This title is also available online at press.anu.edu.au
Design and artwork by Kylie Smith Printed by Prinstant, Canberra
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ContentsForeword 1
Listofacronyms 5
Listoffigures 9
Listoftables 11
Listofboxes 11
Executivesummary 13
Chapter1:Strategicimportanceoftherelationship 25
Chapter2:TheeconomictransformationsinChinaandAustralia 45
Chapter3:Tradeingoodsandservices 71
Chapter4:Investment,humancapitalandlabourmovement 109
Chapter5:Financialintegration 137
Chapter6:Frameworkforcapturingopportunitiesandmanagingrisks 171
Chapter7:AustraliaandChinainregionaleconomicdiplomacy 207
Chapter8:Collaborationintheglobalsystem 233
Chapter9:Conclusions 269
References 283
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ForewordThisReportistheproductofajointstudyundertakenbytheEastAsianBureauofEconomicResearch(EABER)intheCrawfordSchoolofPublicPolicyatTheAustralianNationalUniversity(ANU)andtheChinaCenterforInternationalEconomicExchanges(CCIEE)inBeijing.Wewereprivilegedtoguidethisworkthroughtoitscompletionoverthepastyear.
TherearefewmoreimportanteconomicrelationshipsforAustraliathantheoneithaswithChina.MerchandiseandservicestradewithChinanowaccountsformorethanaquarterofAustralia’soveralltrade.ChineseinvestmentinAustraliaisgrowingfast.FormanyAustralianbusinesses,theChinesemarketrepresentsanenormouspotentialgrowthmarket.ForChina,Australiahasbeenareliableproviderofhigh-qualityinputsfromironoretoeducation.ButasChina’sgrowthmodelandpolicyfocuschanges,therearebigadjustmentsthatwillhavetobemadeintherelationshipandnewopportunitiesthatareemergingforbothcountries.
CapturingtheeconomicpotentialoftherelationshipwilldependonhowboththepublicandprivatesectorsinAustraliaandChinaengageupcloseandshapetherelationship.Gettingthemostoutoftherelationshipforbothcountrieswillrequireafunctionalunderstandingamongpolicymakers,corporateleadersandthebroadercommunityofthechangesthatwillshapeChinaandtheregionalandglobalenvironmentinthenext10years.
Thisisacriticalmomentinaonce-in-a-generationtransition.Thisisavitalopportunityforbothcountriestothinkabouthowtoshapethefuturecourseofourrelationshipinadeliberateway,establishingsomecommonreferencepointsratherthansimplymuddlingthrough.
WhatarethedynamicforceswithinChinathataredrivingitsnewgrowthmodel?OurjointstudylookedbothbackatwhathasworkedinthepastandforwardtowhatmightyieldthebestresultsforthefutureoftheAustralia–Chinarelationship,aftertheconclusionoftheChina–AustraliaFreeTradeAgreementandinthecontextofthebigchangesthataretakingplaceintherelationship.
ThisReportseekstodefinethepotentialofourtradeandinvestmentrelationships,economiccooperationeffortsandotherinteractions,andtoproduceatangiblemacro-andmicro-levelroadmapofthefuturerelationship.Wehavealsotriedtoidentifywheretheeconomicrelationshipislikelytodevelop,lookingatthesectorsandactivitiesinwhichtradeandinvestmenttiesarelikelytoconcentrate,andwhichindustrieswillthriveandwhichwilldeclineunderChina’snewgrowthmodel.
Thekindsofeconomicinteractionsandgovernmentpoliciesthathaveunderpinnedthebilateralrelationshipthusfararethestartingpoint:whethertheseareappropriateorsufficientastheeconomicrelationshipchangesanddiversifiesisthequestiononwhichthisReporthasfocused.
TheReportidentifieskeypolicychangesinChinaandAustraliathatwillbenecessarytopromoteadeepereconomicpartnership,notonlybilaterallybutalsothroughtheirregionalandglobalcooperation.SituatingthesereformswithinthebroadercontextoftheChinesereformagenda(forexample,financialandcapitalaccountliberalisationandderegulation)andtheeconomicchallengesfacingAustralia,thisReporthassetoutdetailedconclusionsforChineseandAustralianpolicymakers,withclearprioritiesforaction.
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FOREWORD
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ThisisanindependentjointstudybyleadingthinktanksinChinaandAustralia,butithasalsohadthewarmsupportofbothgovernmentsandthecooperationofthekeyeconomicministriesandotheragenciesinbothcountries.ItalsomarshalledbroadChineseandAustralianparticipationandinputfrombusiness,fromgovernmentsatalllevels,fromleadingresearchinstitutions,andfromthewidercommunitiesofbothcountries.
TheReportalsoengagedatopteamofexpertsinbothChinaandAustraliatoguideandassistinthepreparationoftheReportanditsargument.Weareverygratefulforthesupportandadviceoftheseverybusypeopleinthecompletionofourwork.
TheAustralianGroupofExpertsincluded:DrIanWatt,formerlysecretaryoftheDepartmentofthePrimeMinisterandCabinet;ProfessorGaryBanks,ChiefExecutiveandDeanoftheAustraliaandNewZealandSchoolofGovernmentandformerlychairoftheProductivityCommission;ProfessorAllanGyngell,DirectoroftheCrawfordAustralianLeadershipForumattheANUandformerlydirector-generaloftheAustralianOfficeofNationalAssessments;DrHeatherSmith,SecretaryoftheDepartmentofCommunicationsandtheArts;andDrPhilLowe,recentlyappointedtobethenextGovernoroftheReserveBankofAustralia;andwithadvicefromProfessorRossGarnautandDrGeoffRaby,bothformerAustralianambassadorstoChina,alongwithotherexpertinputs.
TheChineseGroupofExpertsincluded:ProfessorHuangYiping,Vice-PresidentoftheNationalSchoolofDevelopmentatPekingUniversityandadvisortothePeople’sBankofChina(PBoC)MonetaryPolicyCommittee;DrHeFan,ChiefEconomistoftheChongyangInstituteofFinanceattheRenminUniversityofChina,SeniorEconomicsFellowattheInstituteforNewEconomicThinkinginNewYork,andChiefEconomicsCommentatoratCaixinMedia;ProfessorZhangYunling,DirectorofInternationalStudiesattheChineseAcademyofSocialSciencesandamemberoftheForeignAffairsCommitteeoftheChinesePeople’sPoliticalConsultativeConference;DrChenWenling,CCIEEChiefEconomist;MrLiuZuozhang,formerminister-counsellorattheChineseEmbassyinAustralia;DrZhuBaoliang,DirectoroftheEconomicForecastingDepartmentoftheStateInformationCenter;andProfessorFanGang,afacultymemberattheHSBCBusinessSchoolofPekingUniversityandSecretary-GeneraloftheChinaReformFoundation;withadviceandinputfromMrZhaoJinjun,formerpresidentoftheChinaForeignAffairsUniversityandformerChineseambassadortoFrance;MsHuXiaolian,PresidentofExport-ImportBankofChinaandformerdeputy-governorofthePBoC;andMrXuChaoyou,DirectoroftheCCIEEDepartmentofExternalAffairsandformerlyoftheMinistryofForeignAffairs(MFA).
TheReporthasbenefitedfromthevaluablesupportoftheleadersofCCIEEandtheANU—MrZengPeiyan,ChairmanoftheCCIEE,andProfessorBrianSchmidt,Vice-ChancelloroftheANU.
ThisstudywouldnothavebeenpossibleattheAustralianendwithoutthegeneroussupportofbusinesssponsorswhofirstengagedwiththeANUthroughanAustralianResearchCouncilLinkageGrantprojectonChineseoverseasdirectinvestment.OurdeepestgratitudegoestoRioTinto,andespeciallyTimLane;toMMG,andespeciallyTroyHeyandAndrewPatterson;andtoCorrsChambersWestgarth,especiallyJohnDenton.
Thesuccessofthisprojecthasbeenmadepossiblebythecommitmentandcooperationofpublicserviceleadersonbothsides.InAustralia,theReportreceivedcashandsubstantialin-kindsupportfromtheTreasury,whotookcarriageofthisReportintheAustralianpublicservice.ChrisLegg,JohnKaratsoreosandLachlanCareywereconstantlyinvolvedin
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advancingtheReport,andwealsothankLeesaCroke,AdamMcKissack,JyotiRahman,JohnSwieringa,NanWang,JustinIu,VeraHolenstein,HuiYao,AdamHawkinsandAaronVanBridgesfortheirsupport.
KeyofficialsupportersoftheprojectinAustraliaalsoincludedtheReserveBankofAustralia,particularlyIvanRoberts,EdenHatzviandChrisRyan;theDepartmentofPrimeMinisterandCabinet,particularlyMartinParkinson,DavidGruen,HKYu,JasonMcDonald,HughJeffrey,AlistairMacGibbon,LukeYeaman,JayCaldwell,AndrewForrest,ErnyWahandAnnaEngwerda-Smith;theDepartmentofForeignAffairsandTrade,particularlyPeterVarghese,JanAdams,JustinBrown,BrendanBerne,GrahamFletcher,FrancesLisson,MichaelMuggliston,JamesWiblin,JasonRobertson,MichaelGrowderandKevinThomson;theDepartmentofDefence,particularlyDennisRichardson,MarcAblongandScottDewar;theOfficeofNationalAssessments,particularlyRichardMaude,RodBrazierandJonathanOlrick;Austrade,particularlyBruceGosper,DavidLanders,MarkThirlwellandKellyRalston;TourismResearchAustralia,particularlyGeorgeChenandJaniceWykes;theAustralianBureauofAgriculturalandResourceEconomicsandSciences,particularlyShengYu;andFrancesAdamsoninthePrimeMinister’sOffice.
TheChinesesidewouldliketoextendtheirdeepthankstothosewhocontributedtothesuccessoftheReportfromtheChinesegovernment.AttheChineseEmbassyinCanberra,theyincludeAmbassadorChengJingye,ChargeD’AffairesCaiWei,Minister-CounsellorHuangRengangandFirstSecretaryLiFang.InChina,theyincludeZhaoWenfeiattheMFA;LiChaoattheNationalDevelopmentandReformCommission;FangHaoattheMinistryofCommerce;QinYuexingattheMinistryofFinance;andHuangXinjuatthePBoC.
ThisReportalsobenefitedgreatlyfromconsultationsconductedwithawiderangeofinstitutionsandindividualsinAustraliaandChinaundertakenthroughoutcourseofitswriting.WewouldespeciallyliketothankformerprimeministersBobHawke,PaulKeating,JohnHoward,KevinRudd,JuliaGillardandTonyAbbottfortheiradviceandsupport.
FromAustralianstategovernmentswewouldliketoofferspecialthankstoMartinHamilton-SmithandJingLiinSouthAustralia;SimonPhemisterandDavidLatinainVictoria;andSusanCalvertandMatthewRuddinNewSouthWales.
OurprincipalsupporterswithintheAustralianbusinesscommunityweretheGlobalEngagementTaskforceoftheBusinessCouncilofAustralia(BCA).WeextendspecialthankstoJohnDenton,LisaGropp,JasonChaiandthemanyleadingcompaniesengagedwiththisprocessthroughtheBCAbothinAustraliaandinChina,includingtheChinaDevelopmentBank.
Fromthebusinesscommunitywewouldalsoliketothank:theAustraliaChinaBusinessCouncil,withspecialthankstoJohnBrumby,SeanKeenihan,CameronBrown,DanielBisignano,MoyiZheng,AaronDuffandJetteRadley;TracyColgan,VaughnBarber,GlennCampbell,NickCoyleandOliverTheobaldattheAustralianChamberofCommerceBeijing;AmyAusterandMartinFooattheAustralianCentreforFinancialStudies;StephenJoskeatAustralianSuper;PaulBloxhamatHSBC;AndrewCharltonatAlphaBeta;MickKeoghattheAustralianFarmInstitute;NickBolkusatBespokeApproach;andTimothyCoghlanattheAustraliaChinaFashionAlliance.
Fromtheacademicandresearchspherewewouldliketothank:JennyMcGregor,MukundNarayanamurti,BernardineFernandezandClioZhengatAsialink;BobCarr,JamesLaurenceson,ThomasBoakandHannahBrethertonattheUniversityofTechnologySydney;
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HansHendrischkeandWeiLiattheUniversityofSydney;ChristineWongandAnthonyGarnautattheUniversityofMelbourne;PeterCaiattheLowyInstituteforInternationalPolicy;LindaJakobsonatChinaMatters;ChrisHeathcote,BillBrummittandMarBeltranattheGlobalInfrastructureHub;JuliaEvansattheAustralianAcademyoftheHumanities;JeanDongattheAustraliaChinaOBORInitiative;andJohnLeeattheInstituteforRegionalSecurity
WeareespeciallythankfulforthesubmissionspreparedbytheAustraliaChinaBusinessCouncil;EdwardKus,EllenEganandMerricFoleyattheAustralia–ChinaYoungProfessionalsInitiative;HenrySherrellattheMigrationCouncilAustralia;SallyLoaneattheFinancialServicesCouncil;andBelindaRobinsonatUniversitiesAustralia.
TheReportwouldnothavebeencompletedwithoutthededicatedprofessionalismofthetaskforcesattheANUandCCIEEwhoassistedwithdraftingtheReport.OntheAustraliansidethisincludedShiroArmstrong,AmyKing,RyanManuel,PaulHubbard,AdamTriggs,JiaoWang,OwenFreestoneandNeilThomas.OntheChinesesidethisincludedZhangYongjun,LiuXiangdong,ChenYingchunandLinJiang.
Thereweremanyotherpeoplewithinourrespectiveinstitutionsthatprovidedimportantinputduringthedraftingprocess.AcademicsattheANU,includingDongDongZhang,PaulGretton,RichardRigby,LigangSong,HughWhite,PhilippaDee,PeterMcDonald,ZhaoZhongwei,FrankJotzo,StephenHowes,DavidVinesandAnastasiaKapetas,providedvaluablecontributionsintheirrespectivefieldsofexpertise.TheANUsecretariatincludingTomWestland,RosemaryTran,AlisonDarby,PatrickDeegan,RosaBishop,SamHardwick,MichaelWijnen,NawaazKhalfan,PatrickWilliams,HitonaruFukui,OwenHutchisonandLukeHurstprovidededitorialadvice,researchsupportandlogisticalassistance.
WewouldberemissifwedidnotextendourwarmthankstoNeilThomas,whocoordinatedtheAustralianendoftheworkontheReport,andZhangYongjun,LiuJunandotherswhocoordinatedtheprojectattheChineseend.Theirdevotiontothistaskwasessentialtoitssuccessfulcompletion.
ThisReportistheresultofasignificantandunprecedentedexerciseinbi-nationalcollaboration.Wehavesoughttoprovidecommonreferencepointsinhowwecanconductourrelationshipandprinciplestowhichwecanappealwhenfacingtheinevitableuncertaintiesthatweshallhavetomanagearoundprofoundchange.WeareconvincedthattheeffortthatthisReporthascalledforthinbothourcountriestothinkthroughthefutureofourbilateraleconomicrelationshiptogetherisinitselfanencouragingharbingerofwhatAustraliaandChinacanhopetoachievetogetheroverthecomingdecades.
Peter Drysdale Zhang Xiaoqiang
August 2016
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List of acronymsAALD Australian–AmericanLeadershipDialogue
ABC AgriculturalBankofChina
ABS AustralianBureauofStatistics
ACACA Australia–ChinaAgriculturalCooperationAgreement
ACC Australia–ChinaCouncil
ACCCI Australia–ChinaChamberofCommerceandIndustry
ACJER Australia–ChinaJointEconomicReport
ACOLA AustralianCouncilofLearnedAcademies
ACRI Australia–ChinaRelationsInstitute
ACT AustralianCapitalTerritory
ACYA Australia–ChinaYouthAssociation
ACYD Australia–ChinaYouthDialogue
ACYPI Australia–ChinaYoungProfessionalsInitiative
ADB AsianDevelopmentBank
ADS ApprovedDestinationStatus
AEC ASEANEconomicCommunity
AFTA ASEANFreeTradeArea
AIIB AsianInfrastructureInvestmentBank
AJBCC Australia–JapanBusinessCooperationCommittee
AJPPPD Australia–JapanPublic-PrivatePolicyDialogue
AMPC ASEANMasterPlanforConnectivity
AMRO ASEANPlusThreeMacroeconomicResearchOffice
ANZ AustraliaandNewZealandBank
ANZSOG AustraliaandNewZealandSchoolofGovernment
ANZUS AustraliaNewZealandUnitedStatesSecurityTreaty
APEC AsiaPacificEconomicCooperation
APRA AustralianPrudentialandRegulationAuthority
ARENA AustralianRenewableEnergyAgency
ARF ASEANRegionalForum
ARFP AsiaRegionFundsPassport
ASEAN AssociationofSoutheastAsianNations
ASIC AustralianSecuritiesandInvestmentsCommission
ASX AustralianSecuritiesExchange
ATC AustralianTradeCommission
ATSE AustralianAcademyofTechnologicalSciencesandEngineering
AWIC AustraliaWeekinChina
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List OF AcROnyms
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BCA BusinessCouncilofAustralia
BCIM Bangladesh–China–India–MyanmarEconomicCorridor
BIS BankofInternationalSettlements
BIT BilateralInvestmentTreaty
BRICS BrazilRussiaIndiaChinaSouthAfrica
CBA CommonwealthBankofAustralia
CCB ChinaConstructionBank
CCIEE ChinaCenterforInternationalEconomicExchanges
CEFC CleanEnergyFinanceCorporation
ChAFTA China–AustraliaFreeTradeAgreement
CISA ChinaIronandSteelAssociation
CITIC ChinaInternationalTrustandInvestmentCorporation
CMBA ChineseMedicineBoardofAustralia
CMI ChiangMaiInitiative
CMIM ChiangMaiInitiativeMultilateralization
CNTA ChinaNationalTourismAdministration
CPEC China–PakistanEconomicCorridor
CPPCC ChinesePeople’sPoliticalConsultativeConference
CSIRO CommonwealthScientificandIndustrialResearchOrganisation
CSRC ChinaSecuritiesRegulatoryCommission
DAF DepartmentofAgricultureandFood(WesternAustralia)
DIBP DepartmentofImmigrationandBorderProtection(Australia)
DDPP DeepDecarbonisationPathwaysProject
DFAT DepartmentofForeignAffairsandTrade(Australia)
DSDBI DepartmentofStateDevelopment,BusinessandInnovation(Victoria)
DSGE DynamicStochasticGeneralEquilibrium
EABER EastAsianBureauofEconomicResearch
EAS EastAsiaSummit
EGA EnvironmentalGoodsAgreement
EIA EnergyInformationAdministration
EPG EminentPersonsGroup
ESM EuropeanStabilityMechanism
EU EuropeanUnion
FASIC FoundationforAustralianStudiesinChina
FDI ForeignDirectInvestment
FinTech FinancialTechnology
FIRB ForeignInvestmentReviewBoard(Australia)
FSC FinancialServicesCouncil
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FTA FreeTradeAgreement
FTAAP FreeTradeAreaoftheAsiaPacific
GATT GeneralAgreementonTariffsandTrade
GBP PoundSterling
GCI GlobalCompetitivenessIndex
GDP GrossDomesticProduct
GNI GrossNationalIncome
GTAP GlobalTradeAnalysisProject
GVA GrossValueAdded
HELP HigherEducationLoansProgram
HKMA HongKongMonetaryAuthority
HLD High-LevelDialogue(Australia-China)
IBRD InternationalBankforReconstructionandDevelopment
ICBC IndustrialandCommercialBankofChina
ICT InformationandCommunicationsTechnology
IEA InternationalEnergyAgency
IFA InvestmentFacilitationArrangement
IMF InternationalMonetaryFund
IPCC InternationalPanelonClimateChange
IPO InitialPublicOffering
IT InformationTechnology
ITA InformationTechnologyAgreement
KBC Knowledge-BasedCapital
LED LightEmittingDiode
LNG LiquefiedNaturalGas
MFN MostFavouredNation
MoC MemorandumofCooperation
MOFCOM MinistryofCommerce(PRC)
MoU MemorandumofUnderstanding
MSR MaritimeSilkRoad
NAB NationalAustraliaBank
NAFTA NorthAmericanFreeTradeArea
NAIF NorthernAustraliaInfrastructureFacility
NDRC NationalDevelopmentandReformCommission(China)
NICM NationalInstituteforComplimentaryMedicine(Australia)
NIE NewIndustrialisedEconomy
NLA NationalLibraryofAustralia
NLC NationalLibraryofChina
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List OF AcROnyms
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OBOR OneBelt,OneRoad
OECD OrganisationforEconomicCooperationandDevelopment
PBoC People’sBankofChina
PLA People’sLiberationArmy(China)
PPP PurchasingPowerParity
PSC ProductionSharingContract
PTA PreferentialTradeAgreement
RBA ReserveBankofAustralia
RCEP RegionalComprehensiveEconomicPartnership
RFA RegionalFundingArrangement
RMB Renminbi
RQDII RenminbiQualifiedDomesticInstitutionalInvestor
RQFII RenminbiQualifiedForeignInstitutionalInvestor
SASAC State-ownedAssetsSupervisionandAdministrationCommission(China)
SBLF Australia–ChinaSeniorBusinessLeadersForum
SDR SpecialDrawingRights
SEC SecuritiesandExchangeCommission(USA)
SED StrategicEconomicDialogue(Australia–China)
SOE State-OwnedEnterprise
SSO SydneySymphonyOrchestra
STEM ScienceTechnologyEngineeringMathematics
TCM TraditionalChineseMedicine
TFA TradeFacilitationAgreement
TPP Trans-PacificPartnership
TRIM Trade-RelatedInvestmentMeasure
TTIP TransatlanticTradeandInvestmentPartnership
UKTI UnitedKingdomTradeandInvestment
UN UnitedNations
UNCTAD UnitedNationsConferenceonTradeandDevelopment
US UnitedStates
VECCI VictorianChamberofCommerceandIndustry
WA WesternAustralia
WOFE WhollyOwnedForeignEnterprise
WTO WorldTradeOrganization
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List of figuresFigure1.1: Chineseandglobalsteelproduction 30
Figure1.2: SectoralvalueaddedasapercentageofChineseGDP 32
Figure1.3: China’sGDPgrowth(RHS)anditscontributiontoglobaloutput(LHS),1990–2020 33
Figure1.4: ExportstoChinaasashareoftotalexports,Australiaandothermajorexporters 34
Figure1.5: Asia’sweightintheglobaleconomy 41
Figure2.1: China’sshareoftheglobaleconomicaggregates 50
Figure2.2: InvestmentasashareofGDP 51
Figure2.3: Nationalsavingbysector 53
Figure2.4: China’sshareofglobalcommodityconsumption 53
Figure2.5: China’ssteelproduction 54
Figure2.6: MininginvestmentinAustralia 55
Figure2.7: Australia’sshareofChinesecommodityimports 55
Figure2.8: Growthinglobaltrade 56
Figure2.9: Wagesandhouseholddisposableincome 57
Figure2.10: ContributionstoChina’sGDPgrowth 58
Figure2.11: China’sexportmix1995–2015 59
Figure2.12: Domesticvalue-addedshareofChina’sgrossexports 60
Figure2.13: ContributiontoChina’sGDPgrowth 60
Figure2.14: China’ssteelproductionandironoreimports 64
Figure2.15: GrowthinAustralia’snationalincome 66
Figure2.16: Australia’sindustrialcomposition 66
Figure2.17: Australia’scompetitivenessranking 67
Figure3.1A: Exportshare
Figure3.1B: Importshare 74
Figure3.2: Ironorepriceandexportvalue 75
Figure3.3: ChineseimportsfromAustraliaandrestofworld 77
Figure3.3A: Coal(Tons) 77
Figure3.3B: LNG(Tons) 77
Figure3.4: AustralianagriculturalexportstoChina(A$million,2014–2015) 82
Figure3.5: AustraliangoodsexportstoNortheastAsianeconomies 83
Figure3.6: RealgrowthinexportsfromChinaandAustraliaunderthreeChinesegrowthscenarios 88
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List OF FiguREs
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Figure3.7: TotalaveragespendofforeignersvisitingfriendsandrelativesinAustralia,2015 95
Figure4.1: StockofforeigndirectinvestmentinAustraliabysource(2014A$billion) 115
Figure4.2: OECDforeigndirectinvestmentregulatoryrestrictivenessindex 117
Figure4.3: RecipientsofAustraliandirectinvestment,2014(A$billion) 125
Figure4.4: Workingholidayvisasgrantedfrom1July2014to30June2015 133
Figure4.5: StudentvisaholdersinAustralia,30June2015 135
Figure5.1: Grossvalueaddedbythefinancialservicesindustryasapercentageoftotaloutput 143
Figure5.2: OECDservicestraderestrictivenessindexforcommercialbanking,2015 144
Figure5.3: OECDservicestraderestrictivenessindexforinsurance,2015 145
Figure5.4: IndexofcontrolsonChina’scapitalaccount(ka)andcurrentaccount(ca)overrecentyears 149
Figure5.5: Nominalandnominaleffectiveexchangerates—theRMBagainsttheUSdollar 153
Figure5.6: Australia’sexportsoffinancialservicestotheAsiaPacificregion 154
Figure5.7: Australia’sexportsofinsuranceandpensionservicestotheAsiaPacificregion 154
Figure5.8: TotalsalesoffinancialservicesandinsuranceandpensionservicesbyAustraliabymodeofsupply,2009–2010 155
Figure7.1: AsiaPacificeconomies’shareoftradewithEastAsia,2014 214
Figure7.2: Wavesofregionalandglobaleconomicgrowth 219
Figure7.3: ASEAN,APEC,EASandARFmembershipcompared 222
Figure7.4: ASEAN,RCEP,TPPandpossibleFTAAPmembership 226
Figure7.5: GDPprojectionsofRCEPandTPPgroups,1980–2050,atpurchasingpowerparity 228
Figure8.1: AustraliaandChinaintheglobalgovernancearchitecture 238
Figure8.2: ShareofglobalGDP(ppp)
Figure8.3: Globaltradevolumneofgoodsandservices(1980=100) 240
Figure8.4: Globalcapitalflowssince1980 241
Figure8.5: IMFGDPforecastsforemergingmarketanddevelopingeconomies 246
Figure8.6: Thecomponentsoftheglobalfinancialsafetynet 249
Figure8.7: Totalresourcescomparedtoavailableresources 250
Figure8.8: AustraliaandChinawithintheglobaltradingsystem 254
Figure8.9: InvestmentasapercentageofGDP 259
Figure8.10: AustraliaandChinawithintheglobalenergygovernancearchitecture 261
Figure8.11: China’sannualgrowthinGDP,CO2emissions,energyandemissionsandenergyintensity,2005–2014 264
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List of tablesTable2.1: China’ssteelusagebypurpose(percentageoftotal) 63
Table3.1: ActualandprojectedexportsofcommoditiestoChina 78
Table3.2: Simulatedeffectsofreducingremainingtariffstozero 86
Table3.3: DecompositionofChineseGDPgrowthunderthreegrowthscenarios 88
Table3.4: Actualandprojectedsharesofexportsbysector 89
Table3.5: Actualandprojectedshareofexportsbysectorinalternativescenarios 90
Table3.6: ThechangingnatureofChinesemanufacturingexportstoAustralia 92
Table3.7: Sisterstate–provincerelationshipsbetweenAustraliaandChina 102
Table4.1: Remainingbarrierstoinvestment 127
List of boxesBox2.1: Theglobalriseoftheinnovationeconomy 48
Box2.2: China’shighratesofnationalsaving 52
Box2.3: China’sprogressiontowardshigher-endandvalue-addedmanufacturing 59
Box2.4: China’seconomictransformationandthe13thFiveYearPlan 61
Box2.5: TheoutlookforChina’ssteeldemand 63
Box2.6: AnassessmentofAustralia’scompetitiveness 67
Box2.7: ReformprioritiesacrossAustralia’sservicessector 68
Box3.1: Morethanore 77
Box3.2: Resourcesecurityandglobaltrade 78
Box3.3: AlibabaGroupopensnewmarketsforAustralianexporters 84
Box3.4: Blackmores’Chinaentrystrategy 85
Box3.5: ChinesetourisminAustralia 94
Box3.6: AustraliantouristsinChina 97
Box3.7: Healthcareservices 99
Box3.8: TheAustralia-ChinaStrategicEconomicPartnership 101
Box3.9: Stateandprovincialties 103
Box3.10: CulturalconnectionsandbusinessopportunitiesfromtheChinesediaspora 106
Box3.11: BrandAustraliaandBrandChina 107
Box4.1: Thebenefitsofforeigndirectinvestment 111
Box4.2: Popularattitudestowardforeigninvestment 116
Box4.3: InfrastructureinvestmentinAustralia 119
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List OF tABLEs, List OF BOXEs
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Box4.4: ForeigninvestmentintheUnitedKingdom 120
Box4.5: UnderstandingChineseSOEs 121
Box4.6: Chineseglobalinvestmentsinironore 122
Box4.7: TheChinesediasporainAustralia 129
Box4.8: VisasforinvestorsandtourismintheUnitedKingdom 130
Box4.9: Collaborativeresearchandscientificexchange 134
Box5.1: China’sbigfourbanksinAustralia 151
Box5.2: Australia’s‘bigfour’banksinChina 155
Box5.3: AMPCapitalandChinaLife 157
Box5.4: TheAustralia–ChinaInvestmentCooperationFramework 159
Box6.1: Australia,Chinaandregionalinfrastructureinvestment 175
Box6.2: Experiencewithcommercialrisks 178
Box6.3: Australia’sreactiontoshocksfromshiftsinChinesemarketsentiment 180
Box6.4: LandbridgeGroupandthePortofDarwin 182
Box6.5: SinoGasinChina 183
Box6.6: China’saccessiontotheWTO 186
Box6.7: Deliveringprosperityandsecuritythroughthemarket 188
Box6.8: Modelsofbilateralcollaboration 195
Box6.9: RegionalsecurityandtheAustralia–Chinarelationship 201
Box6.10: Buildingpolicytrust 203
Box7.1: AsiaPacificregionalinitiativesandtheglobalsystem 216
Box7.2: ConsensusandthecreationoftheAsianDevelopmentBank 217
Box7.3: Buildingamultilateralregimeforgoverningforeigndirectinvestment 229
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EXECUTIVESUMMARY
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Executive Summary
Australia and China: forging a comprehensive strategic partnership for change
AustraliaandChina,twovastlydifferentnations,alreadyhaveahugeandjointpolitical,economicandsocialinvestmentinthesuccessoftheirbilateralrelationship.
Takentoahigherlevel,asthisReportrecommends,thisinvestmentintherelationshipcanhaveadramaticadditionalimpactonbotheconomiesandsocieties.
Thisuniquepartnershipstemsfromadeepalignmentofintereststhat,shortofhighlynegativepolicymaking,cannotbeundone.
Therelationshipisalreadylargeandwillundergoahugechange.Thescaleandcomplexityoftherelationshipisgrowingbecauseoftheincreasedroleofservicesandinvestment,aswellasitspoliticalandsecuritydimensions.
Thesecircumstanceslaidthefoundationforsupportfrombothgovernmentsforanindependentjointstudyofdevelopmentsintherelationshipinthedecadeaheadandhowtostrengthenthebilateralframeworkandthepolicysettingsformanagingit.
ThisReportistheproductofanindependentstudyjointlyledbytheChinaCentreforInternationalEconomicExchangesinBeijingandbytheEastAsianBureauofEconomicResearchatTheAustralianNationalUniversity.Itsaimistodefineaframeworkforpolicymakersandforstakeholdersinbusiness,media,researchinstitutionsandthecommunity;aframeworkthatenablesAustraliaandChinatoharnesstheopportunitiesthatarearisingfromtheprofoundtransformationsintheireconomies.
Why Australia and china are important to each other
ChinahasforsomeyearsbeenAustralia’slargesttradingpartnerandoneofitsmostimportantbilateralrelationships.ItisnowwidelyunderstoodthatAustralia’seconomicgrowthandcontinuedrisinglivingstandardsarestronglylinkedtoChina’seconomicsuccess.
IntheChinesepolicycommunity,thereiswideunderstandingandclearacknowledgementoftheeconomicandpoliticaladvantagesofopen,secureandcompetitiveaccesstoAustralianironore,coalandotherrawmaterials.
AsChina’seconomymaturesanditsmiddleclassexpands,ChinaisalsoenjoyingtheaddeddividendofaccesstoAustralianagriculture,institutionsandservices—everythingfrominfantformulatovitamins,buttertobeef,educationtotourism,aswellasadvancedscience,technologyandresearchcapabilities.Australia’sopensocietyprovidesChineseinvestmentswithsecurityinastableandwell-functioningmarketeconomythatguaranteestransparentrecoursetopolitical,legalandregulatoryinstitutions.
Thesenewavenuesofcommercialexchangeareatwo-waystreet.BothAustraliaandChinagainfromgrowinganddiversifyingtheireconomicrelationshipthroughnewflowsoftourists,students,investorsandmigrants.Formorethanadecade,Chinahasbeentheworld’smaineconomicgrowthengine.Despiterecentslowdowns,Chinawillremainakeydriverofglobalgrowthinthecomingdecade.IfChina’sreformagendasucceeds,itcanachieveannualGDPgrowthofaround6percentayearoverthenext10years.
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ButitisobviousthattheimpactofChina’sgrowthonAustraliaoverthenext10yearswillbeverydifferentfrominthepast.Australiawillnolongeronlybearemotesupplierofrawmaterials.ItcanbeapalpableanddistinctivepresenceinChinesedailylife,particularlyfortheurbanmiddleclasseswhoseaspirationsandincomeswillcontinuetoexpandforseveraldecades.
ThenewlyemergingpartnershipbetweenAustraliaandChinahasasignificantandvaluableextradimension.AustraliaisnotonlyeconomicallyenmeshedwithEastAsia,givingitahighstakeinChina’ssuccess.Italsohasstrongeconomic,culturalandstrategiclinkstotheUnitedStates,andthereforeacompellinginterestinapositiverelationshipbetweentheUnitedStatesandChina.
Australia’sgeopoliticalandgeo-economicpositionanditsmulticulturalsocietyarethusuniqueassetsinshapingChina’slinkswiththeWest.
ChineseandAustralianprosperityhasdependedontheliberal,rules-basedglobalsystem.Bothcountrieshaveacompellinginterestinthesuccessfuladaptationoftheinstitutionsofglobalgovernancetotheeconomicandsecuritychallengesofthe21stcentury.AdeeperpartnershipbetweenChinaandAustraliacanbeapowerfulforceforthestrengtheninganddevelopingoftheseinstitutions.Australia’slongstandingcommitmenttoglobalinstitutions,itsdeepengagementwiththeeconomiesofAsiaanditshistoricaltieswithEuropeandNorthAmericaarecomplementarytoChina’sstatusasamajoreconomicpoweranditsdeclaredwillingnesstohelpsupplyandshapetheinternationalpublicgoodsofthe21stcenturyinthetaskofreformingandstrengtheningtheregionalandglobalframeworksofcooperationandgovernance.
ThisaddssignificantweighttoAustralia’ssupportforChina’sgrowingroleintheprovisionofinternationalpublicgoods,suchastheAsianInfrastructureInvestmentBank(AIIB).BothcountrieshaveacommoncommitmenttoChina’sparticipationinglobalinstitutionsandrules.
Benefits of closer economic partnership
Chinaisshiftingitsgrowthdriversfrominvestment,exportsandheavyindustrytoconsumption,innovationandservices.China’sgrowthslowdowndoesnotthreatenthistransformation;itisasymptomofit.
Thistransformationwill,byitself,leadtofastgrowthintradebetweenAustraliaandChinainrealterms,muchofitinservices.Eveninapessimisticscenario,inwhichaverageChinesegrowthisbelow5percentoverthenext10years,ourestimatessuggestthatAustralianexportstoChinawouldstillgrowby28percentandChineseexportstoAustraliaby20percent.A‘baseline’scenariohasAustralianexportsgrowingby72percentandChineseexportsby41percentoverthesameperiod.
Thebiggestgains,however,wouldberealisedifAustraliaandChinaworktoimplementthesupply-sidereformsrecommendedinthisReport.Ifthisreformagendaisprosecutedsuccessfully,AustralianexportstoChinawillgrowby120percentinrealterms,andChineseexportstoAustraliaby44percent.ForChina,thisisconditionalontheimplementationofareformagendathatembracesfinancialandfactorreform,state-ownedenterprise(SOE)reform,increasedopennesstoforeigninvestmentandcapitalaccountliberalisation.ForAustralia,itmeansincreasedcompetitioninshelteredindustries,opennesstoforeigninvestmentandskills,andfacilitatinginvestmentinsocialandphysicalinfrastructure.
Increasedtradeandinvestmentwillmeanhighernationalincomes,moreemploymentandmoretaxrevenueforbothChinaandAustralia.
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ThestructuralchangesintheChineseeconomypresageachangeinthestructureoftrade.TheprofoundcomplementaritystemmingfromAustralia’senergyandresourceabundanceandChina’sindustrialisationwillremainakeypillaroftherelationship,butwillbeincreasinglyaugmentedbyservicessuchaseducationandtourism,withinboundtourismfromChinasettotrebleby2025.Educationandtourismserviceswilljumpfrom8percenttoalmost20percentofAustralianexportstoChinain2025ineventhe“businessasusual”scenario.Machineryandequipmentwilljumpfromjustbelow20percentofChineseexportstoAustraliato28percent.
Chineseproductionisshiftingfromamodelbasedonadaptationandimitationofgoods,servicesandtechnologiesdevelopedelsewheretoamodelbasedondomesticinnovation.ThisisbeingdrivenbyasubstantialinvestmentinChina’sinnovationecosystem.Australia’shigh-qualitytertiaryeducationsector(alreadyamajorservicesexportertoChina)anditscommitmenttoitsownNationalInnovationandScienceAgendamakeitanaturalpartnerinthistransformation.Australia’sexperienceinbuildingahighlydevelopedfinancialsystemcanalsobeofvaluetoChina,whereasophisticatedfinancialsystemwillbecrucialforallocatingcapitaltothemostinnovativeandefficientfirms.ChinaseesspecialbenefitinthepartnershipwithAustraliafortriallingreformsininvestmentpolicyandservicesmarketsaswellasseekinggreateralignmentwithAustraliainitsgeopoliticalinterestsinAsiaandthePacific.
Inshort,thereiseveryreasontobelievethattheAustralia–Chinarelationshipwillbecomemore,notless,importanttobothcountriesastheChineseeconomycontinuestochangeandupgrade.
ForAustralia,thismeansenhancedlong-termeconomiccapacitythroughopportunitiesfornewtradeandproductivity-boostinginnovationaswellasthroughimprovingnationalinfrastructureandthedevelopmentofregionalAustralia.
ForChina,thismeansasustainablepaththroughmiddle-incomestatusonitswaytobecomingahigh-incomeeconomythrougheconomicupgradinganddiversification.
towards a new policy framework
Theneedforanupgradedpolicyframeworkisbroadlyacceptedinbothcountries.
ThatiswhybothgovernmentshavefinanciallyandinstitutionallysupportedtheproductionofthisReportandprovidedthenecessaryaccesstoallowwideconsultationswiththekeyeconomicministriesandagenciesonbothsides,aswellaswithsubnationalgovernments,keyresearchinstitutions,businessleadersandcommunityfigures.
Creatinganupgradedframeworkisacomplextask:itwillrequirebuildinganewsetofnationalcapabilitiesinbothcountries.Thesewillbestbefoundedonpastexperienceandachievements.
Inthe1980s,AustraliaandChinaestablishedwhattheycalleda‘modelrelationship’betweentwoeconomieswithdifferentpoliticalandsocialsystemsandatdifferentstagesofdevelopment.Thiswasthetwocountries’firstsignificantjointeffortatbuildingaframeworkfortheirrelations.Thisprincipleshouldcontinuetoguidethebilateralrelationshiptohigherlevels.
AustraliaembracedChina’sopennessandreformasacriticalfactorinregionalprosperityandstability.ChinaembracedthepartnershipwithAustraliaasacrucialpartofitsopeningpolicy,andAustraliaassumedakeyroleinChina’sforeigneconomicstrategy.Thispath-breakingpartnershipopenedmarket-basedresourcestrade,foreigninvestmentandregionalcooperationwithChina—leadingtopositiveengagementwithChinainAPECandworkingtogetheronChina’saccessiontotheWTO.
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AustraliaandChinahavesinceworkedtostrengthenregionaleconomiccooperationthroughAPEC,theASEANPlusframeworksandtheEastAsiaSummitinordertosecuretheframeworkofpoliticalconfidenceandsecuritynecessarytoeconomicprosperity.
AustraliaandChinaalreadyhaveaComprehensiveStrategicPartnership,agreedin2014,whichguaranteeshigh-levelattentiontothebilateralrelationshipthroughanannualLeadersMeeting,StrategicEconomicDialogue,andForeignandSecurityDialogue.AustraliaandChinaalsohavetheChina–AustraliaFreeTradeAgreement(ChAFTA),whichdeliverssignificanttradeliberalisationandopensthedoorinbothcountriestonewandwideraccesstoinvestmentandtheservicessector.Indeed,ChAFTAhasthepotentialtoserveasakeyagentintransformingthecommercialrelationshipbetweenthetwocountriesinthecomingdecade.
Butthefullopportunityofthesearrangementsisfarfrombeingrealised—bothcountriesmustnowprovideforthecomprehensivesettingofstrategicbilateralobjectivesinaforwardagenda.Thiswilldependonnewframeworksforinstitutionalisingactivecollaborationonpolicydevelopmentandreform.
Chinaisnowbuildingregionalandglobalinstitutionsthatarecommensuratetoitsplaceintheinternationaleconomicsystem.China’sleadontheAIIBandtheOneBelt,OneRoad(OBOR)initiativesrepresentChinaembeddingitsinterestsjointlywithotherspartnerstobolsterinfrastructureinvestmentandregionalconnectivity.
AustraliahasworkedcloselywithChinaintheIMFandotherinternationaleconomicbodiestosupporttheseChineseinitiatives.AustraliaisafoundingmemberoftheAIIB,andparticipatesinOBORthroughprogramsincludingthedevelopmentofNorthernAustralia.TherehasbeenclosecollaborationintheG20onsharedagendasforglobalgrowthandreformingthemultilateraltradingsystem.
managing new dimensions of the relationship: policy framework and programs
HowareAustraliaandChinagoingtomanagetheirincreasinglycomplexrelationship—arelationshipinwhichChinaisbyfarthebiggesteconomyinAsia,isthesecond-largesteconomyintheworld,isdeeplyenmeshedinacomplexrelationshipwiththeUnitedStates,andisprojectinggrowingpoliticalconfidence?
ClosecooperationwithAustraliashouldbeanintegralpartofthenextphaseofChina’seconomicreformandopening.Collaborationonservicesectorreform,financialrestructuringandcapitalaccountliberalisationwillhelpChinarealiseitsgrowthpotential.Asanadvancedregionalservices-basedeconomy,AustraliaisanaturalpartnerandapromisingtestbedforChinainitsreformeffort.
ThisReportoutlinesthekeyideasandprogramsfordealingwiththisquestion.Theconclusionsthatfollowareenvisagedasalong-termagendaofcooperationforbilateralrelations,andwillrequirecarefulconsiderationbybothgovernmentsandotherstakeholdersintherelationshipoverthedecadeahead.
ThisReportshowsthat,inordertorealisetheopportunitiesandcountertheriskstobilateralgrowth,theAustralianandChinesegovernmentsshouldsensiblyelevatetheirrelationshiptotheuniquelevelofaComprehensiveStrategicPartnershipforChange.Leadershipatthehighestlevelshouldsignalthepriorityattachedtodevelopmentoftherelationship.
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Inparticular:
• ThenewComprehensiveStrategicPartnershipforChangethattheReportrecommendswouldbuildonChAFTAandthecurrentannualLeadersMeeting,andparallelministerialmeetings,throughestablishingjointpolicyworkinggroupsthatsupportthisworkandotherpolicyinitiativesstemmingfromtheleaders’dialoguesandadvanceongoingpolicydevelopmentandreform:forexample,inthenegotiationofanewAgreementonInvestmentwithintheframeworkofChAFTAoronaccesstoservicesmarketsandotherissues(seebelow).
• Jointpolicyworkinggroupscanwork,asneeded,withstateandprovincialauthorities,businesssectors,researchinstitutesandcommunity-basedinterestsonspecificinitiativestoadvancethetrade,investment,financial,regionalandglobalreformagendasofbothcountries.
– TheseworkinggroupscanassistineffectingthebilateralcommitmentstofurtherinvestmentliberalisationandexpandedaccesstoservicesmarketsmadeunderChAFTA.
– Thetwocountriesshouldalsoestablishaworkinggroupfordialogueandcooperationonthemaritimeeconomy,asthisisaparticularareaofpotentiallyproductivecollaborationbetweenAustraliaandChina.Bothcountriesaremaritimepowerswithcommoninterestsinseabornesupplyroutesandmanyothermaritimeissues.
• Bothgovernmentsshouldaim,overthedecadeahead,todrawonprecedentfromtheirotherbilateralrelationshipsandembedtheirnewpartnershipintoacomprehensivebilateralBasicTreatyofCooperation.
– Thistreatywouldlockinthepracticeandprinciplesforcooperation,and:committoregularhigh-levelgovernmentdialogues;setouttheprinciplesformanagingtherelationshipthatareenunciatedinthisReport;institutionaliseofficialbilateralexchangesandtechnicalcooperationprogramsbetweeneconomicandforeignaffairsministries,includingbranchesofthemilitary;includepolicyapproachesbetweenfederal–stategovernmentsinAustraliaandcentral–provincialgovernmentsinChina;provideforthecomprehensivesettingofstrategicbilateralobjectivesinaforwardagenda;enfoldtheagreements,mechanismsandreformsoftheChAFTAarrangement;andentrenchcooperationonimprovingeducational,culturalandpeople-to-peopleexchange.
• Bothcountriesshouldnurturethecapacitiesnecessaryfornewhigh-levelengagementthroughestablishingbytreatyagreementanewandwell-resourcedbi-nationalAustralia–China(Ao–Zhong)Commissionintheformofastatutoryentitythatoperatesindependentlyofbothgovernments.
– TheCommissionwillboostthelevelandrangeofpolicy,research,scientific,technology,education,culturalandpeople-to-peopleexchangesbetweenthetwocountries.ItsnearestparallelinAustralianexperienceisthetreatyarrangementbetweenAustraliaandtheUnitedStatesthatestablishedtheAustralian–AmericanFulbrightCommissionafterWorldWarII.
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• WithintheframeworkandprovisionsofChAFTA,AustraliaandChinashouldmovetonegotiateacomprehensiveAgreementonInvestment—incorporatinga‘negativelist’approach,effectivenationaltreatmentofforeigninvestors,respectforruleoflaw,resourceaccessguarantees,andgreatermobilityofpeople—aheadofChineseagreementswiththeEuropeanUnionandtheUnitedStates.TheAgreementonInvestmentcanserveasamodelforaregionalinvestmentregimeinEastAsia.InvestmentflowsfromChinatoAustraliaandfromAustraliatoChinawillplayacriticalroleinthedevelopmentoftheneweconomicrelationshipfromexchange,toinvestment,andnowtopartnership.
– ThiswillnotbeachievedifthebroadercommunitydoesnotgraspthebenefitsofforeigninvestmentinbothAustraliaandChina.InAustralia,thismeansacceptingequaltreatmentforChineseinvestmentandreconsideringattitudestowardsstate-ownedinvestorsfromallcountries.InChina,itmeansbuildingrespectforruleoflawtomakeinvestmentssecureandpredictableforalldomesticandinternationalparties.
• ThereengineeringofthebilateralarchitecturethatisproposedshouldbealignedwiththeAustraliangovernment’sNationalInnovationandScienceAgendaandtheChinesegovernment’sinnovationpriorityinits13thFiveYearPlan.
– Thiswouldseetheprioritisationofbilateralcooperationinfutureopportunitiesinresearchanddevelopment,capitalsourcing,STEMcollaboration,researchcommercialisation,techlandingpads,thedigitaleconomy,andexchangesbetweenAustralianandChineseentrepreneursandinvestors.
• AustraliaandChinashouldattachtopprioritytotheconclusionofahigh-standardagreementontradeandinvestmentliberalisationandongoingeconomiccooperationarrangementsintheAsiaPacificundertheRegionalComprehensiveEconomicPartnership.
• Thetwocountries’sharedinterestintheG20andconstructiveparticipationinglobaleconomicgovernanceshouldfocusonChina’sroleinmutualsupportamongthemajorcurrencies;securingtheinternationalfinancialsafetynettoprotectagainstthespreadoffinancialcrises;connectingreformtoeconomicgrowth;andintensifyingeffortstoreformthemultilateraltradingsystem.
• Importantly,ChinaandAustraliashouldinstigatetop-levelregionaldialogueswithJapan,SouthKorea,India,theUnitedStatesandotherkeyplayersintheregionontheenergytransformationthatisnecessarytomitigateclimatechangeandotherenvironmentalissues.ThisisafruitfulareaforregionalcoalitionbuildingonanissueinwhichChina,asitseekstoreconcileincreasingenergyusewithitsenvironmentalambitions,andAustralia,asamajorenergysuppliertotheregion,haveamajorstake.ItisalsoanareainwhichcooperationwithotherAsiaPacificcountriescouldbeveryproductivepolitically.
Ifthesestepsaretaken,theAustralia–Chinarelationshipwillbetakentoawhollynewlevel.Whilefullyrespectfulofeachother’sexistingrelationships(suchasAustralia’sANZUSrelationshipwiththeUnitedStates),thenewpartnershipwillbeapowerfulforceforthestabilityandprosperityoftheregion,andindeedfortheglobalsystem.ItcanserveasaprincipalvectorofAustralianandChineseengagementwithinarapidlychangingworld.Nurturedcarefullyandimaginativelybygovernments,businesses,researchinstitutionsandotherstakeholdersonbothsides,thisdeeperpartnershipcouldbecomeoneofthemoststrategicallyvitalandproductivebilateralrelationshipsthateithercountryhasintheworld.
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CHAPTER1strategic importance of the relationship
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Key messAges
ThereisnoeconomicorgeopoliticalfutureforChina,AustraliaortheworldthatwouldnotbeimprovedbyChina’ssustainedandbalancedeconomicgrowth.AndyetthefuturedirectionofChinesegrowthwillbeverydifferentfromthatoverthepastfourdecades.TheforcesofchangethathavealreadyunleashedawaveofconsumptiongrowthareaffectingtherelationshipwithAustraliaprofoundly.EconomicreformandliberalisationcanintensifytheongoingchangeinthestructureoftheChineseeconomyand,whilethesechangesimplyalessheavyrelianceinAustraliaontheresourcesectorforeconomicgrowth,thereareopportunitiesforgrowththatwillrequiresubstantialrepositioningofpolicyandcommercialstrategiesbybothcountriesandthedevelopmentofastillcloserrelationshipbetweenthetwocountries.
ThestructuraltransformationoftheChineseeconomyasitgrowstowardhigh-incomestatuswillbefuelledbydomesticreformsthatmaketheallocationofresourcesmoreefficientandbytheopeningofthecapitalaccount,astepthatshouldbeundertakenincrementallyandwithduecaution.Chinawillreorientitseconomytowardsdomesticconsumption.Australia’schallenge,meanwhile,istocounteractthefallinrealincomesthathasresultedfromthefallincommoditypricesasChinesedemandslows,andtoinvestinfillingtheinfrastructuregapsthatwillactasabrakeonproductivityandincomegrowthifleftunaddressed.
Therecenthistoryofthegrowingtiesbetweenthetwocountriesshowsthatthedeterminedpursuitofadeeperrelationshipyieldstangiblebenefits.TheinstitutionsandpolicyframeworksthathaveemergedtoprovidestructurefortherelationshipinrecentyearsprovideastrongstartingpointforthenextphaseoftheAustralia–Chinapartnership.
Bothcountrieshaveinvestedheavilyintheirpartnership.Thepath-breakingrecordoftheAustralia–Chinapartnershipinopeningtheresourcetrade,foreigninvestment,regionalcooperationinitiativesandChina’saccessiontotheWTOprovidesalegacyonwhichtobuildnewinternationalstandardsintotheirbilateraltrade,investmentandallotherdealings.Theirhigh-levelComprehensiveStrategicPartnershipandChAFTAaremajorinstitutionalassets(embodyingmutualtrustandpracticalcommitment)thatcanbedeployedtomanagechangeoverthedecadesahead.Stillcloserengagementandinstitutionalarrangementsareneededtocapitaliseontheopportunitiesthatthesefoundationspresent.
ChAFTAisablueprintforinitialchange,notanend-pointinthebilateralrelationship.Ajointworkplanforachievingchangewillnotonlydefineprogressinthebilateraltrade,investmentandcommercialrelationshipoverthecomingdecade;itwillalsoprovidethefoundationforAustraliaandChinapushingliberalisationandreformintheAsianregionandsettingoutthepathwaytowardsreformandstrengtheningoftheglobaltradeandeconomicsystems.Precedentexistsininstitutionalframeworkssuchasthe1976BasicTreatyofFriendshipandCooperationbetweenAustraliaandJapanforacomprehensivebilateraltreatytoprovideanoverallguidingstructurefortheAustralia–Chinarelationshipasitmatures.
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Thescaleandsignificanceofdevelopmentsthatarenowtakingplace—especiallyinChinathroughitstransformationtowardsahigh-incomeeconomy—recommenddeeperbilateralinstitutionalarrangementsbetweenAustraliaandChina.Thesewouldbuildonexistingbilateralframeworkswithboldnewbi-nationalinitiatives,includingintheareasofinvestment,tourism,peoplemovement,science,andeducationalexchanges.Theywillneedtocaptureopportunitiesintherelationship,andmanagetheinevitablerisksandprocessesthatareaconsequenceoflarge-scalechange.
Bothcountriesshouldworktogethertostrengthentheestablishedregionaleconomiccooperationarrangementsandtosecuretheframeworkofpoliticalconfidenceandsecuritywithinwhicheconomicprosperitycanbeattained.ButtherearegapsinregionalpolicystrategiesthatAustraliaandChinamustnowworkmoreactivelywithregionalpartnerstofill.TheAustralia–Chinarelationshipisanchoredinglobalinstitutionalandpoliticalarrangements.Australiahasadirectandimportantstake,inpartnershipwithChina,inworkingtoensureChina’ssuccessintheassumptionofitsroleofsharedleadershipinglobaleconomicaffairs.
Inthecomingdecade,Australia’srelationshipwithChinawillbeatoppolicypriority.TradewithChinaaccountsforalmostaquarterofAustralia’soveralltrade,withChinaabsorbingalmostathirdofAustralia’stotalmerchandiseexports(DFAT2016e).Chinaisthefifth-largestsourceofforeigndirectinvestmentintoAustraliaandformanyAustralianbusinessesChinarepresentsanenormousgrowthmarket(ABS2016f).WhileAustraliaisChina’sseventh-largestsourceofimports,Australiaisalsoamajorandreliablesourceofstrategicindustrialrawmaterialsandhigh-qualityinputs,fromironoretoeducation,whichChinaneedstofuelitsindustrialisationandurbanisation.TherelationshipbetweenAustraliaandChinaisintegraltotheirotherimportantinternationalrelationships.
WithremarkablesuccessintheachievementofhigherincomesandwagesinChina,thepaceofgrowthisslowingasreadysuppliesoflowcostlabourareexhausted.TheshiftinChinafromexport-andinvestment-ledgrowthtogrowthbasedondomesticdemand,andespeciallydomesticconsumption,hascontributedtothedeclineoftheAustralianresourcesboom.
AsChina’sgrowthmodelandfocusshiftsandAustraliaseekstodefineaprosperouseconomicfuturelessreliantonitsresourcebase,bigchangesareboundtooccurintherelationship.Somebigchangeshavealreadytakenplaceandnewopportunitiesareemergingforbothcountries.Thetransformationtowardsproductivityandinnovation-ledgrowth,financialmarketreformandcapitalaccountopennesswillpropelChina’sdeeperintegrationintotheglobaleconomy.AricherChinawithamoreopenservicesindustrywillgainnewstandingamongthemajoreconomiesoftheworld.Australia’sshifttomorehumancapital-drivengrowth,togetherwiththechangesinChina,providetheopportunitytoforgenewcomplementaritiesbetweenthetwocountries,profoundlyreshapingtheirbilateralrelationshipoverthedecadeahead.
AsproductioninsomeofChina’sheavy,resourceandenergy-intensiveindustriesispeaking,thepriceofAustralia’sexportsofcommoditiessuchasironoreandcoalhasfallen.Aseconomicrebalancingtowardsconsumptionandservicesector-ledgrowthcontinues,theshareofheavyindustryintheChineseeconomywillinevitablydecline.YetChinesedemandforresourcesandenergywillremainlargeasurbanisationcontinuesinChinaandAustralia’s
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shareinChina’sresourceimports,whichhasrisenaspriceshavefallen,islikelytostayhigh.Asoneoftheworld’sleadingandmostcompetitivesuppliersofarangeofindustrialinputs,AustraliawillremainamajoranchorinChina’sexternalresourcesecurity.Increasingly,however,thetraderelationshipwilldiversifybeyondcommoditiesintoawiderrangeofgoodsandservices.Thetwocountries’investmentandfinancialintegrationwillbecomedeeperandmoresophisticated.Australiacanaimtobecomeamajorsupplierofknowledge,skillsandproductssupportingChina’snextstageofdevelopment,whichinvolvesanemphasisonhighvalue-addedindustries,innovationandcleanproductionprocesses.IndustrialrestructuringandupgradinginChinawillseeChina’smachineryandequipmentexportsbecomemoreimportanttoAustraliaandwilldiversifyChineseinvestmentintotourism,financeandinfrastructure.
AustraliaandChinahaveplayedakeyroleineconomiccooperationinAsiaandthePacific,regionswhichincludeeconomiesthatarethefastest-growingandmostdynamiccentresofglobaleconomicactivity.Throughregionalandmultilateralforums,bothcountrieshaveworkedcloselytopromotedevelopment,stabilityandstrongerregionalcooperation.Theyhaveadeepintersectionofinterestinstrengtheningestablishedregionalarrangements,suchasAPEC,theASEANPlusframeworksandtheEastAsiaSummit,andinglobalinstitutions,especiallytheG20.Theyalsohaveasharedinterestinsecuringtheframeworkofpoliticalconfidenceandsecuritywithinwhicheconomicprosperitycanbeattained.
ThegrowthofChina’simportanceintheworldeconomyhasoccurredveryrapidlyandhasbroughtwithitnewcapacity,responsibilities,expectationsandchallengesinmanagingitsinterdependencewiththerestoftheworld.
TheChineseeconomyaccountedforlessthan3percentofglobalGDPin1980(OECD2013a).Itisnowthesecond-largesteconomyintheworldinnominalterms,accountingfor13percentofglobalGDPincurrentUSdollars,anditsGDPislargerthanthatoftheUnitedStatesinrealpurchasingpowerparityterms(WorldBank2016).Chinabecamethesinglelargestcontributortoglobalgrowthin2007andhasmaintainedthatpositioneversince(Yueh2015).Chinaistheworld’slargestgoodstraderandisalsotheworld’ssecond-largestimporterofgoodsandservices,makingitamajorelementinglobaldemandfortradedgoodsandservices(Austrade2015a;WorldBank2016).
Untilrecently,Chinawasmainlyarule-takerintheglobaleconomicsystem.Sincethelate1970sithasbenefitedenormouslyfromopeningitseconomyandparticipatinginthepost-BrettonWoodssystem.China’sroleinglobaleconomicgovernanceremainedpassive,constrainedbythesmallsizeandlowcapacityofitseconomy.NowChinaisgrowingoutofthisstageandisthereforebecomingmoreactiveintheprovisionofglobalpublicgoods.Thetransitiontojoiningtheranksofglobalrule-makersisnotautomaticoreasyforeitherChinaortheglobalsystem.ButChinaisnowactivelyparticipatinginglobalgovernanceandactivelyassumingitsinternationalresponsibilitiesandduties.AnimportantopportunityisChina’schairingoftheG20in2016.
Australiahasadirectstakeinworking,inpartnershipwithChina,toensureChina’ssuccessintheassumptionofitsroleofsharedleadershipinglobaleconomicaffairs.ThereisspecialvalueinthedevelopmentofthispartnershipbecauseofAustralia’suniqueroleintheregionaswellasitsclosenesstotheUnitedStates.ThevalueofthepartnershipincludesthechanceofworkingwithChinainthedevelopmentofitscontributiontotheprovisionofinternationalpublicgoods,boththroughestablishedinternationalinstitutionssuchastheIMF,theWTO,theWorldBankandnewinternationalinstitutionssuchastheAIIB.ItalsoincludesAustralia’s
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workingtogetherwiththeestablishedandemergingpowerstobuildnewplatformstocoordinatearangeofglobaleconomicpolicieswithintheG20andtomanagethechallengestosustainablegrowthfromclimatechangeandotherenvironmentalissues.
Thisisacriticalmomentinafar-reachingglobaleconomictransition.AustraliaandChinahaveavitalopportunitytodefinehowtheywillshapethefuturecourseoftheirrelationshipinadeliberateway,establishingsomecommonreferencepointstohelpmanageitpurposefully,astheyhavewithsomesuccessinthepast,ratherthanmuddlingthroughinthefuture.
CapturingthefullbenefitoftheeconomicrelationshipwilldependonhowboththepublicandprivatesectorsinAustraliaandChinaengageinanddeveloptherelationship.Managingtherisksanduncertaintiesthatcanimpactontheeconomicrelationshipwillbeimportant.Asastartingpoint,gettingthemostforbothcountrieswillrequireafunctionalunderstandingamongpolicymakers,corporateleadersandthebroadercommunityofthechangesthatwillshapeChinaandAustraliainthenext10years.ThisReportcanplayaroleinthis.Theunderstandingthathasbeenbuiltthroughthisworkcanbeembeddedininstitutionalformstohelpfacilitatebettermanagementoftherelationship.ChAFTArepresentsamajorstepinputtinginplacestrongerinstitutionalarrangementsforthedevelopmentoftradeandinvestmentlinks.Butarelationshipofthekindthatwillberequiredbythechangesinbotheconomies,theireconomiccooperationintheregionandtheirpartnershipinglobalaffairsincomingdecades,demandssubstantialjointpolicyinitiativeandstrengthenedinstitutionalframeworks(bothgovernmentandprivate).
In1976,AustraliasignedaBasicTreatyofFriendshipandCooperationwithJapan,anagreementwhichsetouttheprinciplesunderpinningtheirbilateralrelationship,definedkeyareasofcooperation,andpledgedtoenshrineandpreservetheprincipleofnon-discriminationineconomicrelations.Sinceitssigning,theTreaty,andthemutualconfidencethatitgavebothJapanandAustralia,hasprovidedtheframeworkwithinwhichclosertieshaveforged.TheopportunityforevolvingasimilarframeworktounderpintheAustralia–Chinarelationshipshouldnotbepassedup.ChAFTAcanprovidethebeginningsforsuchaframework.
economic transformation in China and Australia
china
TheChineseeconomyisundergoingamajortransformationafternearly40yearsofhigh-speedeconomicgrowth.China’srapideconomicrisehasbeenfuelledbymarket-orientedreformsandeconomicliberalisationthathelpedreducethedistortionsinresourceallocationintheeconomy.Thereformwasmorethoroughinthegoodsmarketthaninfactormarketsforland,labour,capitalandenergy,whichremainedundertighterstatecontrol.Thisgrowthmodelencouragedinvestmentinmanufacturingcapacityandinfrastructure.
WithrealGDPgrowthataround10percentperannumfromthe1980s,manufacturingoutputisnowlargerthanthatinanyothereconomyintheworld.Chinaaccountedforaquarterofworldmanufacturingoutputby2015,upfromlessthan3percentin1990.Chineseconsumptionhasdominatedtheglobalmarketsforindustrialrawmaterials(WorldBank2016).Theexpansionoftheironandsteelindustry,forexample,whichproducedover800milliontonsofcrudesteelin2015,ormorethansixtimesasmuchasitdidin2000,liftedtheChineseshareinworldironoreconsumptionfrom14percentin2000toanestimated65percentin2015(Figure1.1).ThissurgeinChinesedemanddroveamorethanfive-foldriseofpricesintheyearsfrom2000–2008inthescrambleforadditionalsuppliesofironore(RBA2012).
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Australia’sestablishedcompetitivenessininternationalresourceandenergymarkets,relativegeographicproximityandcloseengagementsinceChina’seconomicopeninginthe1970s,madeAustraliaanaturalandcomplementarypartnerinChina’stradeandindustrialtransformation.AustraliahasbeenananchorinNortheastAsianresourcesecurityandapioneerintheexportofhighqualityresourcestoChina.AustraliabecameChina’sprincipalsupplierofimportedironore,coalandarangeofotherindustrialrawmaterialsovertheseyears.In2015,Australiasupplied64percentofChina’simportedironore,forexample,comparedwiththe43percentitsuppliedin2010(Ng2016).TherelationshipwithChinasawmassiveinvestmentintheAustralianresourcesectorinthefirstdecadeofthe21stcentury,andstronggrowthinAustraliathroughouttheglobalfinancialcrisiswhengrowthinotherindustrialeconomieslanguished.
WhileChina’sinvestment-ledgrowthdeliveredastonishingoutcomes,italsoledtostructuralimbalancesthatincreasinglythreatenedsustainablegrowthandstability.
China’sreformsnowaimtoremovethosedistortions,especiallyinthefinancialmarket,andnurtureconsumption-andservice-ledgrowth.TheChinesegovernmentisalsoimplementingmeasurestoclosedowncapacityinheavyindustries,suchasironandsteel,thatdoesnotembodybest-practiceproductiontechnologyorenvironmentalprotection.Thisentailssubstantialcostsofadjustmentandtheneedtomanageeconomicaswellassocialdislocation.Thefocusofgrowthisnowonthe‘neweconomy’.Thechangeingearfromdouble-digittosingle-digitgrowthisexpectedtoputtheeconomyonamoresustainable,butstillrelativelyhigh,long-termgrowthtrajectoryoverthecomingdecade.
Figure 1.1: Chinese and global steel production
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AmongthenationaleconomicpolicycommitmentsthatarelikelytohavethemostprofoundeffectonChina’srelationswithAustraliaandothercountriesistheChinesegovernment’s13thFiveYearPlancommitmenttobuildanopeneconomicsystem,deepenfinancialsystemreform,liberalisefinancialmarketsandacceleratetherealisationofChinesecapitalaccountconvertibility.
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CapitalaccountliberalisationisessentialtomakingChina’srenminbiatrulyglobalcurrencyandincreasingChina’sroleininternationalfinance.InclusionoftherenminbiintheIMF’sSpecialDrawingRightsbasketisafirststepinthisprocess.Fortherenminbitobecomeatrulyinternationalcurrency,however,Chinaneedstohaveanopencapitalaccount.Butthesignificanceofcapitalaccountliberalisationismuchmorewide-rangingthanrenminbiinternationalisation.
FinancialreformandcapitalaccountliberalisationarecentraltorebalancingtheChineseeconomyandfosteringinnovationandproductivitygrowth.Marketreformsandmarket-determinedinterestratesandexchangerateswillcorrectthemisallocationofcapitalthathasuntilnowfavouredparticularregions,state-ownedenterprisesandthestatebankingsector,andcrowdedoutfinancingandinvestmentfromthemoredynamicprivatesector.Healthyandwell-managedfinancialinstitutionsareattheheartoffinancialandeconomicstability.ThesechangeswillhelpChinatomovethroughtheso-called‘middle-incometrap’andtobecomeahigh-incomesociety.Capitalaccountliberalisationcouldalsoassistwithgeopoliticalstabilityintheregionthroughgreatereconomicandfinancialintegration.
ThescaleofChina’scross-bordertradeandinvestmentpaymentsandtheimportanceofusingmarketmechanisms(inparticularafullyflexibleexchangerateandarobustandmoreefficientfinancialmarket)tomanagetheinteractionbetweenthedomesticandinternationaleconomieseffectivelyrequirethemovetoanopencapitalaccount.
LiberalisingChina’scapitalaccountisanenormouschallengeanditwilltaketime.ThenervousnessininternationalmarketsaboutChinesestockmarketvolatilitiesandthemovetoanewforeignexchangerateregimewithmoreflexibilityagainstacurrencybasketoverthepastyearisaharbingerofthedifficultiesinmanagingthispolicychange.Theoverridinglessonoffinancialhistoryaroundtheworldisthattransitionsarenevereasyorsmooth.ThishasbeennolesstrueinChinathanithasbeeninothereconomiesthatareintheprocessofprofoundtransformation.Therehastobepolicytrialanderror,andtherewillinevitablybesomemissteps,butallcountrieshaveaninterestinensuringthatChina’sreformssucceed.
Theprocessofcapitalaccountliberalisationneedstobeincremental,builtonrobustinstitutionsandmarkets,andcarefullystagedandtimedtoavoidpotentiallysubstantialfinancialandforeignexchangerisks.Thisisnotjustatechnicaleconomicchallenge.IntegrationofChinaintointernationalcapitalmarketsrequiresChinatohaveamuchmoreopen,transparentandpredictablesetofinstitutionalarrangementstobuildinternationalconfidenceindealinginChinesefinancialassets,andthiswillpushattheenvelopeofpoliticalreform.
Thetrajectoryofgrowthisslowinginthistransition.Manufacturingandexportgrowthisslowing.WhileChinawillremainabigexporter,exportgrowthislikelytoslowasthestructureofexportsisupgraded.ThemassiveurbanisationthathasalreadytakenplaceinChinawillcontinueastherateofurbanisation—nowat56percentofthepopulation—stilllagsbehindthatinmanydevelopingeconomieswithsimilarincomelevels,letalonethatinadvancedeconomies(CCTV2016).Thisrequirescontinuing,albeitslower,expansionofinfrastructureinvestment.Newinvestmentwillalsobedrivenbytheneedforcleanenergyandenvironmentalprotection.
HigherChinesewagesasthelabourmarkethastightened,aswellastheremovalofsomedistortionsthatfavouredinvestmentratherthanconsumption,havemeantthatgrowthisincreasinglydrivenbyconsumerdemand.Thistrendhasbeenunderwayforsometime,with
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consumptionnowovertakinginvestmentasthemaingrowthdriver(Prasad2015).Servicesalreadyaccountforover50percentofnationaloutput,whilemanufacturinghasfallentowards30percent(Figure1.2).
Theconstraintsonlabourmobility,andinter-provincialfiscalandincomedisparities,continuetobifurcatethegeographicpatternofChineseeconomicdevelopment,meaningthatinnerprovinceshavelowerincomesandlowerratesofurbandevelopment.Ifeconomicconstraintswithanegativegeographicalimpactwererelaxed,theseinnerprovincescouldbecomeasourceofstrongpotentialfuturegrowth.ThetimingofpolicyandinstitutionalreformsthatreducethesedistortionswillaffecttheimpactoffuturegrowthonChina’sexternaleconomicrelations,includingwithAustralia.
China’s‘newnormal’growthpath—withitsstructurallydecliningbutstillrelativelyhighgrowthrate,partiallytighteninglabourmarket,shifttoconsumption-ledgrowth,andsteadyshifttoservicesawayfrommanufacturing—willfundamentallychangeChina’sinteractionwiththeinternationaleconomy.
TherewillcontinuetobegrowthopportunitiesintheChinesemarketoverthenextdecadeasnewbusinessopportunitiesemerge.China’sgrowthwilllikelyremainatmorethantwicetheglobalaveragegrowthrate.Despitemoderatingratesofgrowth,Chinawillcontinuetomakeasizeablecontributiontoglobalgrowth,asitwillbegrowingoffamuchlargerbasethanafewyearsago.SevenpercentgrowthinChinanowisequivalenttoanadditiontoincomeof10percentjustfiveyearsago.China’sgrowthratewas6.9percentin2015,muchlowercomparedtogrowthof10.6percentin2010,butinbothyearsChinastilladdedRMB3.8trilliontoglobalGDP(inconstant2010RMB).Since2008,China’scontributiontoglobalGDPeachyearhasbeenequivalenttoaneconomyaroundthesizeofMexicoorthree-quartersthesizeofAustralia.
Figure 1.2: sectoral value added as a percentage of Chinese gDP
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AsFigure1.3suggests,theIMFexpectsthatChinawillcontinuetoaddmoreeachyeartoglobalGDPoverthecomingdecade(inUSdollars).ChinaislikelytoremainthebiggestcontributortoglobalGDPgrowthforthenextfiveyears,addingmoretoglobaloutputthantheUnitedStates,ormorethanIndiaandalloftheotherAsianeconomiesputtogether.
ThehugescaleofChina’seconomytoday,nonetheless,needstobeunderstoodinthecontextofitsambitionsforgrowthinthefuture.China’spercapitaincomeisstillnothigh,beingonly24percentofthatoftheUnitedStatesor34percentoftheOECDaverage(OECD2014a).Chinesepolicymakershavetomanagethetransitiontohigherincomesandkeepclosingthisgapinthecomingdecades.
Australia
China’sremarkableexpansionthroughthefirstdecadeofthecenturybroughtstronggrowthinAustralia’sminingsector.GrowthinWesternAustraliaapproachedgrowthratesinChinaduringsomeoftheseyears.Australianincomegrowthandhouseholdlivingstandardsbenefitedfromtheterms-of-trade-inducedstrengthoftheAustraliandollarasimportpricesfell.HalftheriseinAustralianincomesduringtheminingboomresultedfromtheboosttoAustralia’stermsoftrade(Downesetal2014).ItwasnotonlytheAustralianminingsectorthatbenefitedfromChinesegrowth:Australia’seducationexportsandtourismservicesgrewstrongly,accompaniedbysharprisesinChina’sshareofthesemarkets(Austrade2015b).China’sshareofAustralianexportsgrewstronglyandishigherthanthatofothermajorexportcustomers(Figure1.4).Whiletheeconomyasawholeunambiguouslybenefitedfromtheminingboom,somesectors,suchastrade-exposedmanufacturers,sawdemandfortheirproductsfallbecauseofAustralia’selevatedexchangerate.Asdramaticastheywere,thesechangeswerepartofalong-termstructuraladjustmentintheAustralianeconomythatwasalreadywellunderwayandwouldhavesubstantiallyoccurredevenwithouttheminingboom.
Figure 1.3: China’s gDP growth (RHs) and its contribution to global output (LHs), 1990–2020
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Figure 1.4: exports to China as a share of total exports, Australia and other major exporters
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SlowergrowthinChinesedemandfor,andincreasedglobalsuppliesof,industrialrawmaterialshavesentironoreandothercommoditypricesdramaticallylower.ThedropinpriceshascausedtheshareofcommoditiesinChina’simportstocontract.ButAustraliahasincreaseditsshareinChina’simportsofindustrialrawmaterials(althoughimportvalueshavedroppedsharply)becauseAustraliacontinuestobeoneoftheworld’smostcompetitivesuppliersofcommoditieslikeironore.Newenergyprojects,inthegasanduraniumsector,willalsocomeonstreaminthenearfuture.ButgrowthinresourceexportstoChinaisunlikelytoreturntotherateseenduringthe2000s,andpricesarelikelytoremainsubdued.
Asinpastcommoditycycles,priceshavefallen(alongwiththetermsoftrade)asnewmineshavecomeonlineinAustraliaandaroundtheworld,draggingAustralianrealincomesdownatthesametime.Thistrendislikelytocontinue,althoughthereislikelytobevolatilityaroundthistrend.Australiawillovercomethisdragonincomegrowthonlythroughitsowneconomictransformationandthroughliftingproductivityacrossthewholeeconomy.
SuccessfuladjustmentandsustainedgrowthoverthecomingdecadewillrequireashiftinAustralia’seconomicstructurebacktoamorenormaltrajectory:awayfromanabnormalexpansionoftheresourcesector(evenifenergydemandcontinuestogrow)towardsresumptionofgrowthintheshareofservices,high-endmanufacturingandhighvalue-addedagriculturalproduction.Thisstructuralchange,aswellasAustralia’sstrongpopulationgrowththroughmigration,willneedlarge-scalerenovationofurbaninfrastructure,investmentininter-urbantransportandcommunications(becauseofgrowingurbancongestionandnationalconnectivitydeficiencies),newinfrastructureinvestmentandintegratedlanduseplanninginthenorthofthecountry(becauseofthelocationofnewagriculturalanddevelopmentopportunitiesthere),andinvestmentininnovation,researchandeducation.
Thesechanges,througharelativelyflexiblelabourmarketandresponsivecapitalmarket,arealreadytakingplace,butmajorchallengesremaininundertakingtoughreformsthatmaketheeconomymoreflexibleandhelptorestructureandupgradeindustry.Moreover,themarketsinwhichtheseopportunitieslieforAustraliaarefiercelycontestedinternationallyandAustraliadoesnothavethesameestablishedadvantageasithasinnaturalresources.Unless
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Australia’sprivateandpublicsectorinvestmentbecomessmarter,andunlessAustraliacanmobilisecapitalathomeandfromabroadtoinvestmoreefficientlyininfrastructure,itisunlikelytoachievethe3percentGDPgrowththatithascommonlyenjoyedoverthepastfewdecades.Itwillnotbeaneasytask—totalproductivitygrowthhasbeenstagnantforsomeyears—andwhiletherearesignsofimprovement,itneedstoimprovefurther.
HoweffectivelythesechangesaremanagedwillshapethefutureoftheAustralia–Chinaeconomicrelationship.
strategic partnership for change
Inmanagingthechangeanticipatedoverthecomingdecade,boththepublicandprivatesectorscandrawuponsubstantialassetsthatalreadyexistintheestablishedbilateralrelationship.TheAustralia–Chinarelationshipisdistinguishedbyahistoryofpoliticalcommitmentatthehighestlevels,sincediplomaticrecognition,toapartnershipthathasembracedChina’sopenness,itsreformanditseconomicrise.DevelopmentoftherelationshiphasalsobeenfacilitatedbyAustralia’sopeneconomy,stronginstitutionsandrichmineralendowment,ChineseperceptionsofAustralia’sbusiness-friendlyenvironment,aswellasAustralia’sgoodstandingwithothercountries.Thoughtheyhavedifferentpoliticalandsocialsystems,bothcountriesacceptthisdifferenceandrespecteachother’sachievements,includingtheremarkableelevationoflivingstandardsandimprovementinsocialconditionsthrougheconomicreformsandliberalisationthatbothcountrieshaveputinplaceoverthepastfourdecades.
Thedeepcomplementarityoftheestablishedeconomicrelationshipandthehighpoliticalcommitmenttoitsdevelopmentbybothcountriesprovideasecurefoundationonwhichtobuildanewanddynamicpartnership.
AustralianandChinesepoliticalleadershaveinvestedheavilyintherelationshipandarenowcommittedtoitselevationasastrategicpartnershipthroughregularhigh-levelleadershipdialogues.
Maintainingtheclosenessintherelationshipatthetopleadershiplevelisapriorityforbothgovernments.Itisasignalofpoliticaltrustandgoodintentioninthepartnership.
ChAFTAisinplace—themostopenandliberalisingsucharrangementthatChinahasenteredintowithanydevelopedeconomyandonewhichgoesfurtherinitspartnercountryliberalisationthanAustralia’spreviousagreements.
Whatdothebigchangesinthestructureofbotheconomiesmeanfortheirbilateralrelationshipanditsmanagementoverthecomingdecade?
Asconsumerincomesriseandpreferencesshift,thenewpatternsofChineseconsumptionwilldrivehighergrowthinimportsofrecreationalservices(liketourism),educationalservices,healthservicesandfinancialservices.Theconsumptionandimportofhighvaluefoodstuffs,inwhichAustraliahasastrongcomparativeadvantage,areexpectedtogrowrapidlyoverthenextfewdecades.Forexample,therealvalueofbeefconsumptioninChinaisprojectedtorise236percentbetween2009and2050(ABARES2014).ChAFTAopensthedoorwidertogrowthetradeinmarketsforhighvaluegoodsandservices.ChAFTAofferstheprospectofsignificantgainsinAustralia’sshareinmarketsforimportsacrosstheboard,fromdairyproductsandhealthproductstoeducationandtourism(seeChapter3).
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ChAFTAopensthedoortonewopportunitiesintheservicestrade,ininvestment,intourismandinthecommoditytrade;buttherearemanyobstaclestorealisingtheseopportunitiesthatstillneedtobeovercome.Theobstacleshavetodowithhowcommercialpartiesrelatetoregulatoryinstitutionsbeyondnationalborders.Theyalsohavetodowithbuildingdeeperprivatebilateralbusinessnetworksandassociationstofacilitatebusinessbetweenthetwocountries.ThereisareviewprocessbuiltintoChAFTA—inthissense,ChAFTAisalivingagreement.Yetthenatureofthearrangementembeddedintheagreementisthatitisreactivetospecificproblemsolving—ratherthanstrategicinitspurpose,seekingopportunitiesthroughtheagreementandbeyond(seeChapters4,5and6).
AsChina’sindustrialupgradinggatherspace,Australia’simportsfromChinawillbeincreasinglydominatedbyhigher-valueappliances,equipmentandmachinery.ManyofChina’sexports,ofcourse,involvesubstantialvalue-addfromothercountriesintheregion,includingJapan,SouthKoreaandtheUnitedStates.AlargeproportionofJapanesebrandimports,fromexample,nowarriveinAustraliaviaChina.
China’scommitmenttofreeingupinvestmentabroadinthepastdecade(the‘goingout’strategy)sawAustraliaemergeasaleadingdestinationforChineseoutbounddirectinvestment.ThereformsthatarenowbeingputinplaceinthefinancialmarkethavealreadyseenChinesebanksandnon-financialenterprisesliftinvestmentinAustralianassets.Inthecomingdecade,thesereformsandwiderliberalisationofthecapitalaccountcouldfundamentallychangethestructureofeconomicrelationsbetweenthetwocountries.
FinancialmarketreformandcapitalaccountliberalisationwillalsofundamentallychangeChina’sstandingandroleintheglobaleconomy—anditsinfluenceandimportanceintheAustralianeconomy.ItwillincreasethesizeandrangeofChineseassetsheldbyAustralianinstitutionsandcorporations,aswellastheportfolioofAustralianassetsheldbyChineseinstitutionsandenterprises.ItwillseeChina’scurrencyusedmoreextensivelyininternationaltransactionsandborrowing.Chinesehouseholdsandinstitutions,notonlyenterprises,willincreasetheportfolioofassetstheyholdinAustraliaandelsewhere.
Arrangementsthatbuildconfidenceinundertakingforeigninvestmentineachcountryareapriority.DespitetheprogressmadeinChAFTA,thereremainsconfusionaboutthetreatmentofAustralianandChineseinvestorsundertheothercountry’sforeigninvestmentregimes.Policiesthatenshrinenodiscriminationagainstthesameclassofforeigninvestmentacrossforeigninvestmentsourcesandentrenchthenationaltreatmentprincipleneedtobetheanchorsofeachforeigninvestmentregime.Mechanismsfordirectcollaborationinsharinginformationanddataoninvestmentandinvestoractivitiesneedtobeputinplacebetweentherelevantagenciesineachcountry.
ThenewphasesofChineseandAustraliangrowthandtheirchangedinternationalcircumstancesrequireanewmodelofeconomiccollaborationwhichencompassesanupdateandoverhauloftheinstitutionalarrangementsthatsupportAustralia–Chinaengagement.
Aninstitutionalframeworkthatdynamicallydrivesbilateralstrategicengagement,promotingthenewopportunitiesfortradeandinvestmentintherelationshipthroughandbeyondChAFTA,willprovidesubstanceattheworkingleveltothestrategicpartnershipbetweenthetwocountriesatthetop.
Thetaskistocapitaliseonandmanagechange.ItwillrequireenergisinganddeepeningtheinstitutionalarrangementsthatarealreadyinplacebetweenAustraliaandChinato:
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buildtrustaroundcommoninterestsineconomicandpoliticalrelationships;managetheuncertaintiesthatinevitablyarisethroughchange;anddeveloptheup-closecommercialandbusinessengagementneededasthestructureoftheeconomicrelationshipshiftstowardsservicesandconsumers.
Thisisanationaltaskforeachcountry.Itisalsoabi-nationaltaskthatembracesnewundertakingsandagreements.
TheframeworkofanewmodelforeconomiccollaborationwouldincludejointmechanismsandworkinggroupsthatbuilduponestablishedpartnershipsingovernmentsuchastheComprehensiveStrategicPartnership,theStrategicEconomicDialogueandtheJointMinisterialEconomicCommissionattheleaderandministeriallevels,aswellasofficialagencypartnershipssuchasthatbetweentheAustralianTreasuryandChina’sNationalDevelopmentandReformCommission(NDRC)andthetiesthataregrowingbetweentheReserveBankofAustralia(RBA)andthePeople’sBankofChina(PBoC).Thesepartnershipsshoulddrawuponbusinessandoutsideexpertise,asrequired,to:
• adviseinthedevelopmentoftheComprehensiveStrategicPartnershipdialogues;
• supportjointtaskforceorworkinggroupactivityonissuesflowingfromthedialoguesorotherbilateralinitiatives;
• workwithstateandprovincialauthoritiesindevelopinginitiativesintherelationship;
• encourageprogramsofresearchwithinandbeyondgovernmentonallaspectsoftherelationship;
• engagewiththebusinesssectorsinbothcountriesinundertakingitswork;
• promotejointtrainingandthedevelopmentoflong-termworkingassociationsinkeyareasamongtheofficialsofbothcountries;and
• reflectuponcommunityinterestsandconcerns.
Thisframeworkwouldalsoincludeabi-nationalinitiativetoestablishanAustralia-China(Ao–Zhong)Commissionforboostinghigh-levelresearch,scientific,politicalandcommunityexchangestobuildthecapacitiesinbothcountriesforcomprehendingandrealisingtheopportunitiesinwhatwillbecomeanincreasinglyup-closerelationship.Thisbi-nationalgovernmenteffortwillbepartneredbybusiness,governmentdepartments,statesandprovinces,asitisinasimilarthoughlesscomprehensivewaythanenvisagedherebytheAustralian–AmericanFulbrightCommission.
ThesearrangementswillunderpintheAustralia–ChinaStrategicPartnershipforChange.Theinitiativesandstandardsthatbothcountriesdeveloppragmaticallywithinthatframeworkshouldalsobeconsistentwiththeirinternationalandregionalambitionsandresponsibilities.
Thisframeworkwilltaketimetoputinplace,butthisprocesscanbeginimmediately.
Itwillrequireinstitutionalinnovationinbuildingthecapacityforengagementstep-by-stepineachbureaucracy,throughtrainingandexchange.ButthisReportdemonstratesthewillandtheincentivetomakeitwork,intheinterestsofbothcountries.Itwillrequirepartnershipwiththebusiness,academicandthinktanksectors.TheframeworkmustbeguidedbyenunciationoftheunderstandingsandprinciplesidentifiedinthisReporttowhichbothpartnersaspireintheconductoftheirrelationship.ThecollaborationestablishedbetweentheChinaCenterfor
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InternationalEconomicExchanges(CCIEE)andtheEastAsianBureauofEconomicResearch(EABER)andtheirgovernmentandnon-governmentpartnersinbothcountriesthroughthisReportprovidesanaturalandusefulfoundationforcontinuingthisinitiative.
Strengtheningtheframeworkfornationalgovernmentinstitutionstodeveloptherelationshipwillbeineffectiveifitisnotcomplementedbyongoinginitiativesatthestateandprovinciallevel,andbybuildingcapacitiesthrougheducationalandresearchinstitutionsandacrossthecommunity.MuchoftheinteractionbetweenChineseandAustralianbusinessandgovernmentsineachcountrytakesplaceatthelocallevel.Muchofthecommunityengagementtakesplacethroughstateandprovinciallevelprogramsandthroughsister-cityrelationshipsandeducationalexchangesdeliveredatthegrassrootslevel.Thepeople-to-peopleassociationsestablishedthroughtheseprogramsarefrequentlythefoundationsofbusinessandcommunitypartnershipsthatdriveinitiativeandthedevelopmentoftherelationship.Thesharpgrowthintourismbetweenthetwocountriesisfullofpotentialtostrengthenpeople-to-peoplelinks,understandingandappreciationofeachother’sculture,circumstanceandcountry.
Thereisarangeofmodelsofsuccessfulengagementacrosslevelsofgovernmentandacrossthecommunity—throughtheorganisationofstateandprovinciallevelprograms,businessassociations,youthandprofessionaldialogues,academicinstitutionsandprograms,culturalandartisticcommunities,andcommunityandschool-levelexchanges.Thesearetargetsfordevelopmentandpromotionthroughthenationalandbi-nationalinitiativesheadlinedabove(seeChapters3,5and6).
Opportunities and risks
AcriticalelementinthesuccessoftheAustralia–Chinarelationshipoverthecomingdecadeswillbetheunderstandingof,andmanagingtheuncertaintiesfrom,thehugechangestakingplaceinbotheconomies.Thesearechangesthatwilltransformbothsocieties—withthenationalambitioninChinatobeonthewaytolivingstandardsequivalenttosomeadvancedcountriesbytheendofthisperiod—althoughtheircourseisimpossibletopredictexactly.In2025,China’seconomywillbemuchbiggerthanitistodayanditsinstitutionswillcontinuetoevolvefromwhattheyaretoday.Australiawillalsohavechangedsignificantly.Apremiseintheconductoftherelationshipiscommitmenttosharedambitionsfornationalchangeandtoengagebilaterallyinregionalandglobalaffairsinawaythatmanageseffectivelytheadverseconsequencesofunforeseenorunwelcomechangethatwillinevitablyoccurfromtimetotime.TheprinciplesandcommonunderstandingsoutlinedinthisReport,andthearrangementsandinstitutionsthatitrecommends,aredesignedtomanagebothproactiveengagementandunexpectedshocks.Themanagementofadversechangebecomeseasierwhenbothcountriesarecloselyengagedandhavethebestaccesstoinformationandanalysisthatispossiblethroughsucharrangements.
TheopportunitiesintherelationshipwithaneconomythesizeofChina’sarehugeformanyofAustralia’sbiggestcorporations,includinganincreasingnumberoffirmsandenterprisesthatwerenottouchedbyChina’searliergrowthphase.Nonetheless,theyhavetomanagetherisksofcyclicalandstructuralchangeintheChineseeconomy,astheydoinothermarkets.Chinesepolicymakersusedtoworryaboutover-dependenceonAustraliansuppliersofironoreintheup-phaseofthecommodityboom,althoughthoseanxietieshavesubsidedinitsdown-phase.Insuranceagainstriskfromhighlevelsofresourcetradedependence,ofcourse,
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isprovidedbydeepandintenselycompetitiveinternationalmarketsforthesecommodities(includingenergy).Chineseenterprisesthatundertakelarge-scaleinvestmentinAustralia,especiallywhensuchinvestmentisneworunfamiliar,inevitablyfacethesamerisksthatotherlarge-scaleinvestors,Australianorforeign,havetofaceintheAustralianorothermarkets.Theserisksareanormalpartofanycommercialrelationship.
Therearealsorisksassociatedwithpolicyandinstitutionaluncertainties.IneconomicandpoliticalsystemsthatareevolvingasrapidlyasthoseinChina,theserisksareanimportantpartofcommercialcalculation.InAustralia,eventhoughtherearerobustmarketandlegalinstitutions,thereareresidualrisksthatrelatetopolitical,policyandinstitutionaluncertainty,althoughmostofthemarelegallycontestablebyforeignaswellasnationalentities.China’saccessiontotheWTOaswellasitsongoingmassiveeconomicandlegalreformservestoamelioratetheserisksinChina.Animportantobjectiveinthedevelopmentoftherelationship,nonetheless,istoreducegovernance-relateduncertaintiesforenterprisesandpersonsdoingbusinessintheothercountry.Agoalintherelationshipoverthelongertermshouldbetoembedtheseprotectionsinacomprehensiveagreementorbasictreatybetweenthetwocountries.
Thereisstrongprecedentforsuchatreatyframework.TheBasicTreatyofFriendshipandCooperationbetweenAustraliaandJapan,signedin1976,committedbothcountriestocooperateonissuesofmutualconcern.FollowingdecadesofpopularuneaseandpoliticalcautionintheAustralia–Japanrelationship,thisTreatyhadalargeandanalyticallymeasurableimpactongrowingtheoverallbilateraleconomicrelationshipevenaftertheresourcesphaseofbilateralexchangebeganlevellingoff(Drysdale2006).Itimprovedwhatwerethenpoliticallycontroversialinvestmentflowsandledtoconsequentimprovementsinpeoplemovement,servicestradeandregionalcooperation.TheAustralia–JapanReportthatledtoandwasassociatedwiththeconclusionoftheTreatychangedtheinstitutionalstructuresthoughwhichbothcountriesengagedwitheachother,andlaidaframeworkofcollaborationoneconomicissuesthatledtotheformationofAPEC.ApplyingasimilarapproachtotheAustralia–Chinarelationshipcouldyieldsimilareconomicandpoliticalbenefits.
ThemacroeconomicrisksofvolatilityinChina’slargereconomycanbemanagedwithinthemacroeconomicandflexibleexchangeratepoliciesthatcushionthedomesticimpactinAustraliaofsuchinternationaleconomicshocks.Focusingonbuildingstrongerbalancesheetsoffinancialinstitutionsandcompanies,bothstate-ownedandprivate,isafoundationforcrisispreventionandcrisisresolution.
Systemicfailuressuchasfinancialmarketcrisis,shouldtheyoccurinChinaastheydidintheUnitedStatesduringtheglobalfinancialcrisis,willneedtobemanagedthroughdomesticandinternationalmechanismsthatprovidelinesofcreditandregulatorydisciplinestoameliorateoravoidthem.TheadequacyofthesemechanismsisdiscussedinChapter8.ActivepartnershipwithChinainregionalandglobaleconomiccooperation,andindiplomacytosecuredynamicpoliticalstabilityinAsiaandthePacific,arekeyinstrumentsforhandlingtheserisks.
Partners in regional and global affairs
Morethanonanyotherfactor,economicandpoliticalstabilityinthe21stcenturywilldependonhowglobalgovernanceadaptstotheriseofChinaandotheremergingeconomies,andtotheroletheyplayinshapingthearchitectureofglobalgovernanceinthefuture.Australiaand
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ChinahaveadeepstrategicinterestinensuringthisinternationaltransitiontakesplaceinamannerthatisconstructiveandbenefitsChina,regionaleconomiesincludingAustralia,andtheworldatlarge.
Strong,inclusive,rules-basedandmarket-promotingglobalinstitutionsareimportanttoeconomicprosperityinbothAustraliaandChina.BothcountrieshavebenefitedgreatlyfromglobalinstitutionsthatwereputinplaceattheendofWorldWarII.TheUnitedNationsframeworkandtheBrettonWoods-inspiredeconomicinstitutionscontinuetoserveasthefoundationsofglobalgovernanceandhaveprovidedaframeworkforglobalstabilityandeconomicprosperity.
Thesystemofglobalgovernancethattheseinstitutionsunderpinisnotstatic.Itmustcontinuetoevolvesoastocomprehendnewissuesandstakeholders.Therapidchangeinthestructureoftheworldeconomyanddepthofglobalintegrationthathasbeendeliveredbyeconomicopennessandthecommunicationsandtransportationrevolution,hascreatedenormouspressuretochangeandstrengtheninstitutionsforglobalgovernance.TheglobalfinancialcrisissawtheG20Summitemergeasthepreeminentforumforguidingthischange.
Nocountryalonecandictatethischange:itmustbeforgedthroughaconsensusamongallthecountriesthatareaffectedandfeeltheneedforchange.ButtherearesomeareasinwhichcollaborationbetweenChina,Australiaandtheirpartnersinglobalinstitution-buildingwillbeofspecialimportanceinthecomingdecades.
Globalgovernanceisinparttheresultofwhatlargeeconomiesdobetweenthemselvestomanagetheirinteractionwithothereconomiesandpolities,aswellasbeingtheresultofcooperativeorcollectiveactionamongtheeconomicpowers,largeorsmall.InmanywaysChina’sownchoicesininternationaleconomicpolicystrategynowexertinfluenceontheshapeofglobaleconomicgovernancealongsidetheactionsandinitiativesChinatakesdirectlyincollaborationwithothercountriesthroughinternationalforumsandinstitutions.TherelationshipbetweenAustraliaandChinawillthusbeshapedbyChina’sowneconomicpolicystrategiesalongsidethecommitmentsthataremadebybothcountriesinglobalandregionalsettings.AustraliaandChinahaveinthepast,andshouldseekevenmoreactivelyinthefuture,tobestrategicpartnersinboththeatres.ThereisnomoreobviousexampleofthisinthepastthanChina’schoicetoseekaccessiontotheWTOandconformtoitsmultilateralobligations.BilateralpoliticalinitiativesopeneduptradewithChinabeforeWTOaccession.ButparticipationintheWTO,notnarrowlybilateralarrangements,isthecornerstoneofthelargeandconfidenttraderelationshipsthatAustraliaandothercountrieshavewithChinatoday.ThissystemisundersomechallengeandbothcountrieshaveaprofoundeconomicandpoliticalinterestinworkingtogetherandwithpartnerstoensurethatpreferentialregionalandbilateralarrangementsdonotcorrodethemultilateralframeworkthatisanchoredintheWTO.
China’seconomicintegrationintotheEastAsianandglobaleconomyhasoccurredwithinaglobalframeworkthatpromotesfreetradeandinvestment.Australiahasprosperedunderthesameframework.CooperationintheAsiaPacificregionhasbeensignificantlydirectedtoreinforcingglobalgoalsandobjectives,suchaswhenAPECwasfounded,tolendweighttotradeliberalisationintheinterestsofAsia’semergingeconomiesandagriculturalexporterssuchasAustralia.RegionalcooperationinAsiaandthePacificfosteredmarket-ledintegration.Asianeconomiccooperationhasbeeninclusive,hasavoideddiscriminatoryarrangementsthatweakentheglobalsystemandhasledregionalpoliticalcooperation.
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Figure 1.5: Asia’s weight in the global economy
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Withthehugechangethathastakenplace,andthatwilltakeplaceoverthecomingdecade,inthestructureofregionalandglobaleconomicpower(Figure1.5),thereisaneedtorethinktheroleofregionalcooperationasapillarthatsupportsaninclusiveglobaleconomicsystemandmanagesneweconomicandpoliticalchallenges.
APECandtheASEANPlusregionalarrangementsprovidethefoundationalframeworkforregionalcooperation.Thesearrangementsandtheirevolutionhavebeenconsensus-driven.Theyarecharacterisedbyinclusiveness,intermsoftheglobaldimensionoftheiragendasandtheirroutineopennesstodialogueswithothers.Theseprinciplesareanenduringfoundationforregionalcooperation.
WiththeglobalprocessesoftradereformstalledandproliferationofpreferentialbilateralandregionalFTAs,animmediatepriorityistoensurenewandexistingtradingarrangementssuchastheTrans-PacificPartnership(TPP),RegionalComprehensiveEconomicPartnership(RCEP)andFreeTradeAreaoftheAsiaPacific(FTAAP),areinclusiveandcomplementary.Inthiscontext,bothAustraliaandChinahavealargestakeinthesuccessoftheASEANEconomicCommunity(AEC),whichwasestablishedbeforetheTPPwassigned.TheAECwillbefurtherdevelopedinparallelwithTPPdomesticratificationprocesses.ThereisacrucialopportunitytosimultaneouslyconcludeRCEPandadvanceopennessoftheregionaltraderegimebystrategiccommitmentstocomprehensivetradeandinvestmentliberalisationthatissupportiveofthegoalsofASEANandinclusivenessacrossthePacificandtheworld.Theeconomicimperativesforcooperationhavebecomemoreimportantand,sofar,theflexibilityofAsianregionalarrangementsprovidesanopportunitytoconnectexistingarrangementsinwaysthatallowthemtoaddressnewchallengesandopportunities.
Theshifttowardsamorecomplex,multipolarorderhascreatedsomenewtensions,anddifferentpoliticalallegianceshavebecomeacomplicatingfactor.
ThemajorchallengesnowfacingtheinternationalcommunityrequireinnovativesolutionspromotedbyeffectiveregionalcoalitionsthatincludeChinaandtheUnitedStatesandtherebymanagetheUS–Chinarelationship,whichisarguablythemostimportantbilateralrelationshipintheworld.
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Fourforcesunderscoretheneedforpower-sharing,cooperationandpolicyadaptationinourregionoverthecomingdecade:transitioninthegeopoliticalorder;theshiftinthestructureofthefinancialgeographyoftheregion;theopportunitiesofchangingtechnology;andtheimpactofclimatechange.
Geopolitically,territorialdisputesandstrategicrivalrieshaveopeneduptensionintheAsiaPacificregion.ManagingcompetinginterestsintheSouthChinaSeaexemplifiesthechallengethereisasChinaprojectsitsperipheralpower.ThisisatestingtimeinwhichitwillbecriticaltoexertcommonsenseonthesharedinterestbetweentheUnitedStatesandChinainmaintainingmaritimesecurityandregionalstability,whilemanagingstrategicdifferences.
Australia’sroleasahistoricalallyoftheUnitedStates,combinedwithitsgeographicalpositioninAsiaanditsdeepinterestinitseconomicrelationshipwithChina,opensaspaceforitsleaderstoplayavitalroleasaninterlocutorwithacompellingandsincereinterestinthepeacefulaccommodationofChinaasanewpowerwithintheregionalandglobalorder.
TwomajordevelopmentsinthetransitiontoanewfinancialgeographyoftheAsiaPacificunderlinetheneedforgreaterregionalcooperation.ThefirstwasChina’smovetoestablishtheAIIBasanadditionalchannelofdevelopmentfinance.Thebank’screationcameinthecontextofUSdelayintheimplementationofthe2009G20agreementtowidenIMFreform,includingexpandingChina’svotingrightsintheIMF,andtheobstaclestocontributingadditionalequitytomultilateralfinancialinstitutionstofillthehugegapindevelopmentfinancing.In2015,theIMFagreedtoincludetherenminbiintheSpecialDrawingRightsbasket.TheAIIBoffersopportunityforproactiveAustralianpartnershipwithChinainbuildingexperienceintheprovisionofanimportantinternationalpublicgood,andinvestmentininfrastructuredesignedtopromoteregionaleconomicintegration.Itisanopportunitythatcannowbeactivelyembraced.
Thesecondeventwasdivergenceinindustrialcountries’quantitativeeasingstrategies,withtheUSFederalReservebeginningtoreverseeasingandtheEuropeanCentralBankandBankofJapanbothstillcommittedtofurtheraggressiveeasing.Thisdivergenceinmonetarypolicybetweenthemajorreservecurrencycountriesopenstheprospectofaphaseofdollarstrengthening.AstheBankofInternationalSettlementshaspointedout,theLatinAmericandebtcrisesofthe1980sandtheAsianfinancialcrisisofthe1990swerebothassociatedwithperiodsofstrengtheningoftheUSdollar.Astrongdollar—particularlywhentheUSeconomyisnolongertheengineofimportgrowthitwasinthepast—createshugetensionsandadollartrapforemergingmarkets.Capitalflowsbacktoadvancedmarketstendtoputadeflationarypressureonemergingassetmarkets.Thiswillputpressureonregionaleconomiesandwillrequiretheirclosecooperationintheregion.
Regardingtechnologyadvancement,technologicaldisruptionhasprovedmorepervasiveanddamagingoftraditionaleconomiesthanwasanticipatedbecauseitdiffusedpowertonewcentresandweakenedincumbents.AsianandMiddleEasternoil-producers’wealthisbeingundercutbyinnovationsinshaleoilandrenewableenergytechnologies.TheseareissuesonwhichthereisacloseintersectionofinterestsbetweenAustraliaandChina,andtheirregionalpartners.Asrobotisationreducestheneedforcheapandunskilledlabour,governmentsaroundtheworldarefindingitdifficulttogeneratenewjobsforgrowingpopulationsofunemployedyouthandlow-skilledworkers.Atthesametime,non-stateplayersareusingtechnologytocreatecentresofsocialchangeordisruptionorconflictthatcannotbedealtwithbynationalpowerwithconventionaltools.Thesearealsoissuesonwhichbothcountriescanencouragebothregionalandglobaldialogue.
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Climatechangeisalsoresponsibleformajorsocialupheaval,resultinginahigh-pressureyearforglobalgovernanceinstitutionsintheleaduptotheParisagreements.Aswaterstresses,airpollutionandElNinoeffectsbecamemoremarkedacrosstheworld,globalopinionswungenoughtohelptheParisCOP21negotiationsonclimatechangereachconsensusinDecember2015.Thisoutcomehelpfullyembedsconcertedunilateralmitigationandisatestamenttotheurgencyofconsensusandcooperationinthewaronpollutionandclimatechange.ThenewconsensusprovidesabasisforAustraliaandChinatoworkwithregionalpartnersindevelopingcooperativestrategiesonputtinginplacetheinstitutional,technologicalandpolicyinnovationsneededtoaddresstheseproblems.
Twopriorityareasforcollaboration,buildingonChina’sG20presidencythisyear,aredevelopingamorecohesiveglobalfinancialsafetynetandstrengtheningthemultilateraltradingsystem.Whiletheseprioritiesrelatetotradeandfinance,otherimportantareasforcollaborationareonglobalenergygovernanceandclimatechange.AustraliaandChina’sactiveparticipationwithintheG20iscrucialtoalloftheseambitionsandbothcountrieshaveincentivestobolstertheG20andbuilditsroleasthepreeminentforumforglobaleconomiccooperation.CollaborationalsoneedstoextendbeyondtheG20,forexampleindevelopinganewandproactiverolefortheWTOnowthatpreferentialarrangementsareovertakingthemultilateraltradingsystemandtradeliberalisationattheborderisnolongertheprimaryprobleminthepromotionofmoreopenandcontestableinternationalmarkets.ThequestionofhowdifferentregionalarrangementssuchastheTPP,RCEP,AECandtheproposedFTAAPaffecttheglobaltradingsystemaremattersthattheG20shouldconsiderintheareaofinternationaltrade.
TheG20is,however,thepremierforumthroughwhichChinacanarticulateitseconomicpolicymakingstrategiesandintentions.Thisismoreimportanttoothereconomies,whichnowneedmoreinformationandanalysisofdevelopmentsintheChineseeconomytoincorporateintotheformationoftheirowneconomicstrategies.ThisisnotaboutsecuringChina’splaceagainstothercountries.ThestepsthatChinatakestodaywillbeofimportancetoIndonesia,IndiaandAfrica,withthelastinglegacyofamorerobustglobalsystem.
Inthecontextofthebigforcescurrentlyshapingthefinancialgeographyoftheregionandoftheworld,amorecohesiveapproachtotheissueofinfrastructureinvestmentneedstobetakenwithafocusonimprovingintermediationbetweeninfrastructureinvestmentopportunitiesandglobalsavings(particularlyfromAsiaandthebigpensionandsuperannuationfundsinadvancedeconomies)aswellasprojectpreparationandprioritisation.Moresensitively,theG20andregionaldialoguesprovideanopportunitytoopeninformalpoliticaldialogueonsomeofthestressesoftechnologicalprogress,likeenergytransformationandcybersecurity.
ThecurrentpressuresininternationalfinancialmarketsreinforceChinaandAustralia’sinterestinastrong,inclusiveandresponsiveglobalfinancialsafetynet,centredontheIMF.Fragmentationhaspresentlyreducedthesafetynet’scapacityandagilitytorespondtocrises,whichreducesmarketconfidence,actstoconstraintradeandinvestmentflows,anddiscourageseconomicopenness
Ontrade,thereisanopportunitytoadvanceglobaltradereformandeconomiccooperationthroughleadershipinAsianreformandliberalisation.WhileAustraliaandChinacooperateatalllevelsoftheglobaltradingsystem,bothcountriesgainthemostfromthemultilateraltradingframeworkandfromtradeliberalisationwhenitismultilateralratherthanbilateral
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CHAPtER 1: Strategic importance of the relationship
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orpreferential.AustraliaandChinahaveaparticularinterestinensuringtheglobaltradingsystemsupportsregionalandglobalvaluechainsbyfacilitatingtradeandinvestmentflowsacrossallborders,notjustthoseconfinedtoparticularbilateralorregionalarrangements,andworkingwithregionaleconomiesindefiningapathwaytoglobaliseachievementsinregionalliberalisationandreform.
TheEastAsianmembersoftheG20canstepforwardindefiningwhatroletheregioncanplayinreshapingglobaltradegovernanceandensuringasustainedandeffectiverecovery.
ThereisopportunitytouseregionalarrangementssuchasRCEPtoraisethestandardforcohesiveregionalagreements,topushforbettercollaborationbetweentheWTOandregionalagreements,andtodeliverambitiouscommitmentsundertheTradeFacilitationAgreementbygivingthestructuralreformsthathavebeenpledgedintheG20growthstrategiesastrongertradefocus.
Finally,onenergy,theG20hasdevelopedhigh-levelprinciplesonenergycollaborationundertheleadershipofAustralia,ChinaandtheUnitedStates.Existinginstitutionsandmechanisms,liketheInternationalEnergyAgency(IEA)andthestockpilingobligationsunderitstreaty,aredramaticallyweakenedthroughexcludingChinaandotheremergingmarketeconomies.Butthesecountries,quiterightly,willwantasayintherulesandnormsthatapplytothem.Amongotherthings,theG20recognisedtheimportanceofmakinginternationalenergyinstitutionsmorerepresentativeandinclusiveofemerginganddevelopingeconomies.Chinacanbuildonthesesmallstepsand,alongwiththinkingaboutlow-emissionstransformationofenergy,useitsG20hostyeartobolsterglobalenergysecuritythroughreformstoglobalenergygovernance.
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CHAPTER2the economic transformations in china and Australia
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Key messAges
TheAustralia–Chinaeconomicrelationshipisenteringanewphase,shapedbythebigchangesnowunderwayinbotheconomies,whichareseeingtheservicessectorandinnovationemergeaslargerdriversofgrowth.
TheChineseeconomyisinthemidstofamajortransformationafterdecadesofrapidheavyindustrialgrowth.Itisnowshiftingtowardstheservicessectorandadvancedmanufacturing,industriesthatwillbecrucialinsustainingChina’sprogressiontoahigh-incomeeconomy.Atthesametime,China’slargeandincreasinglywealthymiddleclasswilldrivemassivegrowthinconsumerspendinginthecomingyears.
• Tosupportthistransformation,Chinamustprioritisesupply-sidereformsthatallowinefficientindustriestoshrinkandmoredynamicandinnovativesectorstogrow.Thiswillrequirefinancialmarketreformstoimprovetheefficiencyofinvestment,moreprivatesectorinvolvementinanumberofstate-dominatedsectorsandsupportingthemanufacturingsectortomoveuptheglobalvaluechain.
• China’stransformationwillhaveprofoundimplicationsforAustraliaandtherestoftheworldasrisingdemandfromChina’shugemiddleclasscreatesvastnewexportmarketsinareasfromfinancialservicestofood.Likewise,China’stransitiontowardsamoreopencapitalaccountwillcontinuetoreshapetheglobalinvestmentlandscape,asChinesesaverslookforinvestmentopportunitiesabroadandforeigninvestmentexpandsintonewsectorsofChina’seconomy.
InAustralia,theendofthemininginvestmentboomandsteepcommoditypricefallshavealsonecessitatedstructuralchangetowardsbroaderdriversofgrowth,especiallygivencompetitivepressuresintheregion.ThishassharpenedthepolicyfocusonliftingAustralia’sproductivity,especiallyinthelargeservicessector,whichexperiencedarelativedeclineagainstinternationalbenchmarksoverthepastdecade.
• AbetterproductivityperformancewillbecrucialforAustraliatocaptureashareofemergingexportmarketsandsupporthigherlivingstandards.Amongotherthings,thiswillrequireremovingprotectionforlessproductivefirms,greatercompetitioninshelteredservicesindustriesandfacilitatingcost-effectiveinvestmentinnewinfrastructure,includingbyattractingfurtherChineseinvestment.
WhiletheAustralia–Chinarelationshipwillcontinuetobeunderpinnedbythetraditionalareasofcomplementarityincludingcommoditytrade,newareasfortrade,investmentandbroadercooperationareemerging.Besidesthegrowingprominenceoftheservicessectorinbotheconomies,thisalsoreflectsthebroadershifttowardsinnovation-drivengrowth,whichwillrequirehighly-skilledworkforcescapableofdevelopingandabsorbingnewtechnologies.
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TheAustralia–Chinaeconomicrelationshipisenteringanewphase,shapedbytheverybigchangesthatarenowtakingplaceinbotheconomies.Whilethedynamicofthesechangesisdifficulttopredictexactly,somethingsareclear.
InChina,thestructureoftheeconomyisshiftingtowardstheservicessectorandhigher-valuemanufacturing,andthesenewdriversofgrowthwillbecrucialinsustainingChina’sprogressbeyondmiddleincome.Householdconsumptionisbecomingamoreimportantsourceofdemand,underpinnedbyrisingwagesandincomes.
China’seconomictransformationwillhavefar-reachingimplicationsfortheworld,givenChinanowaccountsforaboutone-sixthofglobaloutputandglobalincome,andhasafast-growingmiddleclassthatisprojectedtoreach630millionpeopleby2022(WorldBank2016;Barton2013).AsChineseconsumersdemandanincreasinglybroadrangeofgoodsandservices,vastnewexportmarketswillopenupinareassuchasprofessionalservices,healthandagedcare,andagriculturalproducts.
ForChina,thedevelopmentofmoreadvancedmanufacturingindustrieswillallowitsexportsectortomoveuptheglobalvaluechain,whilestrongertransportandinfrastructureconnectivitywiththeregioncansupportdemandforChina’straditionalmanufacturingexports.
Meanwhile,China’songoingfinancialsectorreformsandcapitalaccountliberalisationwillcontinuetorecasttheglobalinvestmentlandscapeoverthenextdecade.AccordingtoWorldBankprojections,China’sshareofglobalinvestmentflowscouldincreasedramaticallyoverthenexttwodecades,asChina’sdomesticratesofinvestmentmoderateanditshugepoolofdomesticsavingslooksoffshoreforbroaderinvestmentopportunities(WorldBank2013).
China’seconomictrajectoryoverthecomingdecademaynotbesmooth.AchangeofthekindtowhichChinesepolicymakershavecommittedisunprecedented,andmanagingtheeconomy’stransformationpresentsarangeofdifficultchallengesforpolicymakers.Amongotherthings,Chinamustpushaheadwithsupply-sidestructuralreformsthatfacilitateindustrialrestructuring,allowingoutdatedfirmsandindustriestoexitandencouragingnewandinnovativefirmstoflourish.Furtherfinancialmarketreformwillbecrucialtothisshift,byallowingmoreproductivebusinessesinemergingsectorstosecurefinanceforinvestment.Facilitatingmoreprivatesectorinvolvementwithinindustriescurrentlydominatedbystate-ownedenterprises(SOEs)—suchasenergy,utilities,transportandbanking—willbesimilarlyimportant.
Afterdecadesofeconomicgrowthdrivenbyincreasingthenumberofworkersandtheamountofcapital,thesesupply-sidestructuralreformswillbenecessarytopromotegreaterefficiencyandachievesustainedincreasesinmultifactorproductivity,andthereforeincomes,overthenextdecade.
Muchasinthepastdecade,theChineseeconomywillcontinuetohavealargeinfluenceonAustralia’seconomicprospectsinthecomingdecade.
AustraliacapitalisedontheChina-ledincreaseinglobalcommoditydemandinthelastdecade,thankstoanabundanceofeconomicallyprovenmineralreserves,agloballycompetitiveminingindustryandpolicysettingsthatfacilitatedalarge-scaleexpansionoftheresourcesindustry.
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However,Australia’sincomegrowthhasnowslowed,partlyasaresultofChina’seconomictransformationtowardslessresource-intensivegrowth.Inthenextdecade,Australiawillneedtobroadenitsexportbasebeyondminingbytappingintothefast-growingmarketforconsumerandcommercialservicesthatiscurrentlyemerginginChinaandacrosstheregion,whilecementingitspositionasareliable,low-costsupplierofabroadrangeofenergyandindustrialcommodities.
Succeedinginthesenewmarketsforservicesintheregionwillnotbeeasy.Australiawillfacefiercecompetitionfromservicesuppliersglobally,withoutthenaturalandgeographicadvantagesitpossessesinmineralsproduction.Australiawillneedtoreinvigorateitseconomicreformagendatohelpdriveinnovationandproductivity,particularlyinAustralia’slargeservicessectorwhereproductivitylagsbehindtheglobalfrontierinmanycases.Improvingproductmarketefficiencythroughouttheservicessector,includingbystrengtheningandextendingcompetitionpolicy,willbeessentialifAustraliaistoexpanditsserviceexportsandmaintainprosperityinthenextdecade.
ForbothChinaandAustralia,drivinginternaleconomicreformwillalsorequireengagingfurtherwiththerestoftheworld.InChina’scase,thismeansallowingtheChineseeconomytobecomemorecloselyintegratedwithglobalfinancialmarketsasawayofimprovingtheallocationofcapitalinternally,andopeningupitsexpandingservicessectortogreaterforeigntrade,investmentandtechnologies.
ForAustralia,increasingcontestabilityincurrentlyshelteredserviceandinfrastructuremarketswillhelpattractawiderrangeofChineseandotherforeigninvestment.Asarelativelysmall,openeconomy,thiswillbecriticalinfinancingnewinfrastructureandAustralia’sbroaderinvestmentneeds.
InbothAustraliaandChina,theservicessectorisbecomingalargerdriverofgrowth,especiallyinprofessionalserviceareasandintheinformationeconomy,wherenewtechnologiesarefundamentallychangingthewaybusinessisbeingdoneacrosstheworld(Box2.1).
BOx 2.1: THe gLOBAL Rise OF THe innOvATiOn eCOnOmy
ChinaandAustralia,liketherestoftheworld,arelookingtowardsinnovationandtheinformationeconomyaskeydriversofinvestmentandgrowthinthecomingdecade.
Rapidlyemergingdisruptivetechnologiesarereshapingthewayconsumersandbusinessesinteract,includingthroughtheadventofthesharingeconomy,thegrowingcapacitytocollectandanalyse‘bigdata’andthroughtheshifttowardsknowledge-basedcapital(KBC).
KBCincludesinvestmentindigitalinformation(softwareanddata),innovativeproperty(patents,copyrights,trademarksanddesigns)andorganisation-specificcompetencies(brandequity,trainingandorganisationalcapital).TheOECDestimatesthatinvestmentinKBCnowrepresentsalmosthalfofallinvestmentintheUnitedStatesandotheradvancedeconomies(OECD2013b).
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Bothcountriesarerightlyfocusedonfosteringaninnovativebusinessclimatethatsupportsnewanddynamicfirmstoexpandandcreateemployment.Theirleadershipsopenedanewdialogueabouttheircountries’innovationstrategiesinAprilthisyear.Aspartofthis,policymakersmustensurethatlocalworkforceshavetheskillsandcapabilitiestotapintothelatesttechnologiesandbusinesspracticesdevelopedabroad.Buttherearedeepertrendsdrivingtheglobalenvironmentinwhichinformationandbigdatabusinessesarereshapingtheworldeconomyandinternationalbusiness,andthesetrendswillneedtobeontheiragendaforcooperationoverthecomingdecade.
Althoughmerchandisetrade—includingincommodities—willremainafoundation,theChina–Australiaeconomicrelationshipwillincreasinglybedefinedbyeachcountry’stransitiontowardsmoreservices-andinnovation-basedeconomies,andthebilateralcollaborationsthatcanhelpbringthisabout.
Thiswillmeangreatertradeinservices,butalsoabroadeningofpeople-to-peopleengagementtosharetechnologies,businesspracticesandinstitutionalknow-howaseachcountrynavigatesitsreformchallenges.Theseareasforgreaterbusinessandgovernmentcollaborationarediscussedinfollowingchapters.
ThischaptersetstheeconomiccontextfortherestoftheReport.ItbeginswithasummaryofChina’sriseandimpactontheglobaleconomyoverthepastfewdecades,withthenextsectionfocusingonChina’sinfluenceoncommoditymarketsandAustralia.ItfirstexaminestheeconomictransitionthatisnowoccurringinChinaandtheimplicationsforAustraliaandtherestoftheworld.Thisincludesadiscussionofthekeyeconomicreformsthatwillberequiredinbothcountriestohelpsustaineconomicgrowthandprosperityoverthenextdecade.
KBCwillbeakeyfactorinspurringnewsourcesofgrowth,byallowingfirmsandorganisationstoprosperinacompetitiveglobaleconomyandcreatehigh-wageemployment.ThisisparticularlyrelevantforAustraliaandChinaastheylooktoreplacethetraditionalsourcesofexportgrowthoverthepastdecade.AstheOECDnotes:‘KBCallowscountriesandfirmstoupgradetheircomparativeadvantagebypositioningthemselvesinhighvalue-addedindustries,activitiesandmarketsegments’.New,innovativefirmsarealsobecomingthemaindriversofemploymentcreation,with‘high-growth’firmsaccountingforuptohalfofalljobsgrowtheventhoughtheyonlyaccountforaround5percentofallbusinesses(OECD2012).
Thatsaid,theriseofKBCiscreatingnewchallengesforpolicymakersandbusinesses,notleastthedifficultiesinvolvedinmeasuringeconomicactivityassociatedwithKBC.Forexample,theriseofKBChasmadeacountry’sintellectualpropertyregimeevenmoreimportant,apointhighlightedinAustralia’srecentReviewofCompetitionPolicy.
KBCbusinessesarealreadydrivingmassiveinnovationintheAustralia–Chinarelationshipthroughinnovativedeliveryofgoodsandfinancialservicesviae-commercethatisleapfroggingoldbarrierstoeconomicintegration.Whatweseesofarisjustthetipoftheiceberg(seeChapter3).
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China’s rise and its impact on the world economy
China’seconomictransformationsince1978hasbeenremarkable.Atthecommencementofthereformperiod,China’sGDPpercapitawaslessthan5percentoftheUnitedStates’(TheConferenceBoard2015).AccordingtoWorldBankDevelopmentIndicators,since1978,China’seconomyhasgrowninsizebyanannualaveragerateofaround10percentandisnowalmost30timeslargerthanitwasin1978(WorldBank2016).Thisreflectsasubstantialincreaseinlabourproductivity,whichhasrisenfrom3percentoftheUSlevelin1978tomorethan20percentnow(TheConferenceBoard2015).
ThisperformancehasresultedinChinarapidlycatchinguptohigher-incomeeconomies,which,combinedwithahugepopulation,hasseenChina’sshareofglobaloutputandincomerisefromlessthan5percentin1990to17percenttoday(Figure2.1).
Whileuniqueinscale,China’seconomicconvergencebroadlymatchesthepreviousexperienceofotherAsianeconomiessuchasJapanandSouthKorea.Indeed,theprinciplefactorsbehindChina’ssuccessaresimilartothosethathavedriveneconomicconvergenceelsewhereinAsia.Theseincludeveryhighratesofphysicalcapitalaccumulationandmassmobilisationoflabourtowardsanexport-orientedmanufacturingsector,supportedbyongoingimprovementsinhumancapitalandtechnologicalcatch-up.
ThescaleandspeedofChina’seconomicriseoverthepastfourdecadesalsoreflectsthesizeanddemographicprofileofChina’spopulation,whichsawtheworking-agepopulationgrowsignificantlyfasterthantheoverallpopulation.Thiscoincidedwiththemassmovementofruralsurpluslabourfromthelowproductivityagriculturalsectortohigherproductivityindustrialandservicesectors.
China’sexport-orientedgrowthmodelhasunderpinnedalargeandrapidexpansioninitsinternationaltradeandintegrationwithglobalmarketssince1978.
Figure 2.1: China’s share of the global economic aggregates
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Inthepast15yearsalone,China’sexportshaveexpandedmorethan10-fold,facilitatedbyaccessiontotheWTOin2001.HavingsurpassedboththeUnitedStatesandGermany,Chinaisnowtheworld’slargestexporterbyvalue,accountingfor12percentofglobalmerchandisetrade(Figure2.1).
GreaterinternationalopennessallowedChinatoabsorbforeigntechnologiesandknow-how,drivingimprovedproductivityacrossthebroadereconomy.Amoreopeneconomyalsoincreasedcompetitiveforcesdomestically,promotingefficiencyandinnovationintrade-exposedsectors.
Figure 2.2: investment as a share of gDP
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Sincethemid-1990s,China’srapideconomicconvergencehasreflectedverylargeinvestmentsinphysicalcapital.Chinacommencedthereformperiodwithrelativelylowcapitalperworker,allowingforinitiallylargelabourproductivitygainsandhighreturnsoninvestment.Growthinthecapitalstockisestimatedtohaveaveraged10percentannuallyfromthe1980s,accountingforsignificantlymorethanhalfofGDPgrowthoverthistime(Wu2014).
ThesetrendshaveresultedinChina’sinvestmentasashareofGDPreachingveryhighlevels,bothhistoricallyandevencomparedwithotheremergingeconomies(Figure2.2).
China’selevatedratesofinvestmenthavebeensupportedbygovernmentpoliciesthathaveincentivisedpropertydevelopmentandinfrastructureinvestment,andexpansionsinmanufacturingcapacity.Thisincludesthestructureofthefinancialsystem,whichhaschannelledsubsidisedcapitalfromsaverstolargeprivateandstate-ownedenterprises,andanexchangerateregimeinpreviousdecadesthatencouragedexportsoverdomesticspending.China’sveryhighratesofinvestmenthavebeensupportedbyveryhighratesofnationalsaving(Box2.2).
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The impact of China’s rise on global commodity markets and Australia
ItisnotjusttherapidgrowthandtransformationoftheChineseeconomythathasaffectedopportunitiesglobally;itisalsothesheerscaleofChina’simpactthathasmatteredtotheworldeconomy.
TheunprecedentedscaleofChina’sindustrialisationhasresultedinChina’sconsumptionofmetals,otherrawmaterialsandenergyexpandingmassivelyoverrecentdecades.Chinaisnowtheworld’slargestuserofarangeofindustrialandenergycommoditiesincludingsteel,copperandcoal(Figure2.4).
BOx 2.2: CHinA’s HigH RATes OF nATiOnAL sAving
China’svaststockofsavings,togetherwithitscapitalaccountcontrols,hasplayedanimportantroleinhighratesofinvestment.SavingasashareofGDProsefromlessthan40percentinthe1980stoapeakof50percentinthelate2000s.Whilethenationalsavingratehaseasedinthepastfewyearstoaround48percent,itremainsveryhighbyhistoricalandinternationalstandards(Figure2.3).
Thehouseholdsectorhasmadeasignificantcontributiontohigherratesofnationalsaving,reflectingagrowingworking-agepopulationwithanincreasingcapacitytosave.Incompletedomesticfinancialmarketsandrestrictedaccesstoforeignfinancialassetshavealsoencouragedhighhouseholdsavingrates,ashasthelimitedstateprovisionofsocialsecurityandhealthinsurance.
CorporatesavinghasalsomadealargecontributiontoChina’shighratesofnationalsaving.AflexibledividendpolicyhasallowedSOEstoretainandthenreinvestmostoftheirprofits,ratherthandistributingdividendstothestate.Financialunderdevelopmenthasalsomadeitdifficultfortheprivatesector,especiallysmallbusinesses,toaccessintermediatedfinancing,inducinghighersavingratesinthatsector.
Plannedreformstofinancialmarkets(includinginterestrates)andtotheregulationofSOEs,aswellasthebroaderprovisionofsocialinfrastructure,shouldsupporthigherhouseholdconsumptionandcorrespondingdeclinesinhouseholdandcorporatesavingrates.Likewise,China’sageingpopulationislikelytoplayapartinreducingsavingrates,asanincreasingshareofChina’sadultpopulationmovesintoretirementageandbeginstodrawdownsavings.
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Figure 2.3: national saving by sector
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China’sgrowthinsteelconsumptionhasbeenparticularlydramaticoverthepasttwodecades,drivenbyrisinginvestmentinsteel-intensivebuildingsandinfrastructure,aswellaslargeexpansionsinthemanufacturingsector.Chinaisnowthelargeststeelconsumer,accountingfor45percentofglobalsteelusagein2015(WorldSteelAssociation2015).China’sincreasingsteelrequirementsnecessitatedamassiveexpansioninitssteelindustry,whichisestimatedtohaveproducedover800milliontonnesofcrudesteelin2015—morethansixtimesasmuchasitdidin2000(Figure2.5).
Figure 2.4: China’s share of global commodity consumption
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China’sincreasingproductionofsteelhashadflow-oneffectstoitsdemandfortherawingredientsusedinsteelmaking,namelyironoreandmetallurgicalcoal.Mostnotably,China’sshareofworldironoreconsumptionrosefrom14percentin2000toanestimated65percentin2015.
Whilehavinglargequantitiesofitsownresources,Chinahasbecomeincreasinglyreliantonimportedinputsasstrongcommoditydemandhasdrawninlower-cost,higher-qualitycommoditiesfromabroad.Tradedependencycontinuestoriseascommoditypricesfall,andtheshareofimportedindustrialinputsindomesticconsumptionisatanall-timehigh.
Figure 2.5: China’s steel production
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RespondingtothesharpriseinglobalcommoditypricesandgrowthinChina’sdemandforrawmaterials,Australia’sminingindustryinvestedheavilyinnewexportcapacityoverthepastdecade(Figure2.6).Thisinvestmentwasinitiallyconcentratedintheironoreandcoalsectors,butwasfollowedbyanevenlargerinvestmentinliquefiednaturalgas(LNG)capacity,whichwillmakeAustraliathelargestexporterofLNGwithinafewyears.Atitsheightin2013,theminingindustry’sshareofprivateinvestmentinAustraliareachedone-third,morethantriplethetypicalhistoricalshare.
Therewasalagintheresponseofinvestmentandcapacitytorisingpricesbecauseofitsgestationperiod.Butasthisnewcapacitycameonline,Australia’sexportvolumesoftheseproductsalmostdoubledcomparedtothepreviousdecade.Intheironoremarket,Australianowaccountsforalmostone-thirdofglobalproductionandone-halfofseabornetrade,significantlyhigherthanadecadeago.
AlmostallofAustralia’sadditionalironoresupplyhasbeenabsorbedbyChina,withAustraliaincreasingitsshareofChineseimportstoover60percentaslessefficientglobalsupplyhasbeendisplaced,includingwithinChinaitself.Australia’sshareofChina’scoalimportshasalsoincreased,fromaround10percentin2009toaroundone-thirdnow(Figure2.7).
By2018,theminingindustry’scapitalstockwillbealmostfourtimeslargerthanitwasin2004,amassiveinvestmentinnewcapacitythatwillunderpinAustralia’sminingexportsfordecadestocome.
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Extensivereservesofironore,coalandothercommoditiesmeantthatAustraliawaswellpositionedfromtheoutsettobenefitfromChina’srisingcommoditydemand.ButthemereexistenceofthesenaturalresourcesdidnotguaranteeAustralia’ssuccess.Instead,Australiaowesitssuccesstothecompetitivenessofitsminingindustryaswellastheflexibilityofthewidereconomythatallowedresourcestobeefficientlyreallocatedtoexpandthemineralssector.
Figure 2.6: mining investment in AustraliaPanel A: By commodity type Panel B: share of total private investment
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Australia’swell-establishedmacroeconomicpolicyframeworks,includingafloatingexchangerate,playedanimportantroleinaccommodatingtheexpansioninAustralia’sminingcapacitywithlimiteddisruptionstothebroadereconomy.Alongwithasufficientlyflexiblelabourmarket,thesesettingshelpedinflationexpectationstoremainanchoredwhenthetermsoftraderosesharply,avoidingmanyofthemacroeconomicdifficultiesthataroseinprevioustermsoftradeboomsinAustralia(Gruen2011).
Figure 2.7: Australia’s share of Chinese commodity imports
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%
2015 2008 Source:ChinaNationalBureauofStatistics2015.
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China’s economic transformation to new drivers of growth
Afteralmostfourdecadesofrapidgrowth,theChineseeconomyisundergoingamajortransformation,broughtaboutbyacombinationofinternalandexternaleconomicforces.
Ontheexternalfront,substantiallyslowergrowthininternationaltradehasseenacorrespondingmoderationindemandforChina’straditional,labour-intensivemanufacturedexportsinrecentyears(Figure2.8).ThisslowdownpartlyreflectsChina’salreadysignificantmarketshareinsomeglobalmanufacturingsegments,aswellasamorefundamentalshiftinglobaltradetowardsinformationandservices,consistentwiththeriseofe-commerceglobally.
Figure 2.8: growth in global trade
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Domestically,aswagesandincomesrise,householdconsumptionisemergingasamoreimportantdriverofeconomicactivity.Atthesametime,China’sgrowthdriversinrecentdecades—investmentinphysicalcapitalandlabour-intensivemanufacturedexports—areslowing.Thelowergrowthininvestmentinthesesectorsreflectsoversupplyinthepropertymarketandtheexcesscapacitythathasemergedacrosssegmentsofthemanufacturingsector,andthelowerprofitabilityinthesesectors.
DemographicforcesandlabourmarketdynamicsarealsoplayingtheirpartinChina’sshiftawayfromfactor-drivengrowthtowardsmorebalancedgrowth.Aftergrowingstronglyfornearlyfourdecades,China’sworking-agepopulationisnowshrinking,whichisdirectlyreducingChina’sgrowthpotentialvialowergrowthinthelabourforce.
China’sageingpopulationhasimplicationsthatgobeyondtheimpactonaggregateeconomicgrowth.Forexample,therewillbeanextra110millionpeopleagedover65by2030,whichwillincreasethedemandforaged-careservicesandputpressureonChina’sstilldevelopingsocialsafetynet.
Inthelabourmarket,theslowergrowthinthelabourforceandshrinkingpoolofsurplusrurallabouriscontributingtohigherwages.Higherwagescombinedwithasignificantappreciationoftherealexchangerateoverthepreviousdecadeishelpingtoshiftthecompositionof
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demandfromexportsandinvestmenttowardsconsumption.Thisisbeingsupportedbyashiftineconomicresourcestowardsconsumers,illustratedbytheuptickinthewageandhouseholdsectorsharesofGDPinrecentyears(Figure2.9).
Similarly,consumptionexpenditurehasnowovertakeninvestmentspendingasthemaincontributortoeconomicgrowth.Whilethispartlyreflectsslowergrowthininvestmentinrecentyears,thecontributionfromhouseholdconsumptionalsorosein2015(Figure2.10).
Withinconsumption,theshifttowardsservices,aswellasdiscretionarygoods,isoccurringasChinesehouseholdsbecomewealthier.Thischangingpatternofdemandisgivingrisetofasteremploymentgrowthintheservicessector.Overthepasttwoyears,employmentinChina’sservicessectorhasgrownstronglyandnowaccountsforalittlemorethan40percentofemploymentacrosstheeconomy,upfrom30percentadecadeago(WTO2016).
TheappreciationofChina’srealexchangerateisalsoencouragingemploymentcreationinChina’snon-tradedservicessectors,whichultimatelywillbeattheexpenseofemploymentinChina’sexport-orientedsectors.ThisdynamicisconsistentwiththeexperienceofotheremergingeconomiessuchasJapaninthe1970sand1980swhereincreasesintherealexchangeratereinforcedashifttowardsdomesticallyorientedindustriessuchaseducation,healthandfinancialservices(Dorruccietal2013).
WhileinvestmentasashareofGDPhasfalleninrecentyears,andmayfallfurther,China’stransformationtowardsservices,higher-endmanufacturingandthedigitaleconomywillstillinvolvesubstantialnewinvestmentinthesegrowingindustries.Forexample,China’sentryintonew,higher-technologymanufacturedsegmentswillrequirelarge-scaleinvestmentinplant,equipmentandhumancapital,asillustratedbytherecentplantoestablishasemi-conductorindustryinChina.
Figure 2.9: Wages and household disposable income
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ThetypesofassetsattractinginvestmentarealsolikelytoevolveasChina’sindustrybecomesmoreadvanced.ThisreflectsthegreaterneedforinvestmentininnovationandinformationtechnologyasChineseindustrydevelops,inlinewiththeglobaltrendtowardsknowledge-basedcapital(OECD2013b).ForChina,thismeansagreaterproportionofinvestmentislikelytobedirectedtowardsintangibleassets,suchasdigitalinformation,computersoftwareandresearchanddevelopmenttosupportChina’sprogressionintohigher-technologymanufacturing(Box2.3).
Figure 2.10: Contributions to China’s gDP growth
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Source:ChinaNationalBureauofStatistics2015.
ThatisnottosaythatinvestmentintraditionalformsofphysicalcapitalwillnotremainessentialinsupportingChina’scontinuedurbanisationandraisingthequalityoflifeinurbancentres.Thisincludesfurtherinvestmentinpublictransportnetworksandurbanamenities,whichinmanycitiesremainunderdeveloped.Notwithstandingthecurrentareasofoversupply,continuedurbanisationwillalsorequiresubstantialnewinvestmentinresidentialandcommercialbuildingoverthecomingdecade.
Reforms to assist China’s economic transformation
Tosustaineconomicgrowthinthenextdecade,China’spolicyenvironmentwillneedtosupporttheshiftinactivitytowardstheservicessector,higher-techmanufacturingandenergytransformationtoaddressenvironmentalchallenges.Itwillalsoneedtoalloweconomicresourcestoshifttowardsthesemoreinnovativeandfast-growingsectorsoftheeconomy.
Thisfocusonliftingmultifactorproductivityrecognisesthatthelongperiodoffactor-drivengrowthChinahasexperiencedoverthepast40yearscannolongerbesustained.Thisreflectsfallingratesofreturnandthebuild-upofexcesscapacityinsignificantpartsoftheindustrialsector,ashrinkingworking-agepopulationaswellasbroaderqualityoflifeconsiderations,includingreducingthepollution-intensityofgrowth.Inthiscontext,China’seconomicperformanceoverthecomingdecadewilldependinlargepartonwhetherChinacanimproveuponthelimitedgrowthinmultifactorproductivityachievedsince2007(Figure2.13).
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BOx 2.3: CHinA’s PROgRessiOn TOWARDs HigHeR-enD AnD vALue-ADDeD mAnuFACTuRing
ThepaceandscaleofChina’sriseasamanufacturingexporterhasbeentrulyremarkable.SinceaccessiontotheWTOin2001,China’sshareofglobalmanufacturingexportshasgrownfrom5percentto18percent,makingastrongcontributiontoeconomicgrowthbothdirectlyandthroughtechnologyspilloverstothewidereconomy.
However,growthinChina’sexportsoftraditional,labour-intensivemanufacturingproductshasslowedinrecentyears,reflectingarangeoffactors—includingthatglobalmarketsmayhavereachedsaturationpointfortheseproducts.Forexample,China’sshareofinternationalclothingexportshasremainedatalmost40percentinrecentyears,havingrisencontinuouslyoverthepreviousfewdecades(WTO2016).
Inthenextdecade,Chinawillthereforeneedtobuilduponitstraditionalexportcategoriesbycontinuingtoprogressintohigher-technologymanufacturing,followinginthefootstepsofcountriessuchasJapan.Thisprocesshasbeenunderwayforsometime,withtheshareofmedium-andhigh-techmanufacturinginChina’smerchandiseexportsnowsubstantiallyhigherthanwhatitwas20yearsago(Figure2.11).
Figure 2.11: China’s export mix 1995–2015
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High-tech Medium-tech Low-tech Resource-based Commodities
Source:OECDandUnitedNation’sComtradedatabase.
Atthesametime,China’smanufacturingsectorwillneedtocapturealargershareofthegrossvalueofitsmanufacturingexports,bymovingupthevaluechaininlinewiththeMadeinChina2025initiative,anofficialinitiativeaimedatpromotingadvancedmanufacturing.ThiswillbeessentialifChina’sexportsectoristocontinuetomakeastrongcontributiontoeconomicgrowthoverthenextdecade.Again,therearesignsthatChinaisalreadymakingprogressinthisrespect,havingcapturedalargershareintheglobalvaluechainacrossmanymanufacturingsub-categoriesoverthepasttwodecades(Figure2.12).Thisincludesparticularlylargeincreasesinthedomesticeconomy’sshareofthevalue-addedofcomputers,electricalmachineryandapplianceexports.
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Figure 2.12: Domestic value-added share of China’s gross exports
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Source:WTOandOECD2016.
WhileChina’sprogressiontoamoreadvancedandhigher-incomeeconomywillnotbestraightforward,the13thFiveYearPlanrecognisestheseeconomicimperatives,buildinguponthereformstrategiesassetoutintheThirdPlenumofthe18thPartyCongressinlate2013.Thisincludestheneedtosupportgreaterhouseholdspending,improvetheefficiencyofinvestment,encourageamoreinnovativescience-ledeconomyandexpandintohigher-technologymanufacturing(Box2.4).
Figure 2.13: Contribution to China’s gDP growth
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Capital Total factor productivity Labour GDP Source:ConferenceBoard2015;Wu2014.
Mostimportantly,thePlan’sfocusonsupply-sidestructuralreformsrecognisestheneedtoencourageanexpansioninChina’smoredynamicprivatesectorwhilelimitingfurtherinvestmentinthosepartsoftheeconomythatarenowexperiencingover-capacity.Thiswillencompassabroadrangeofreformsincludingopeningupmonopolyindustriestoprivatesectorparticipation,reducinggovernmentinvolvementinanumberofsectorsstilldominatedbySOEsandimprovingmarketexitmechanisms.
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Financialmarketreformswillalsoplayaroleinallowingmoredynamicandefficientfirmstoexpandbyprovidingbetteraccesstofinanceatlowerrates.Thiswillrequirepushingaheadwithbankingsectorreforms,includingliberalisinginterestrates,aswellasencouragingagreaterrolefornon-traditionalbanking(includingthroughemergingonlinecreditproviders)anddirectequityfinancing.
BOx 2.4: CHinA’s eCOnOmiC TRAnsFORmATiOn AnD THe 13TH Five yeAR PLAn
The13thFiveYearPlan(‘thePlan’)presentsaroadmapforChina’seconomictransformationtowardsahigherincomeeconomy.ThePlanprioritisesarangeofareasincluding:improvingdevelopmentqualityandefficiency;supply-sidestructuralreforms;bettermatchingsupplyanddemand;encouragingamoreinnovativeeconomy;fosteringmorecoordinated,greenandinclusiveeconomicdevelopment;andacceleratinginstitutionalreformstosupportChina’scontinuedeconomicdevelopment.ThePlanfocusesonthethreeeconomicgoalsofliftinghouseholdconsumption,transformingindustrytowardsservicesandhighervalue-addedmanufacturing,andpromotingthedevelopmentofaninnovation-andtalent-basedeconomy.
Strengtheningconsumption-ledgrowth.Chinawillpromoteconsumptiontobecomeamoreimportantcontributortoeconomicgrowth.ThisencompassespoliciesthatpromoteanindustrystructurethatbetterreflectsdemandfromChineseconsumersforhigher-qualityproductsandencouragesanexpansioninChina’sconsumer-orientedservicesindustries,includinghealthandagedcare.Consistentwithagreaterdomesticcapacitytoproducehigher-endconsumerproducts,Chineseconsumerswillbeencouragedtoconsiderswitchingtheirspendingfromoverseastodomesticmarkets.
Encouragingtheservicessectorandhigher-endindustry.Chinawilllifttheshareoftheservicessectorintheeconomyandencouragehigher-endmanufacturing.Whileaggregatedemandwillbeadjustedappropriately,theemphasiswillbeonsupply-sidestructuralreformsthatenabletheChineseeconomytomeettheChinesepeople’sgrowingmaterial,cultural,ecologicalandenvironmentalneeds.Consistentwiththe‘MadeinChina2025’initiative,thetransitionintohigherendmanufacturingwillallowChineseindustrytocapturealargeshareofvaluechains.Tohelpacceleratethedevelopmentofamodernservicesector,thesepartsoftheeconomywillbeexposedtogreaterforeigncompetition.The‘InternetPlus’actionplanwillhelptopromotebetterandbroaderuseoftheinternet,withgreateraccesstoinformationandbetterinformationnetworksfacilitatingtheadoptionofmoreefficientproductionmethodsandorganisationalstructureswithinindustry.
Fosteringscientificandtechnologicalinnovation.Chinawillaimtoimprovemultifactorproductivity,underpinnedbyscientificandtechnologicalinnovation,investmentinhumancapitalandgreaterentrepreneurship.Marketreformswillbeundertakentoensurethatresearchandinnovationisgearedtowardsthemostvaluableareas,supportedbyclosercollaborationbetweenresearchersandindustry.Whileabsorbingandintegratingforeigninnovationwillremainimportant,thePlanprioritiseswaysofencouraginglocallygeneratedtechnologiesandnewideas,tohelpgenerateself-sustainingeconomicdevelopment.
Atthesametime,thePlanhighlightstheneedtoaddressdistortionsinpolicyandinstitutionalarrangementsandtheneedtopromotefurthercompetitionamongfirmsinsomeindustriesaspartofagenerallyopenandcontestablemarketsystem.
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Capitalaccountliberalisationcanalsoassist,byprovidinganotherchannelthroughwhichChinesefirmscanaccessfinanceatmarketrates,whilealsosubjectingdomesticprovidersoffinancetoexternalcompetition.
BesideshavingthepotentialtoimproveChina’sefficiencyofinvestment,capitalaccountliberalisationcanalsosupporttheshifttohouseholdconsumption.Astheconstraintsonoutboundinvestmentareloosenedfurther,Chinesehouseholdswillbeabletoinvestinawiderrangeofassetswithhigherrisk-adjustedreturns.Thiswillbereinforcedbyestablishingmarket-determinedinterestratesandamoremarket-determinedexchangerate,helpingtoreallocateincometowardsthehouseholdsector.
AlthoughitisinChina’slonger-terminterests,thetransitiontonewdriversofgrowthwilltaketime,andthepaceofeconomicgrowthmaymoderatemorethananticipatedinthetransitionalperiod.Alternativegrowthscenariosareexaminedinlaterchapters(seeChapters3and6)toconsidertheeffectofdifferentChinesegrowthtrajectoriesandstructuresontheAustralia–Chinaeconomicrelationship.Forexample,China’sprogressionintohigher-techmanufacturing,whichisadifficulttransitioninitsownright,maynotoccurquicklyenoughtooffsettheimpactofslowergrowthintraditionalmanufacturingsegments.Likewise,China’sconcernabouttheenvironmentalimpactofheavyindustryandtheminingsectormayweighfurtheronindustrialproductionasnewpoliciesintheseareasbegintotakeeffect.
Duringthistransition,Chinamuststriketherightbalancebetweenpoliciesthatsupportnear-termgrowthandpoliciesthatpromotetheeconomy’slonger-termgrowthpotential.
Inparticular,excessivelyloosemonetarystimulustosupportshort-termgrowthwouldhavethepotentialtoencouragehigherborrowingandleverageinthecorporatesector,whichcouldcreatefragilitiesinthefinancialsystemandundercutlonger-termreformstoimprovetheefficiencyofinvestment.Chinashouldbeextremelycarefulinmanagingfinancialrisksassociatedwithhighlevelsoftotaldebt,whichreached237percentofChina’sGDPinthefirstquarterof2016,from148percentattheendof2007.Deleveragingisoneoffivetopprioritiesfortheworkofthegovernmentfor2016.DeleveragingwillhelpChinaachievemoresustainablegrowthinthelongertermbutcanputdownwardpressureintheshortterm.
implications of China’s transition
implications for the global economy
Firstandforemost,thesheersizeoftheChineseeconomymeansopportunitiestodobusinesswithChinawillcontinuetoexpandevenifaggregatesratesofeconomicgrowtharelower.TheIMFprojectsChina’sgrowthratetoremainmorethantwicetheglobalaverageinthenextfewyears,whileitscontributiontoglobalgrowthwillbemuchlargerthanitwas10yearsagogivenitisnowasignificantlylargershareoftheworldeconomy.
ButthetransformationunderwayintheChineseeconomymeansthatChina’simpactontheworldeconomywillbeverydifferentfromwhatitwasinthelastdecade.Theincreaseinpercapitaconsumption,urbanisationandtheemergenceoftheserviceseconomy,aswellasthefurtherliberalisationoffinancialmarketsinChina’seconomy,willfundamentallychangehowChinainteractswiththerestoftheworld.
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Thelargerroleforconsumerspendingandtheshifttoamoreservices-basedeconomywillprovideChina’stradingpartnerswithvastexportopportunitiesinnewareasoftheChineseeconomy.China’smiddleclassisprojectedtoreach630millionpeopleby2022,providingahugeandexpandingmarketforinternationalprovidersofconsumergoodsandservices,inareasspanninghealthcare,educationandfood(Barton2013).
China’sdemandforhigh-valuefoodstuffsisexpectedtorisedramaticallyoverthecomingdecades,withtheconsumptionofbeefandothermeatsdoublingoreventriplingaccordingtosomeprojections(Hamshereetal2014).WhilethemajorityofthisincreasedfooddemandwillbemetbyexpandingChina’sdomesticproduction,therewillbesignificantunmetdemandthatinternationalfoodexporterswillbeabletoexploit.
Likewise,theopeningupofChina’sdomesticservicessectorwillpresentnewopportunitiesforforeigninvestors,inareassuchasfinance,insuranceandtheutilitiessector.
TheshareofChina’slabour-intensivemanufacturingsegmentislikelytodeclinegoingforward.However,buildinggreaterconnectivityandinfrastructureprojectswithAsianandEuropeanexportsmarketsviatheinfrastructureinvestmentprojectsassociatedwiththeOneBelt,OneRoad(OBOR)initiativecansupportdemandforChina’straditionalexportcategories.
TheOBORinitiativecanalsoassistinabsorbingChina’sconstructioncapacity(includingforinfrastructure),whilesimultaneouslysupportingeconomicandtradenetworksacrossparticipatingeconomies.
BOx 2.5: THe OuTLOOK FOR CHinA’s sTeeL DemAnD
Havinggrownstronglyoverthepreviousdecade,China’sapparentsteelconsumptionfellby3percentin2014andisestimatedtohavefallenbyanother5percentin2015.ThisraisesthequestionofwhetherChina’ssteelconsumptionhaspeakedorwhetherthisweaknessreflectsmainlycyclicalfactorsthatwillgivewaytofurtherincreasesinChina’ssteelconsumptionoverthecomingdecade.ThisquestionwillhaveimportantimplicationsforChina’slargesteelindustryaswellasironoreproducersinChinaandoverseas.
Inthepast,largerisesinChina’ssteeldemandweredrivenbyconstructioninvestmentanddemandfromthemanufacturingsector,whicharethemainusersofsteel(Table2.1).
Table 2.1: China’s steel usage by purpose (percentage of total)
2000 2010 2014
Construction 56 56 55
Machinery 15 18 19
Automobile 6 7 7
HomeAppliance 3 1 1
Rail 2 1 1
Energy 7 4 5
Shipping(a) 3 5 2
Other 8 8 11
Source:ReproducedfromHamshereetal2016.(a)Shippingisdefinedasthesumofthe‘container’and‘shipbuilding’categories.
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ThelargecontributionfromtheconstructionindustryreflectsthesubstantialsteelrequirementsassociatedwithChina’surbanisation,includingforhigh-densityresidentialandcommercialbuildingsandforurbaninfrastructuresuchasrailways,highwaysandbridges.
China’sincreasedsteelconsumptionoverrecentdecadeshasbeensuppliedbyexpansionsinitsdomesticsteelindustry.Overthedecadeto2013,China’sdomesticsteelproductionincreasedalmostfour-foldtoaround820milliontonnes.Thishashadflow-oneffectstoironoreandmetallurgicalcoal—therawingredientsusedbyChina’ssteelmakers—withdemandfortheseinputsalsogrowingstrongly.Inthecaseofironore,China’sdomesticsupplies,whilesubstantial,areofrelativelypoorgradeandlocatedinlessaccessiblepartsofthecountry.ThishasmeantthatChinahasincreasinglyturnedtotheseabornemarket,includingAustraliansupply,toaccommodateitsgrowingironoreneeds(Figure2.14).
Inrecentyears,thedownswinginthehousingmarket,combinedwithweakerconditionsinChina’smanufacturingsector,havebothcontributedtolowerdemandforsteel.ThishasresultedinChina’ssteelconsumptionfallingoverthepasttwoyears.Steelproductionwasflatin2014andfellby2.3percentin2015despiteastrongincreaseinsteelexports.
Inthenearerterm,theoutlookforChina’ssteeldemandwilldependinlargepartonthestateofChina’shousingmarket,wherethereissignificantoversupplyacrossanumberofregions.Growthinrealestateinvestment,whichisanimportantdriverofoverallsteeldemand,isthereforelikelytoremainweakuntilthesepocketsofunsoldhousingareabsorbedbythemarket.
Similarly,excesscapacityinthemanufacturingsectorisweighingonproducerpricesandprofitability,andthiswillcontinuetolimitmanufacturing-relatedinvestment,andthereforesteelusageinthissector,untilthisexcesscapacityisabsorbed.
Notwithstandingcontinuedstrengthininfrastructure-relatedsteelusage,thesefactorsmeanthatChina’ssteelindustryislikelytofacecontinuedchallengingdemandconditionsincomingyears.Asaresult,China’sdemandforironoreisalsolikelytogrowatasignificantlyslowerratethaninthepreviousdecade,althoughtheremaybescopeforlow-costglobalsupplierssuchasAustraliaandBraziltoexpandtheirmarketshare.
Figure 2.14: China’s steel production and iron ore imports
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Source:Robertsetal2016.
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China’seconomictransitionisalsolikelytoresultinlessresource-intensivegrowththaninthelastdecade.Already,slowergrowthinindustrialproductionandrealestateinvestmenthascoincidedwithsignificantlyslowergrowthinChina’sdemandforsteelandothercommoditiesinrecentyears.Whilesomeofthisweaknessmayprovetobecyclicalratherthanstructural,theoutlookforChina’ssteeldemandremainsacentralsourceofuncertaintyforglobalsteelandironoremarkets(Box2.5).
Beyondthenearterm,China’ssteelandbroadermetalusagewillbeunderpinnedbyanumberoflonger-termdrivers,notwithstandingtherebalancingcurrentlyunderwayintheeconomy.Theseincludefurtherurbanisation,withChina’surbanisationrateofjust55percentsuggestingthattheneedforinvestmentinnewconstructionisstillsubstantial.Likewise,China’spublicinfrastructureremainsunderdevelopedinanumberofareas,includingurbanamenitiesandnationaltransportnetworks.Withrisingincomes,Chinesehouseholdswillalsodemandagrowingnumberofdurablegoods,includingmotorvehicles(withChina’spercapitalvehicleusagestilllowbyinternationalstandards)andhomeappliances.
TherearealsodownsideforcesthatcouldaffectChina’ssteelindustryanditsdemandforironore.Thisincludesthepolicyobjectiveofconsolidatingthesteelindustrytohelpeliminateexcesscapacityandimproveenvironmentaloutcomes,whichisagrowingfocusforauthorities.ThepotentialforgreateruseofscrapsteelcouldalsosignificantlyaltertheoutlookforChina’sdemandforironore,notingthatscrapusageinChinaremainslowbyinternationalstandards.
WhiletheoutlookforChina’ssteelproductionandironoredemandishighlyuncertain,Australiahassomeofthelowest-costironoreproducersintheworldandwillthereforeremainamajorsourceofChina’sironoreimportsinthecomingdecade.
implications for the Australian economy
FortheAustralianeconomy,theslowergrowthinChina’scommoditydemandinrecentyearshascontributedtoamorechallengingglobalenvironmentjustastheinvestmentphaseoftheminingboomhasnearedcompletion.Combinedwithlargeincreasesinglobalsupplies,softerglobaldemandhasresultedinAustralia’scommodityexportpricesfallingsharplyinrecentyears.ThishasreducedAustralia’stermsoftradeandgrowthinnationalincome,withAustraliafacingtheprospectoflowergrowthinincomesoverthecomingdecadeunlessproductivitygrowthcanbeliftedabovehistoricalaverages(Figure2.15).
Whilegrowthhasbeenslowinrecentyears,establishedmacroeconomicpolicyframeworks,includingafreelyfloatingexchangerate,haveservedAustraliawellinmanagingthedownswinginglobalcommodityprices,reinforcingthepositiverolethesemechanismsplayedincushioningtheAustralianeconomyfromtheAsianfinancialcrisisinthelate1990sandtheglobalfinancialcrisisinlate2000s.Likewise,Australia’slabourmarket,whilestillover-regulatedinsomeareas,hasbeenflexibleenoughtoallowthenecessaryadjustmentsinrealwagestotakeplaceinrecentyears,helpingtosustainemploymentgrowth.
ButAustralia,likeChina,isnowsearchingfornewsourcesofgrowthastheoldonesfade,andthestructureoftheAustralianeconomyisrevertingbacktoamorenormalpatternofgrowthinwhichtheservicessectorwillagainbethemaindriverofgrowth.
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Australia’sservicessector,whichaccountsforaroundthree-quartersofoutput,comprisesadiverserangeofindustries.Thisspanstraditionalareassuchasutilitiesandgoodsdistribution,servicestohouseholdssuchashealthcareandrecreation,aswellasservicesmainlydirectedtowardsotherbusinessessuchasprofessionalservices(Figure2.16).
Figure 2.15: growth in Australia’s national income
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Labour utilisation Terms of trade Labour productivity National income per person
Note:GrowthinGNIpercapitaalsoreflectsagenerallysmallcontributionfromnetforeignincome,whichisnotshown.Source:GovernmentofAustralia2014.
Figure 2.16: Australia’s industrial composition
29%
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Administrative and support services
Distributionof goods and utilities
Services to households and businesses
Commodities, manufacturingand construction
Arts and recreation services
Other
Accommodation and food
Information media and telecommunications
Financial and insurance
Rental, hiring and real estate
Professional, scientific and technical
Public administration and safety
Education and training
Health care and social assistance
Source:ABS2015a.
Whileitisimpossibletopredictexactlywhichindustrieswillprosperinthecomingdecade,China’stransitiontowardsamoreconsumer-driveneconomywillundoubtedlyseeChina’simportstilttowardsservicesandhigher-valuefood.TheongoingliberalisationofChina’sfinancialmarkets,aswellaslatentdemandofChinesehouseholdsandfirmsforabroaderrangeofinvestmentandcreditproducts,willpresentaraftofopportunitiesforAustralia’sfinancialservicessector.TheseopportunitiesarediscussedfurtherinChapter5.
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Exportopportunitiesarelikelytoextendwellbeyondfinancialservices.SupportedbyChAFTA,therewillalsobeopportunitiesforprovidersofotherservicestoaccessthegrowingChinesemarketinareassuchaseducation,tourism,healthcare,accountingandlegalservices.
However,unliketheexperienceofthelastdecade,Australiawillhavenoparticularnaturaladvantagesincapturingthesenewexportmarkets,andwillfaceformidablecompetitionfromotheradvanced,service-basedeconomies.
Infact,productivityinsomeofAustralia’sserviceindustrieslagswellbehindtheglobalfrontier,partlyreflectingarelativelypoorperformanceoverthepastdecade.ThispictureisconsistentwithmeasuresofAustralia’srelativeinternationalcompetitiveness,whichalsopointtoanunderlyingdeteriorationoverthepastdecade(Box2.6).
BOx 2.6: An AssessmenT OF AusTRALiA’s COmPeTiTiveness
TheWorldEconomicForumprovidesausefulcross-countryassessmentofcompetitivenessbasedonitsratingon12categories(or‘Pillars’)thathavebeenfoundtocorrelatewithacountry’slonger-termproductivityperformance(WorldEconomicForum2015).These12Pillarsincludeacountry’sinstitutions,infrastructureandmarketefficiency,withscoresineachofthe12categoriesaggregatedtoformanoverallglobalcompetitivenessindex(orGCI).
Australia’soverallGCIrankinghasfallenoverthepastdecade,from16thto21st.Whileslippingacrossmostcategories,Australia’sdropintheareasrelatedtomarketefficiency(inbothgoodsandlabourmarkets)hasbeenstarkest(Figure2.17).
Figure 2.17: Australia’s competitiveness ranking
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1st pillar:Institutions
2nd pillar:Infrastructure
4th pillar:Health andprimary education
6th pillar:Goods marketefficiency
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8th pillar:Financial marketdevelopment
9th pillar:Technologicalreadiness
10th pillar:Market size
11th pillar:Businesssophistication
12th pillar:Innovation
2015–16
2006–07
Note:Pointsfurtherfromtheorigindenoteahigher/betterranking.Source:WorldEconomicForum2015.
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Intheareaofgoodsmarketefficiency,thefallinAustralia’srankingreflectslowerscoresonindicatorsofdomesticcompetition,partlyoffsetbyincreasedscoresrelatingtoforeigncompetition.Thelowerrankingonlabourmarketefficiencyreflectsincreasingcostsassociatedwithredundanciesandhiring,andlittleprogressoverthepastdecadeinstrengtheningthelinkbetweenproductivityandpayoutcomesinemploymentagreements.
Australia’srankingoninfrastructurehasalsofallen,reflectinglowerscoresforroadandairtransportinfrastructure,partlyoffsetbyincreasesinthequalityofelectricityinfrastructureandamorecomprehensivemobilephonenetwork.
WhiletheGCIisonlyonemeasureofcompetitiveness,thesemovementsinAustralia’sGCIperformancehighlightsomeareaswherereformeffortsshouldbefocused,namelyinproductandlabourmarketefficiencyaswellascertaincategoriesofinfrastructure.InthecategoriesinwhichAustralia’sscorehasimprovedmost—healthandprimaryeducation—itisimportantthatincreasedpublicspendingintheseareasisallocatedefficiently,toensurethathigherspendingtranslatestobetteroutcomes.
Tocompeteeffectivelyinemergingexportmarkets,Australiawillthereforeneedtoundertakefurtherreformstodriveproductivityperformance,particularlyintheservicessector.Thiswillrequireexposingthedomesticeconomytoincreasedinternationalcompetition,througheliminatingremainingtradebarriersandaddressingtherelativelyhighregulatoryburdenimposedonbusinessesengagingininternationaltrade,asnotedintheWorldBank’sEaseofDoingBusinessmeasureforAustralia.
Strengtheningandextendingnationalcompetitionpolicythroughoutthedomesticservicessectorwillalsobeneeded,especiallyinAustralia’slargehuman-servicessector,wherecompetitiveforcesandconsumerchoicearegenerallylacking(Box2.7).
BOx 2.7: ReFORm PRiORiTies ACROss AusTRALiA’s seRviCes seCTOR
Withthetermsoftradereturningtowardshistoricalaverages,thefocusofpolicymakersisnowonimprovingtheproductivityofAustralia’sservicessectorasawayofmaintainingeconomicgrowthandprosperity.
ThisfocusreflectsthelargeweightoftheservicessectorintheAustralianeconomy(morethan70percentofoutputand80percentofemployment)anditsunderperformanceinkeyareasrelativetoglobalproductivitybenchmarks.
Forexample,Australia’sProductivityCommissionfoundthatproductivityinAustralia’sretailindustryisalmost40percentbelowtheUnitedStates’,whileresearchersbasedattheRBAhavefoundbelow-parproductivitygrowthinthefinancialservices,educationandwholesaleindustriesoverthepastdecade.
Recognisingthisproductivitychallenge,theHarperReviewofCompetition(2015)highlightedtheneedtocultivatemorecompetitioninproductmarkets,particularlyacrosstheservicessector.TheReviewemphasisedtheneedforpolicysettingstobeflexibleinordertoallownewentrantspossessingdisruptivetechnologiesorlower-costproductsinto
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theAustralianmarket,includinginthe‘sharingeconomy’andthroughonlineprovision.Aspartofthis,theReviewidentifiedintellectualpropertylawasanareawherepolicyframeworksneededtobereassessedtoensurethattheexistingregimeisnotpreventingnewideasandtechnologiesfrombeingefficientlydispersedacrosstheeconomy.
TheReviewalsoemphasisedthepotentialforefficiencyimprovementsinhumanservices,includingthoseprovidedbygovernments,suchashealth,educationandcommunityservices.Whilealreadysignificant,theageingofAustralia’spopulationmeansthathumanservicesareexpectedtobecomeanevenlargerpartoftheeconomy,underliningthebenefitsthatcouldaccrueintheseareasfromincreasedcompetitionandcontestabilityaswellasgreaterconsumerchoice.
CompetitionreformwillnotonlyhelpAustralianbusinessestocompeteinfiercelycontestedserviceexportmarkets,butwillalsobeimportantinachievingproductivitygrowthacrossthenon-tradedsegmentsoftheservicessector.BetterproductivityperformanceinAustralia’snon-tradedsectorwill,inturn,freeupresourcestocopewiththedemandsofanageingpopulationandtofurtherimprovelivingstandardsoverthenextdecade.
AsnotedinBox2.6,thereisalsoroomforAustraliatosignificantlyimproveitsinfrastructure,withfurtherinvestmentneededinareasliketransportnetworkstosupportgrowingurbanpopulations.Additionalpublicspendingintheseareasneedstobeaccompaniedbyamorerigorousapproachforselectingprojects,toavoidwastingpublicresources(InfrastructureAustralia2016).
Asarelativelysmall,capital-importingeconomy,Australiawillalsoneedtoensurethatpolicysettingsremainsupportiveofforeigninvestmentininfrastructureandotherpartsoftheeconomy.China’smovetowardscapitalaccountliberalisationwillfundamentallychangetheavailabilityoffundswithintheinternationalcapitalmarket.China’svastpoolofsavingscouldhelpunderpinAustralia’sinvestmentneedsoverthenextdecade,butonlyiftheforeigninvestmentregimeandbroaderpolicyframeworkscontinuetomakeAustraliaanattractivedestinationforbothdirectandportfoliocapitalinflows.Improvinginfrastructuredeliveryforexistingassetswillbeapriority,includingthroughmoreefficientpricingintheareasoftransportandwaterinfrastructure(InfrastructureAustralia2016).Similarly,witharelativelysmallpopulation,Australianeedstoensurethatthelocalworkforcehasthecapabilitiesandnimblenesstocapitaliseonnewandemergingtechnologies.Inpart,thismeansbuildingupontheemergingcultureofstart-upbusinessesandentrepreneurship,andencouraginggreatercommercialisationofresearchideas,consistentwithAustralia’sNationalInnovationandScienceAgenda(AustralianGovernment2016).
Partners in economic transformation
ForbothChinaandAustralia,thepastdecadesaweconomicprosperityreachnewlevels,aseacheconomysuccessfullynavigatedtheglobalfinancialcrisistoextendalreadylongperiodsofunbrokeneconomicexpansion.
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Butglobaleconomiccircumstanceshavechanged,andthesourcesofgrowththatunderpinnedrisingincomesinthelastdecadewillneedtochangealso.Thechallengeinthenextdecadewillthereforebetounleashnewsourcesofgrowth,especiallyineacheconomy’sservicessectorandinotherareaswherenewtechnologiesarerapidlyemerging.
Toachievethis,bothcountrieswillneedtoextendanddeepenreforminthoseareasoftheeconomythathaveremainedprotectedfromdomesticandinternationalcompetition,whichwillbethemainrecipefordrivingproductivitygrowthandinnovation.
InChina,openingupdomesticcapitalmarketstotherestoftheworldwillbecrucialinsupportingdomesticfinancialmarketreformstoimprovetheallocationofcapitalandtounderpinfurtherincreasesinincomes.ReformstoreducetheroleofSOEs,includingthoseoperatinginthebankingsector,willalsobeneeded,aswillfurthertradeliberalisationofChina’sservicessector.Together,thesepoliciescanassistChinatorebalancetowardsmoreconsumer-orientedgrowth,andsupporttheeconomy’stransformationtowardstheservicesandhigher-technologymanufacturingsectors.
Intheeconomictransition,Chinaalsoneedstobalancetheshort-termgoalofsupportingaslowingeconomywithfiscalandmonetarypolicymeasures,whichmaycontributetotheriseoftotaldebt,andthelong-termobjectiveofachievingmorebalancedandsustainablegrowth,whichwillrequireapropermanagementoffinancialrisks.
AsChina’scapitalaccountbecomesmoreopen,itsinvestmentlinkswiththerestoftheworldarelikelytogrowdramatically,whichhasthepotentialtoprofoundlyaffectAustraliaandtherestoftheworld.
Asacountryreliantonforeigninvestment,AustralianeedstobereadytoembracetheexpansioninChineseoutboundinvestment,includingininfrastructurewhereAustraliawillneedtofinancenewprojectsinareasliketransportationtosupportgrowingurbanpopulationsandlivingstandards.
Morebroadly,Australiawillneedtoincreasecontestabilityacrossmarkets,includinginsignificantpartsoftheservicessectorthatarecurrentlyprotectedfromdomesticandinternationalcompetition.Foreignparticipationwillbeimportanttosuccessinthisendeavour.Amongotherthings,thiswillinvolveextendingreforminareassuchascompetitionpolicyandlabourmarketregulationandbreakingdownremainingbarrierstointernationaltrade.
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CHAPTER3trade in goods and services
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Key messAges
AustraliaandChinaareandwillremaindeeplycomplementarybilateraltradingpartners.ThebedrockofthistradehasbeenChina’sdemandforAustralia’smineralandenergyexports.ThestructuraltransformationofChina’seconomyimpliesastructuralchangeinthecompositionofbilateraltrade.
ModellingundertakenforthisReportindicatesthatwhileAustraliawillcontinuetosupplyChinawithmineralswellintothefuture,therelativeimportanceofhighvalue-addedgoodsandservicesinAustralia’sexportbasketwillincrease.Thistransformationwill,byitself,leadtofastgrowthintradebetweenAustraliaandChinainrealterms,muchofitinservices.Australiancompaniescanbeasourceofthehigh-qualityfoodandhealthproductsthatChineseconsumersincreasinglydemand.Evenmorepromisingistheexpansionoftheservicestradebeyondeducationandtourism,toservicessuchashealthcareandfinance,whereAustralianexperienceandexpertisecanassistwiththedevelopmentofChina’sownservicessector.China,meanwhile,willcontinuetomoveupthevaluechainintohighervalue-addedmanufacturingandservices.
Eveninapessimisticscenario,inwhichaverageChinesegrowthisbelow5percentoverthenext10years,themodellingsuggeststhatAustralianexportstoChinawouldstillgrowinrealtermsby28percentandChineseexportstoAustraliawouldgrowby20percent.A‘baseline’scenariohasAustralianexportsgrowingby72percentandChineseexportsby41percentoverthesameperiod.Buttherewillbemuchstrongeroutcomes—growthof120percentinAustralia’sexportsand44percentinChina’s—ifthetwocountriessucceedintheirambitionsforsupply-sidestructuralreform.
• ThepotentialofAustralia–Chinatradewillnotberealisedautomatically.Australiadoesnotenjoythesamenaturaladvantageinservicesasitdoesinresources.Deeper,broaderengagementatalllevelsofsocietywillbenecessary.DomesticregulatoryreformsinbothChinaandAustraliawillbenecessaryifbothcountriesaretomakethemostoftheopportunities.
• Recognitionofprofessionalqualifications,startingwithtraditionalChinesemedicineandengineering,willaddnewtradepotential.Onereformthatofferslargepotentialgainswouldbetoestablishrecognitionofprofessionalservicesqualificationsfromtheotherjurisdiction.Bytheendof2017,thesidelettertoChAFTAonskillsassessmentandlicensingisdueforreview.Tohelpmakethemostofthisreview,theAustralianandChinesegovernmentsshouldcoordinateengagementbetweenaccreditingregulatorybodies.
• E-commercechannelsarenowprovidingachannelforChineseconsumerstofindnicheproductsandservices.Regulatorsonbothsidesshouldcooperate,particularlyconcerningfoodandhealthcareproducts,toencouragemutualrecognitionofstandardsthatallowthistradetobescaledup.
• Reflectingthenatureofregionalandglobalsupplychains,extendingthetariffreductionscommittedtoinChAFTAthroughtoRCEPnegotiationswillhelpsustainChina’sindustrialup-skilling.
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• InordertocapitaliseondemandfromChinesetourists,Australiacouldconsiderremovingrestrictionsondomesticaviationservicesthatmakeinternationalroutestothecountrylesscommerciallyattractive.ThiswouldnotonlyhavepositivedirectimpactsonthecompetitivenessoftheaviationindustryinAustralia,butwouldencouragemoreflightsfromChinathatwouldboostAustralia’stourismindustry.
• Atthenationallevel,theStrategicEconomicDialogueprovidesamechanismalongsideChAFTAforhigh-levelofficialengagement.TheAustralia–ChinaState/ProvincialLeadersForumandsister-cityrelationshipsprovidemorelocalchannelsforengagement.
• Withinthecommunity,theChinesediasporainAustraliaisavaluableagentforbuildingengagementandtrust,asarecivilsocietyorganisationsandpeakbusinessgroups.
EconomicprosperityinAustraliaandChinadependsoninternationaltrade.Tradeallowscountriestospecialiseinareasofcomparativeadvantage,encouragesthemtoexploiteconomiesofscale,andobligesthemtocompetewiththebesttheworldhastoofferinforeignanddomesticmarkets.Byincreasingcompetition,tradeboostsproductivity,fuelsinnovation,makesconsumersbetteroffthroughimprovedchoiceandlowersinputpricesforproducers.
AustraliaandChinaaredeeplycomplementarytradingpartners.Australiahasalargenaturalresourcebaserelativetoitspopulation.Australiathereforespecialisesintheproductionofprimarygoodsforexport,andusestheproceedstopurchaselabour-intensiveandothermanufacturedgoods.Conversely,Chinahasalargelaboursupply,butrelativetoitspopulationhassmallerendowmentsofnaturalresourcesandaccumulatedcapital.Forthisreason,China’sindustrialdevelopmentwasbuiltonlabour-intensiveproduction,whichitexchangeswithAustraliaforimportsofscarceresources.
In2014,AustraliaandChinaeachimportedanequivalentof21percentoftheirGDP,andexported20and24percentrespectively(OECD2016).ChinaisnowAustralia’slargesttradingpartner.ItbecameAustralia’ssinglelargestsourceofgoodsimportsin2006(replacingtheUnitedStates,Figure3.1A)andthelargestmarketforgoodsexportsin2009(replacingJapan,Figure3.1B).Thetotalvalueofbilateraltrade,includinggoodsandservices,wasin2015A$156billion(ABS2015b).In2009–2010,ChinaovertooktheUnitedStatesasthelargestoverseaspurchaserofAustralianservices.ThevalueofAustralia’sservicesexportstoChinaincreasedfromA$1.1billionin2000–2001toA$8.8billionin2014–2015,asChina’sshareofAustralia’sservicesexportsrosefrom3percentto14percent(ABS2016c).
Therelationshipisnaturallyasymmetricbecauseoftherelativesizeofthetwocountries.AustraliaisonlyChina’sseventh-largestimportsourceand14th-largestexportdestination(DFAT2016c).EventhoughAustraliaisalreadyaneconomicallydevelopedcountry,itsentirepopulationisroughlythesameasthatofShanghai.TheChineseeconomyinevitablydwarfsAustraliainscale,despiteitsmuchlowerlevelsofpercapitaincome.
ThisasymmetrymeansthatevensmallchangesinChina’seconomycanhaveprofoundimpactsonAustralia.Bycontrast,AustralianpolicychoicesoreconomicperformancehavelittleimpactonChina,whichhasnoshortageofothercountriescompetingtosupplyitshugedomesticmarket.Forthisreason,Australianeedstoensurethatitspoliciesenableflexiblemarketsthatcanadaptquickly,allowingdomesticbusinessestoremaincompetitiveinresponsetochangingglobalcircumstances.Waitingforglobalagreements,orholdingoutoneconomicliberalisationasabilateralnegotiatingtactic,wouldmeanmissedopportunitiesforAustralia.
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Australia’sroleasalow-cost,high-qualityandreliableproviderofrawmaterialsneededforChina’sgrowthmakesAustraliaamuchmoreimportanttradingpartnerthancouldbeexpectedbasedonscalealone.Beyondthis,AustraliacanassistChinainitsowneconomictransformationtoaservices-basedeconomy.ThisisanareawhereAustralianexperiencemaybehelpful.Australia’sservicessectoraccountsformorethan70percentofitsrealgrossvalueadded(ABS2016e).Outsideofmining,thefastest-growingindustriesinAustraliaoverthelast25yearshavebeeninknowledge-orientedindustriessuchasinformationmedia,telecommunications,financeandprofessionalservices.Therehasalsobeensubstantialgrowthinmajorservicesindustriessuchaseducationandtourism(ABS2016e).
Australia’s merchandise trade by trading partner
Figure 3.1A: export share Figure 3.1B: import share
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ChAFTA,whichcameintoforceinDecember2015,willlowerthecostsofbilateraltradeacrossresources,manufacturingandservices.ButChAFTAis,inmanyrespects,likeopeningadoor.Theopportunitiesofthisopendoorwillnotbefullyrealiseduntilfurtherworkisdone.ThetwocountriesthereforeneedtousetheplatformestablishedbyChAFTAtodeveloptheirrespectiveeconomicstrengthsinamutuallybeneficialway.InadditiontoanoverarchingJointCommissionwhichisscheduledtomeetatleastannuallytoreviewoverallimplementation,ChAFTAcreatescommitteesdealingwithinvestment,tradeinservices,financialservices,movementofnaturalpersons,tradeingoods,sanitaryandphytosanitarymeasures,technicalbarrierstotradeandintellectualproperty.
Throughtheseforums,ChAFTAshouldbethoughtofasalivingdocumentthatcanfacilitatemanyofthepolicysuggestionsfromthisReport.Inparticular,AustraliacanhelpmeetthechangingneedsofChinaasitshiftstoamoresustainablemodelforeconomicdevelopment,movingupthevaluechainwithalargerservicessectorandagrowingmiddleclass.ThegoalofthisisnottocreateanyartificialtradepreferencebetweenAustraliaandChina,buttocreateanenvironmentinwhichbothcountriescanmoreeasilydeveloptheirrespectiveadvantagesformutualbenefit.Thatbenefitcanextendbeyondbilateraltrade,andAustraliaandChinacan
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jointlypursuetradestrategiesthatexpandregionalintegrationtospreadthegainsfromtradethroughcountriesinvolvedintheRegionalComprehensiveEconomicPartnership(RCEP),andeventuallyaFreeTradeAreaofAsiaandthePacific(FTAAP)(seeChapter7).
The resources trade
TheunprecedentedscaleandspeedofChina’surbanconstruction,aswellasChina’sdominanceinmanufacturing,havedemandedtremendousmineralandenergyresources,particularlysteel(Garnaut2012).Themaininputstosteelareironoreandmetallurgicalcoal,bothofwhichAustraliahasinabundanceathighqualityandlowcost.Priortothe2000s,Australia’smainexportstoChinahadbeenagricultural,withironoreaccountingforjust15percentofthevalueofAustralianexportstoChinain2001(DFAT2011).
AustralianironorehelpedfuelChina’sinvestmentboomintheearly2000s.Whiletheglobalfinancialcrisiscausedabriefslumpin2008,theresources-intensivenatureofChina’sinvestment-ledgrowthhelpedAustraliaavoidtherecessionthatgrippedotheradvancedeconomies.Asironorepricespeakedin2011,Australia’sironoreexportswereworthA$44billion,or57percentofthetotalvalueofAustralianexportstoChina.Bytheendof2015,theironorepricehadfallentoone-quarterofitspeak,inresponsetoincreasedglobalsupplyandslowingdemandgrowthinChina.However,increasedexportvolumesandthedecliningvalueoftheAustraliandollarmeanthatthetotalAustraliandollarvalueofironoreexportshasremainedwellabovehistoriclevels(Figure3.2)andAustralia’stotalshareofChina’sironoreimportshasbeenincreasing.
Figure 3.2: iron ore price and export value
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Monthly Value of Iron Ore Exports (RHS) Iron Ore Price (LHS)
Source:Price,IndexMundi-ChinaimportIronOreFines62%FEspot(CFRTianjinport),USDollarperDryMetricTon,MonthlyExport,andAustralianBureauofStatisticscatno.5368.0Table12B2016a.
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Thepricesofcommoditiesaredeterminedthroughtheinteractionofglobaldemandandsupply,includingtherecenteffectsofChineseinvestmentoverseastoexpandthatsupplywhilereducingtheresource-intensityofgrowthonthedemandsidethroughimprovedefficiency.BecausethepriceofcommoditiesimpactsbothAustraliaandChinagreatly,betterunderstandingpricedeterminantsandtheeffectofsupplyresponsesshouldbeoneoftheprioritiesforjointacademicresearchbetweenChineseandAustralianacademic,governmentandbusinesspartners.
Whateverthefluctuationsinglobalprices,thesheervolumeofChineseresourcedemandwillkeepresourcesasthebedrockofbilateraltradefordecades.Evenatslowerratesofeconomicgrowth,thesizeofthebasetowhichthatgrowthappliesmeansthatoveralldemandwillstillincreasebyasignificantamountinabsoluteterms.TherearestillhundredsofmillionsofChinesewhowillmovetocities.Thismigration,coupledwithhigherlevelsofincomeandconsumptionforurbanresidents,couldsustainChinesedemandforapartments,highways,railways,bridgesandcars(BerkelmansandWang2012;WilinksandZurawaski2014).AlthoughChina’srichestcitiessufferfromtrafficcongestion,overallcarownershipinChinaislow.Acontinuedshiftinmanufacturingfromtextiles,clothingandfootweartohighervalue-addedelectronicsandmachinerywillalsosupportresourcedemand.Chinaproduced603kilogramsofsteelperpersonin2014,butpeaksteeldemandcouldreach700–800kilogramsperpersoninthemid-2020sdependingonthespreadofautomobileownership,theprevalenceofhigh-riseconstructionandthepaceoftechnologicalchange(McKayetal2010).China’ssteelproducersoperateinahighlycompetitivemarket—continuedrelianceonmarketmechanismstodealwithanyshort-termovercapacityinsteelproductionisthebestwaytomakesurethatthesupplywilladjusttomeetdemand(Hubbard2015).
Muchoftheseresourceswillcontinuetobeimported.China’sdependenceonimportedironorerosefrom50percentin2005to81percentin2015.Australia’sshareoftheseimportsrosefrom41percentin2008to64percentin2015(Russell2016).Aspriceshavefallen,AustralianironoreproducersincreasedtheirshareoftheChinesemarket.Infact,evenasChina’ssteelproductiondeclinedby2.3percentin2015,thevolumeofAustralia’sironoreexportstoChinaincreasedby9.8percent(Robertsetal2016).
ChinesedemandforAustralianresourcesextendswellbeyondironore.ThecompositionofChina’sresourceconsumptionislikelytochangeasitsmanufacturersmoveupthevaluechainanditsmiddleclasscontinuestogrow(Box3.1).Forexample,greaterdemandforwhitegoods,consumerelectronicsandlightweightelectricvehicleswillincreasedemandforAustraliancopperandbauxite(themineralfromwhichaluminiumisproduced),andrequiremorethermalcoal,gasanduraniumforpowergeneration.AustraliasupplieshalfofChina’simportsofmetallurgicalcoal,anotherkeyingredientinsteel.ChAFTAisalreadyassistingAustralianresourceexporters,havingeliminatedthetariffonmetallurgicalcoalinDecember2015.ItalsoremovesChinesetariffsonsteamingcoal,copper,aluminium,nickel,zincandtitanium,eitherimmediatelyoroverafour-yearperiod.ThiscouldreducecostsofdeliveringAustralianmineralsandenergytoChinabyA$600millionperyear(MineralsCouncilofAustralia2016).
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BOx 3.1: mORe THAn ORe
China’sconsumptionofcopperandaluminiumhasincreasedby16percentannuallyoverthepastdecade,makingittheworld’slargestconsumerofbothcommodities.In2014,Chinabought46percentofAustralia’scopperexports,worthA$1.8billion,and74percentofAustralia’stotalnickelexports,worthA$0.6billion.China’smachinery,automobileandhomeapplianceindustriesarekeydriversofaluminiumdemand.AustralianexportsofaluminiumoxidetoChinamakeup89percentoftotalworldaluminiumoxideexports.AndAustralianexportsofaluminiummetaltoChinaare19.1percentoftotalworldaluminiumexports(MineralsCouncilofAustralia2016).AsChinaincreasesproductionofmoresophisticatedmanufacturinggoodsitsdemandforaluminiumwillalsoincrease.ThescaleofChina’saluminiumsmeltingcapacitymakesitdifficultforothernationstocompeteforsupplyoftheprimarymetal,butAustraliaremainsamajorsupplierofthebauxiteandaluminarequiredtofeedthosesmelters.
China’simportsofLNGwillgrowasChinaseekscleanerenergysourcesbyreducingdependenceoncoal.Australiaiscurrentlyoneoftheworld’sthreelargesturaniumexporters,andhashadanagreementsince2006toallowuraniumexportstoChina.Whiletradestatisticsonuraniumarenotpubliclyavailable,thevolumeofAustralianuraniumexportstoChina(around500tonsayear)isreportedlylessthanexportstotheUnitedStates,theEU,JapanorSouthKorea(WorldNuclearAssociation2016).
AustraliawasChina’ssecond-largestsupplierofcoalin2015,afterIndonesia.Australiasupplied35percentofChina’stotalimporttonnage(Figure3.3A).AustraliaisChina’slargestsupplierofliquefiednaturalgas(LNG),supplying28percentofChina’srapidlygrowingimportsin2015(Figure3.3B).
Figure 3.3: Chinese imports from Australia and rest of world
Figure 3.3A: Coal (Tons) Figure 3.3B: Lng (Tons)
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Source:ChinaGeneralAdministrationofCustoms2016.
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ProjectionsacrossarangeofcommoditiessuggestthatfoodandLNGarelikelytoriseinimportanceasashareofAustralia’sexportstoChina,whileironoreandbasemetalsarelikelytofallasashareoftotalcommodityexports(Table3.1).
Table 3.1: Actual and projected exports of commodities to China
share of commodity exports to China by value (per cent)
2005 2015 2025 2035
Growthscenario Actual Estimated Projection Projection
Ironore 47.3 57.9 51–51.5 43–47.5
Basemetals 25.1 13.2 13 12–13
Coal 4.3 8.7 9.5–10 11–13
Naturalgas(LNG) 0.0 5.4 10 12–14
Food 5.8 8.6 9 9.5–11
Source:Robertsetal2016.
TheAustralia–ChinaresourcetraderelationshipechoestheevolutionoftheAustralia–Japanrelationshipsincethe1960s.WhileAustralia’sresourcestradeisprivate,since1976therehasbeenanofficialtreaty-levelrecognitionbetweenAustraliaandJapanofeachcountry’s‘mutualinterestineachbeingastableandreliablesupplier’,discussedfurtherinBox3.2(Dee2006).The2014Japan–AustraliaEconomicPartnershipAgreementaffirmedthisprincipleinachapterthatensuresthestablesupplyofenergyandminerals.Thiscommitmentisimportant,becausewhileglobaltradedisciplinesarestrongwithrespecttorestrictingimportbans,multilateralrulesagainstexportrestrictionsarenotasrobust.
BOx 3.2: ResOuRCe seCuRiTy AnD gLOBAL TRADe
Alleconomiesrequireaccesstoenergyandmineralresourcesforindustrialisation,urbanisationandgrowth.Toensurestabilityoftheirowneconomy,somecountriesadoptpoliciestoensureresourcestability,whichmayincludestrategicstockpilesofresourcesor,inextremecases,policiestendingtowardautarky.Butthesepoliciesareofteninsufficienttomeetdemand,andcanonlybedoneatveryhighcost.Theyforgothegainsthatcanbehadfromglobaltradeonopenmarketsconsistentwithcomparativeadvantage.
Butinternationaltradeisnotwithoutitsrisks.Rawmaterialsmaybeabundantin,orneedtotransitthrough,politicallyunstableordangerouspartsoftheworld.
TheresourcepartnershipsbetweenAustraliaandthecountriesofNortheastAsiaoverthelast60yearsisapowerfulexampleofhowresourcesecuritycanbeachievedthroughopenmarkets,inastablegeopoliticalsettingandinthecontextofmaturepoliticalrelationships.TheabilityofdownstreamresourceuserstoinvestdirectlyintoAustralia’sresourcesaddsthereassurancethatresourceswillbeavailable,whileexpandingsupplyforglobalmarkets.
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AspointedoutinChapter1,thegeographicalorientationoftheChineseeconomyhaschangedfundamentally,frombeingcontinentallyself-containedtobeingthelargestmaritimeeconomyintheworld.Importdependencehasgrownascommoditypriceshavefallenandhigh-costdomesticsuppliesbecomelessattractiveindustrialinputs.ThereductionsincostsandgainsinefficiencyfromincreasedrelianceoninternationalmarketshavefreedupcapitalforinvestmentelsewhereintheChineseeconomyandmadebetteruseofstateresources.ThisdevelopmenthasnaturallyandsteadilydrawnChinaintothemaritimeeconomy,includingtheconstructionofhugeseafreightcapacities,interestinmaritimescientificandweatherresearch,andconcernaboutsecuringinternationalsupplies.Asitisoneoftheworld’slargestmaritimeresourcesuppliers,Australiareciprocatestheseinterests.
PolicythinkingabouttheimplicationsofChina’smaritimeeconomyhasfailedtokeeppacewiththischange.ThemajorefforttoredressthisdeficiencythatisnowunderwayinChinawouldbeassistedbycollaborationbetweenAustraliaandChinaontheimplicationsofgrowingresourcedependencyforresourcesecurity,maritimeresourcedevelopmentandprotection,maritimescientificandweatherresearch,andAustralianparticipationinChina’sMaritimeSilkRoadinitiative.Workingtogetherontheseandotherjointinterestsinthemaritimeeconomy,givenbothcountries’deepmutualinterestsinthissubject,shouldbeseenasatoppriorityforbothgovernments.TheinitiativecancommenceundertheestablishedframeworkforcooperationbetweenChina’sNationalDevelopmentandReformCommission(NDRC)andtheAustralianTreasury,andbringinotheragenciesandresearchorganisationsasitdevelops.ThiscouldincludebuildingontheexcellentcooperationbetweenbothcountriesonAntarcticresearch.
ResourcesecurityisimportantforChinainensuringongoinginputsforitseconomicgrowth.Thisdoesnotmeansecurityfrominternationalmarkets.Atreaty-levelcommitmentbetweenAustraliaandChinanottoarbitrarilyrestrictAustralianresourceexportswouldhelpreinforceChina’sconfidenceintheabilityofopenmarketstoprovideresourcesecuritywhilereducingcostsandimprovingefficiencythroughincreasedcompetition.ThiswouldbothbegoodforChinaasarecipientofAustralianrawmaterials,andgoodfortheAustralianresourcesindustry,whichcouldmakelong-termplanswithconfidence.ThiscommitmentwouldbethecoreoftheproposedAustralia–ChinaComprehensiveStrategicPartnershipforChange.
Agricultural trade
EvenbeforeChina’sreformandopeninginthelate1970s,thepostwarAustralia–Chinatraderelationshiphadbeguninagriculture,withlarge-scaleAustralianwheatexportstoChinafrom1960(Wilczynski1965).MineralexportstoChinaovertookagriculturalexportsinthe2000s,butAustraliastillplaysanimportantroleinChina’sagriculturalmarket.ChinahasalsobecomeasignificantexporterofagriculturalproductstoAustralia.Thelocationofthetwocountriesindifferenthemispheresmeansthatcounter-seasonalproductscanbetradedtofilldomesticsupplygaps.Theproximityofthetwocountriesallowsforproductstoreachmarketsquicklyandinqualitycondition.AndAustralia’strackrecordasasafeandreliablesourceofhigh-qualityproduceshowsthatitcanhelpmeetthefoodsafetydemandsofChineseconsumers.
Australia’sexportsofagriculturalprimaryproductstoChinagrewsteadilythroughthe2000sbeforemorethandoublinginvaluebetween2009–2010and2013–2014,whentheyreachedA$9.6billion.In2010–2011,ChinaovertookJapantobecomethemostimportantexportdestinationforAustralianagriculturalprimaryproducts.China’sshareofAustralia’stotalagriculturalexportsgrewfrom6.4percentin2000–2001toover20percentin2014–2015(Austrade2016b).
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AustralianexportsofwoolandgrainstoChinawereeachworthmorethanA$2billionin2014–2015(Figure3.4).AustraliaisChina’slargestsourceofwoolimports.AustralianbeefexportstoChinahavegrown,fromalowbase,atarateofmorethan200percentayearandwereworthmorethanA$736millionin2014–2015.ChinaisAustralia’ssecond-largestmarketfordairyexports,whichgrewanaverageof20percentannuallyoverthepastfiveyears(andwereworthA$295millionin2014–2015)(Australia–ChinaBusinessCouncil2015).AustralianwineexportshavefocusedontheChinesemarketformorethanadecade.China’swineimportindustrywasvaluedatA$2.1billionin2014–2015.AustraliaisChina’ssecond-largestwinesupplierbyvalue,withexportsvaluedatA$269millionin2014–2015(DFAT2014b).Chinahasalsotappedtheexpertiseofforeignwinemakersandhasbeenexpandingitsowndomesticproductionoverthistime,whichiswhygrowthopportunitiesforAustralianwinemakerscomefromfocusingonthepremiummarketratherthanbulkwineexports.
AgriculturaltradehasgrowndespiteChinesetariffbarriersandnon-tariffmeasures.WTOdatashowthatwhileChina’strade-weightedaveragetariffratein2013wasjust4.6percent,itwas13.5percentforagriculturalgoods(WTO2016b).ChAFTAremovedsomeofthesebarriers.Forexample,tariffsonbeefthatpreviouslyrangedfrom12–25percentarebeingeliminated(DFAT2014b).UnderChAFTA,theAustraliandairyindustrywillnowreceiveevenmorefavourabletreatmentthanthatnegotiatedbyNewZealandwithChinaintheir2008freetradeagreement.
OneofthekeydriversforopeningupChina’sagriculturetofurthertradeistoensurelong-termfoodsecuritythroughaccesstoopenmarkets.Chineseagriculturestilltendstoberelativelysmall-scaleandnon-commercial,althoughtherearenowmajoragriculturaloperationsintheprivateandpublicsectorsthatareexpandingtheirinfluenceinChinaandabroad.Asmorearablelandpassesintourbanuse,Australia’shighlyproductivefirmsandextensivelandcanbuttressChina’sfoodsupplies.InthesamewaythatAustraliahasprovedtobeareliablepartnerforChineseenergyandmineralsdemand,sotoocanAustraliabeavaluablepartnerinsupplementingChina’sfoodsecurity.
DevelopingthecapacitynecessarytomeetChina’sdemand,evenatthemargin,willrequiresignificantinvestmentinAustralianagribusiness,someofwhichmaybefinancedbyChineseinvestors,asdiscussedinChapter4(Australia–ChinaBusinessCouncil2014).
Volumegrowthisnottheonlyindicatorofpotential.AustralianagriculturealsoofferspremiumopportunitiestoserveChina’sgrowingmiddle-incomeconsumers.Moreover,accordingtotheBCGChinaConsumerSurvey2016,foodsafetytopsthelistofconsumerconcerns,aheadofhealthcare,educationandtheenvironment.TheresultsareparticularlystarkforyoungerChineseconsumers,with63percentofthoseagedbetween18and25expressingdissatisfactionwithfoodsafety(WaltersandKuo2016).
Since2004,bothcountries’dairyindustrieshavebeeninvolvedinanofficialdialogue(DFAT2012).Butmovingfromformaldialoguetolarge-scaledeliveryofnewsupplywillrequireinvestment,servicesandinfrastructure.A2012jointreportbetweentheAustraliaandChineseministriesresponsiblefortradeandforagricultureidentifiedtheconstructionofbreedingfacilities,aswellasdairyfarms,aspossibleopportunitiesforChineseinvestmentinAustralianagribusiness.
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PartofthepremiumvalueofAustralianfoodproductsinChinaisAustralia’strackrecordinsupply-chainmanagementandfoodsafety.ForChineseinvestors,partneringwithrecognisedAustralianbrandsandbusinessescanhelpthemrealisethefullvalueoftheiroutput.ForAustralianbusinesses,partneringwithChineseinvestorshelpswithdistributionchannelswithinChina,whetherdirectlytoretailconsumersorasinputsforotherpartsoftheChinesefoodindustry.
Despitetheseopportunities,investorsinAustraliafromChinafaceamuchstricterthresholdforinvestmentinagribusiness(A$55million)comparedtoothersectors(wherethethresholdisoverA$1billion)orcomparedtootherFTApartnersfromChile,NewZealandandtheUnitedStates,aswellasotherTPPmembersshouldtheTPPcomeintoforce.Whilethisscreeningthresholddoesnotnecessarilypreventinvestmentgoingahead,itaddsextracostsandriskstoinvestmentsthatwouldexpandtradeanddevelopruralAustralia.BarrierstoChineseinvestmentareconsideredinChapter4.
new opportunities for bilateral trade
TheminingboombenefitedAustraliansdirectlyemployedintheresourcesector,boostedgovernmenttaxreceiptsandincreasedthepurchasingpowerofAustraliansoverseasthroughastrongerAustraliandollar.Australianhouseholdscouldaffordtoimportmore,andmuchofthisimportdemandwasmetbyChina.By2014–2015,almostone-thirdofAustralia’simportsofelaboratelytransformedmanufactures—acategorythatincludesclothing,motorvehicles,machineryandpaint—camefromChina,upfromjust10percentin2000–2001(ABS2002;DFAT2016c).
ButthehighAustraliandollaralsoreducedthecompetitivenessofotherAustralianexports,particularlyinmanufacturing.Indeed,therapidriseofChinesemanufacturing,withhundredsofmillionsoflow-costChineseworkersenteringtheglobaleconomyforthefirsttime,inhibitedwagegrowthinthelowerendofmanufacturingaroundtheworld.
TheboostinAustralia’snationalincomefromtheresourcesboomcushionedAustraliafromsomeofthecoststhatcomewithindustrialrestructuring.However,Australianowfacessignificantpolicychallengesifitistomaintainitslivingstandardswhileadjustingtomuchlowercommodityprices.Inparticular,Australia’sresourceendowmentsandpositioninAsiaprovidelimitedcompetitiveadvantagetoAustralianbusinesswhencomparedtocompetitorsinotherdevelopedmarketsinEuropeandNorthAmerica.
TheflexibilityofAustralia’sfloatingexchangerateregime,whichallowsthedollartofallinvalueascommoditydemandeases,isanimportantchannelformakingnon-resourcesectorsmorecompetitive.Butpolicymakersneedtomakesurethatlabourmarketsareflexibleenoughtoenablecreationofjobsinemergingindustries,thatworkersareabletoacquiretheskillsrequiredtofindnewemploymentinemergingindustries,andthatfaster-growingregionsreceiveadequateinfrastructureinvestment.TheremovalofobstaclestoChinesecapitaltodevelopAustralia’sproductivecapacityinareasofgrowingChinesedemandwouldbeofbenefittobothcountriesandstrengthentheiroverallrelationship(seeChapter4).
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Figure 3.4: Australian agricultural exports to China (A$ million, 2014–2015)
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Five year average annual growth (RHS)
Note:Freeonboardvalue,Grainsincludesoilseedsandpulses.Source:ABARES2016.
AsChAFTAcomesintoeffect,over86percentofAustralia’sgoodsexportstoChina(by2014value)willenterdutyfree.Thiswillincreaseto94percentby2019and96percentby2029(DFAT2016d).ThisisanimportantopportunitytodiversifyAustralia’sexportstoChina.In2014,morethan85percentofAustralia’sgoodsexportstoChinawereinunprocessedprimaryproductsandgold.
ComparingthisfigurewithAustralianexportstohigh-incomeNortheastAsianeconomiesshowsthatwhileprimaryexportscompriseanimportantshareofexportstotheseothercountries,thereisalsoalargeroleforprocessedprimaryproducts,especiallyfoods(Figure3.5).ThissuggeststhatthereisasignificantopportunityforAustralianagribusinesstotransformrawunprocessedfoodandlivestockintosafeandrespectedbrandsofhigh-qualityfood,wineanddairyproductstoexporttoChinainthefuture.AustraliaisalsoalargepotentialsourceofingredientsusedinTraditionalChineseMedicine(TCM).
ThevalueofChineseonlineretailsalesofgoodsandservicesin2015wasRMB3.9trillion(US$592billion),anincreaseof33.3percentcomparedwith2014.Thisgrowthisdueprimarilytolowerprices,greaterproductvariety,betterproductinformation,morereliablesellerreputationsandfasterdeliverytimescomparedtotraditionalretailshopping.Thepent-updemandforqualityAustraliangoodsinChinaisevidentinthegrowingvolumeofAustraliangoodsretaileddirectlyandindirectlyinChinathroughe-commercechannels.
Chineseconsumersdemandforeigngoodsfortheirquality.AccordingtoNielsonresearch,ChineseonlineshoppersimportedUS$16.3billionofforeignproductsin2014(Burbank2014).In2014,AustraliaPostandtheChinesee-commercegiantAlibabaagreedtoadealthatallowsAustralianbrandstoselldirectlytoChineseconsumersthroughleadingChineseonlineretailerTMall(ABCNews2014)(Box3.3).PopularpurchasesfromAustraliaincludehealthfoodproducts,infantformula,cosmetics,organicfoodsandsheepskinboots.AnadvantageofthisarrangementisthatitguaranteestotheChineseconsumertheauthenticityofthegoodandprovidesaguaranteedsupplychainforsellers.
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Figure 3.5: Australian goods exports to northeast Asian economies
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China South Korea Japan
Processed Primary Products
Manufactures
Other goods
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Note:Theexportof‘othergoods’includesconfidentialuraniumexports.Source:DFAT2015c
Theopportunitiespresentedbytheinternetande-commerceneedtobecloselystudied.Governmentagenciesresponsibleforinnovationpoliciesonbothsidesshouldpartnerwithindustrytoidentifyandremovebarrierstothefulladoptionofthisnewtechnology.Moreover,thepoliciesthataffectcross-bordere-commerceneedtobecarefullycommunicatedoneachside.Forexample,suddenrecentchangestotheenforcementofChina’sCustomsandDutiesLawweremistakenlybutavoidablyperceivedbysomeasacrackdownonforeigncompetition,ratherthantheclosingofataxloophole(Manuel2016).
AlthoughchangestoChina’se-commercemarketwerewidelyanticipated,therolloutofthesechangeswasconductedwithoutadequateconsultationwithkeystakeholders.Thisresultedinconfusioninthemarket,andledtoadverseimpactsonsuppliers.Thishasbeenalearningexperience.Theseguidelineshavesincebeenrevisedandagraceperiodallowedinordertominimiseunintendedconsequencesandallowforsellersandsupplierstoadjusttothesechanges.ClosercooperationbetweenAustralianandChinesecustomsauthoritiescouldhelpensurethatthesekindsofactionsarebettercommunicatedandunderstood.Itcouldalsoensurethatregulationsarecommonlyunderstoodandconsistentlyappliedbetweenallstakeholders.
Evenoutsidee-commercechannels,thereisastrongflowofhealthfoodproductsthatareboughtatretailoutletsinAustraliaandpostedtoChina(BattersbyandZhou2015).Small-scaleretailcanbeattractivepartlybecauseofthehighnumberofChinesewithfriendsandrelativesinAustralia,andbecausetheselow-valuepersonalimportsintoChinaavoidtheneedtoundergotheoften-onerousproductandfood-safetytestingthatwouldberequiredforcommercialimports.WhileformaltariffbarriersarereducedunderChAFTA,theneedforproducttestingandcertificationwithinChinaincreasesthecostsoflarger-scaletradeinagricultureandprocessedfoodproducts.Therefore,Australiancompaniescanalsobesuccessfulincomplementinge-commercedeliverychannelswithatraditional‘bricksandmortar’presence(seeBox3.4).
Removingbarriersto,andloweringthecostof,commercial-scaleimports,aswellasguaranteeingtheintegrityofbilateralsupplychainsandproductquality,shouldbeapriorityforAustralia–Chinatradecooperation.Whentheenforcementofdomesticstandardson
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importedgoodsismorerigorousthanitisforlocallyproducedgoods,thisconstitutesadefactotradebarrier.Thereareopportunitiestoreducethesediscrepancies,basedonanoverarchingprinciplethatthepurposeofsuchregulationsistoprotectdomesticconsumers,notdomesticproducers.Indeed,onereasonforthepopularityofe-commerceinAustralia–ChinatradeisAustralianproducersoffoodandnutritionalproductsnotbeingabletoaccessChineseconsumersthroughtraditionalchannelsbecauseofhightariffsandprotractedproductregistrationandaccreditationprocesses.
BOx 3.3: ALiBABA gROuP OPens neW mARKeTs FOR AusTRALiAn exPORTeRs
AlibabaGrouphasprovidedanelectronicbridgeforAustralianexportersintonewChinesemarkets.
ThevalueofChina’se-commercemarketexceededUS$600billionin2015.Ofthis,AlibabaaccountedforaroundUS$485billionine-commercesales,orover80percentofthetotal.ThisfiguremakesAlibabaGroupthelargestretaile-commercecompanyintheworld.Bythe2020fiscalyear,AlibabaaimstobethefirstcompanytohavearetailmarketscaleofoverUS$1trillion.
AustralianexportershaveachievedsuccessbytappingintoAlibabaGroup’se-commerceplatformsincludingTmall,TmallGlobal,1688.com,TaobaoandAlibaba.com.
AustralianproductsareincreasinglypopularonChinesee-commercechannels.Alibabaseesstrongandgrowingdemandforarangeofproductssuchasdairy,premiumfoods,healthcare,skincare,andmotherandbabyproducts.
Eachyear,Alibabarunsthelargestshoppingfestivalintheworld,theDouble11ShoppingFestival,on11November.In2015,Australiarankedfifthamong41countriesgloballyonTmallGlobal,withoneAustralianvendor,ChemistWarehouse,recordingsalesworthRMB10million(overA$2million)injustthefirst46minutesoftheFestival.
AlibabaGrouphasalsoforgedastrategicpartnershipwithAustraliaPost.AustraliaPost’sTmallstoreprovidesasolutionforexporters,particularlysmallandmediumenterprises,toaccesssomeofthe420millionactiveChineseconsumersacrossAlibabaGroup’splatforms.
AlibabaGroupplanstoopenanofficeinAustraliaattheendofthe2016tobettersupportitsAustralianclientsandassistmoreAustraliancompaniesinaccessingtheChinesemarket.
Toleveltheplayingfieldfurther,ChinacouldunilaterallyrecogniseAustralia’shighfoodsafetyandqualitystandards,andexpeditetheapprovalsofAustralianfoodexportstoChina.Thiswouldbeawin–winpolicy:itwouldbenefitChineseconsumersthroughlowerpricesandbenefitAustralianproducersthroughlowertransactioncosts.BothcountriesshouldaimtoensurethatChineseconsumerscanaccesssafeproductsatlowcostfromaroundtheworld.TherelevantchapterofChAFTAonsanitaryandphytosanitarymeasurescanhelpensurethatquarantinerulesdonotposeanunnecessaryobstacletotrade.However,thereareopportunitiestogofurtherinbuildingtrustandunderstandingonbothsides,includingthroughdirectexchangesofofficials.
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BOx 3.4: BLACKmORes’ CHinA enTRy sTRATegy
Blackmoresisamarketleaderinthenaturalvitamin,herbalandmineralsupplementsmarketinAustralia,withstrongmarketpositionsthroughoutAsia.
BlackmoreslaunchedinChinain2012andhasestablisheditselfasapremiumnaturalhealthbrandwithChineseconsumers.BeforelaunchinginChina,Blackmoresspentmorethantwoyearsresearchingthemarket.ThisinvolvedextensiveuseoftheservicesofAustradeandDFATtounderstandtheregulatoryenvironment,tomeetrelevantChinesegovernmentagencies,toconnectwithindustryorganisationsandtoassesspotentialpartnersandmarket-entrymodels.
UnlikemanyforeignfirmswhosawrapidgrowthinChina’svitaminsanddietarysupplementsmarketasashort-termtradingopportunity,Blackmores’relationshipwithChinahasbeenpositionedfortheverylongterm.ThecompanyestablishedaWhollyOwnedForeignEnterprise(WOFE)inBeijingandsubsequentlyestablishedbranchofficesinShanghaiandwithintheShanghaiFreeTradeZone.
BlackmoreshasabsorbedfromitslonghistoryandexperienceinotherAsianmarkets—thecompanyhasbeeninThailandandMalaysiafor40years—thatsuccessintheregionrequirestherecruitmentofstronglocallyengagedteamsineachmarketwhoareresponsibleforitsbrand.Since2012,Blackmoreshasbuiltateamof30staffinChinawithofficesinBeijing,ShanghaiandGuangzhou,withanothersoontoopeninChengdu.
Blackmoresdistributesthroughthetraditional‘bricksandmortar’retailtrade,hasanextensiveonlinepresenceandover3200offlinedistributionpointscoveringfirst-tierandsecond-tiercities.Thecompanyhasawide-rangingpresenceonallmajorChinesee-commerceplatforms(domesticandcross-border),includingTmallandJD.comaswellasstrategicpartnershipswithVIP.comandNetease.Thecompanyservesmorethan20keye-retailersandthousandsofTaobaoandWeChatstoresthroughFreeTradeZonedistributors.Blackmoreshasalsoundertakenbroadchannelexpansiontocoverchainpharmacy,independentpharmacy,healthandbeautystores,supermarkets,hypermarkets,medical,TVshopping,dutyfreeoutlets,departmentstoresandcorporatesales.
BlackmoresstronglysupportedtheentryintoforceofChAFTA,whichstrengthensthelong-termcommercialtiesbetweenAustraliaandChina.ChAFTAnotonlydeliveredtheeliminationoftariffsonAustralia’spharmaceutical,vitaminandhealthsupplementproductsbutalsocontainsabuilt-inagendatoaddressnon-tariffbarrierstotradebetweenAustraliaandChina.
ThissituationcouldbeimprovedbytheincreasedsharingoftechnicalexpertisebetweenregulatorsinAustraliaandChina,includingstaffexchanges.Suchexchangeswouldhelpbuildcapacity,familiarityandtrustwitheachother’sregulatorysystems.
The next stage for bilateral trade
TheopportunitiesforbothChinaandAustraliaarelarge,ifpolicymakersareproactiveinpursuingthereformsnecessarytoachievethem.
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ChAFTAoffersaframeworkthroughwhichAustralia–Chinainitiativesinreformandliberalisationacrossallareas—merchandisetrade,servicestradeandinvestment—canbeadvanced.Thebilateralliberalisationofcommoditymarketaccessdeliverssomeimmediatebenefits.Thesebenefitsareimportanttothegrowthofagriculturaltrade,forexample,buttheywillalsobedependentonimprovingthebilateralinvestmentregimeandachievingtheliberalisationofcomplementaryservices.GiventhebigshiftinthestructureoftheAustralia–ChinarelationshipthatthisReporthighlights,manyofthepotentialgainsfromChAFTAwillonlyberealisedthroughsecuringreformandopeningoftradeinservicesaswellasreformofinvestmentpolicies.Itisdifficult,inanycase,forliberalisationoftradeinservicestobenarrowlybilateralandonlyprovidingspecialiflimitedbenefittoeitherAustraliaorChinaineachother’smarket.Reformthatincreasestheproductivityofservicesmarketsrequirescomprehensivedomesticinstitutionalreform.ButChAFTAopensthedoortotriallingservicesreformwithAustraliainChinaandhasthepotentialtobeattheleadingedgeofChina’seconomicreformprogram.ThereispotentialforChAFTAtodeliverbenefitsbeyondtheborderfordomesticreforminbothcountries.
ModellingundertakenforthisReportbolstersthiscase.First,thegainsareestimatedfromthefullpreferentialmerchandisetradeliberalisationthatispotentiallyavailableundertheChAFTAframework,usingstandardGTAPtechniques(Gretton2016).(InChapter4,thiswillbeextendedtoconsiderthegainstobehadfromliberalisationthatismorecomprehensive,includingservicesandinvestment).ThepresentsimulationshowsthattheremovalofalltariffspreferentiallybetweenChinaandAustraliayieldsmodestbutimportantoutputgainstoeachcountry.Inthelongrun,itcouldincreaseAustralia’sGDPby0.22percentandliftChina’sGDPby0.11percent(Table3.2).ThissimulationmeasuresthemaximumpossiblegainunderafullycomprehensiveChAFTAagreement,notthegainsfromtheagreementthatiscurrentlyinplace.Itpresumesthatthetwocountrieswillmoveto100percentbilateraltariffremovalintheirmerchandisetrade,andthattherearenonegativeeffectsimposedbyrulesoforiginorotherregulationstoenforcepreferences.TheChAFTAagreementcurrentlyinplaceisinfactstillsubjecttocarve-outsandproduct-specificrulesoforiginandwillnotyieldthesegainsfully,butthismeasurecanberegardedastheouterlimittopotentialgainsfromChAFTA-focusedmerchandisetradeliberalisation.
Table 3.2: simulated effects of reducing remaining tariffs to zero
Australia China
gDP gain as proportion of
full world mFn liberalisation
gDP gain as proportion of
full world mFn liberalisation
simulation per cent change
per cent of full gain
per cent change
per cent of full gain
Australia–china bilateral 0.22 23 0.11 4
Australia unilateral 0.56 60 0.03 1
china unilateral 0.12 13 2.28 78
RcEP open liberalisation 0.88 94 2.37 81
World mFn liberalisation 0.94 100 2.94 100
Source:Gretton2016.
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Bywayofcomparison,andtodefinetheparametersofgainsfromusingChAFTAasaleverforbroaderregionalandmultilateralliberalisation,modellingisdonetosimulateliberalisationthroughacomprehensiveAsianfreetradeagreement—RCEP.And,asabenchmark,anestimateismadeofthebenefitstoAustraliaandChinafrommultilateralmerchandisetradeliberalisation.
IfRCEPbringscomprehensivemerchandisetradeliberalisationbasedonopenregionalism,Australia’sGDPcouldincreaseby0.88percentandChina’sby2.37percent.Ifalltariffswereremovedglobally,Australia’sGDPcouldincreaseby0.94percentandChina’sby2.94percent.Australiacanachieve60percentofthatglobalmerchandisetradeliberalisationscenariobyunilaterallyremovingtariffs.Chinacanachieve78percentoftheglobalscenariobyremovingitstariffs.Thesescenariosaresimplysimulatedtoestimatethedifferentmagnitudesofpotentialgainsunderalternativetradepolicystrategies.
The structure of bilateral trade
NotonlyisthevolumeoftradebetweenChinaandAustraliasettoincrease,itsstructurewillchangeaswell,dependingonthewaysinwhichtheChineseeconomyitselfistransformed.
ThegrowthtrajectoryofChina’seconomywillbeoneofthebiggeststoriesintheglobaleconomyoverthenextdecade.NotonlywillitmatterforthelivingstandardsforChinesepeople,itwillalsoimpactonChina’stradewithAustraliaandtherestoftheworld.
Takingintoaccountpossibledevelopmentsinbotheconomiesaswellasintherestoftheworld,whatisthestructureandscaleofAustralia–Chinatradelikelytolooklikeinthenext10years?Toanswerthisquestion,growthanditsstructureoverthisperiodismodelledunderthreedifferentsetsofassumptionsusingGTAP(Sheng2016).
Intheperioduntil2020,InternationalMonetaryFund(IMF)growthprojectionsareused,afterwhichthreegrowthscenariosforChinaareprojectedusingUnitedNationspopulationprojectionsandtheglobalcompetitivenessindexasaproxyforqualityofinstitutions.Inthefirst‘businessasusual’case,China’sGDPgrowsatanaverageannualrateof5.0percentayearfrom2021to2025withannualaveragelabourproductivitygrowthof5.2percentoffsettinganannualaveragedeclineintheworking-agepopulationof0.2percent(Table3.3).
Anoptimistic,orreform-based,scenariowouldseeChineseinstitutionsconvergeupwardstothequalityofSouthKoreaninstitutions,withgrowththenaveraging6.1percentto2025.Afinal,stagnationcasewouldseegrowthfallto3.1percentperyearasChineseinstitutionsconvergedownwardstowardsthequalityofTurkishinstitutions.Thegrowthrateto2020isfromtheIMFandisthesameforallthreeprojections,at6percentfrom2016–2020.
ThestructureofbilateralAustralia–Chinatradeisprojectedto2025underthethreegrowthscenarios.Theworldissplitinto12regionsand16sectors,whicharecomprisedof10manufacturing,twoagriculturalandfourservicesectors.TheresultsareshowngraphicallyinFigure3.6.
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Table 3.3: Decomposition of Chinese gDP growth under three growth scenarios
Historic 2011-2015
imF Outlook 2016-2020
Projection 2021-2025
Business as usual
Growth 7.5 6.0 5.0
Productivity 7.3 6.3 5.2
Workingpopulation 0.2 –0.3 –0.2
Reform scenario
Growth 7.5 6.7 6.1
Productivity 7.3 6.9 6.3
Workingpopulation 0.2 –0.3 –0.3
stagnation
Growth 7.5 5.0 3.1
Productivity 7.3 5.8 3.3
Workingpopulation 0.2 –0.3 –0.2
Source:HubbardandSharma2016.
Underthebusinessasusualscenarioofanaverageof5.73percentgrowthperyearfrom2016–2025,AustralianexportstoChinagrowfromUS$84.0billionin2014toUS$145billionin2025,or72percentinconstantvaluetermsoverthedecade.ChineseexportstoAustraliaincreasefromUS$41.0billiontoUS$58.0billion,or17percent.TotalAustralianexportsincreasefromUS$295billiontoUS$535billionwhiletotalChineseexportsincreasetoUS$4.04trillionfromUS$2.58trillion.China’sshareinAustralianexportsfallsslightlyto27.1percent(from28.5percent)whileAustralia’sshareinChina’sexportsfallsfrom1.6percentto1.43percent.
Figure 3.6: Real growth in exports from China and Australia under three Chinese growth scenarios
0
%
20
40
60
80
100
120
140
Australia to China China to Australia Australia to the world China to the world
Stagnation Business as usual Reform Source:Sheng2016
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Theextractionsector,whichincludesmetals,mineralsandvariousothernaturalresources,isthelargestsectorforAustraliacomprisingof70.6percentofexportstoChinaand46.6percentoftotalexportsin2014(Table3.4).Therelativeimportanceofthissectorfallsin2025to58.7percentofAustralia’sexportstoChinaand36.0percentoftotalexports.
ThegrowthinAustralia’sexportstoChinaisdrivenmainlybyservices,whichmorethandoubleasaproportionoftotaltrade,ledbytransport,telecommunications,computerandinformationservices.CurrentlytheAustralianservicesexportsectorislargelyeducationandtourism,witheducationaccountingfor4.9percentofAustralianexportstoChina(ofthe8.0percentthatthetransport,travelandtourismsectoraccountsfor).Underthebusinessasusualscenario,educationandtourismgrowto11.9percentofAustralianexportstoChina,ofthe19.6percentthatthebroadertransport,travelandtourismsectoraccountsfor.Agriculturalexportsalsorisesubstantially.
Table 3.4: Actual and projected shares of exports by sector
2014 2025 Business as usual
AustoChina
AusTotal
ChinatoAus
ChinaTotal
AustoChina
AusTotal
ChinatoAus
ChinaTotal
GrainsandCrops 2.5 4.5 0.4 1.4 3.0 4.8 0.3 0.9
LivestockandMeatProducts
4.8 6.0 0.5 0.7 6.4 6.9 0.5 0.6
MiningandExtraction 70.6 46.6 2.3 2.1 58.7 36.0 1.5 0.9
ProcessedFood 0.6 1.9 1.2 0.9 0.8 2.5 1.1 0.7
TextilesandClothing 0.0 0.2 21.7 16.3 0.0 0.2 20.0 15.0
Leather,WoodandPaperproducts
0.6 0.9 4.5 3.1 0.5 0.7 4.7 3.4
PetroleumandChemicalproducts
8.2 8.7 14.1 12.1 6.3 8.5 10.7 8.6
Metalproducts 2.9 4.4 9.0 7.2 2.2 3.2 7.8 6.1
Motorvehiclesandtransportequipment
0.1 1.6 4.8 4.1 0.1 1.8 5.3 4.5
Electronicequipment 0.2 0.9 14.1 22.2 0.1 0.2 15.1 26.0
Othermachineryandequipment
0.7 2.9 19.6 18.4 0.5 3.3 27.9 25.7
Othermanufacturing 0.0 2.9 3.0 2.5 0.0 3.8 2.1 1.8
Utilitiesandconstructionservices
0.1 0.4 0.1 0.6 0.1 0.5 0.1 0.6
Transport,travelandtourism
8.0 12.9 3.7 3.7 19.6 19.7 2.2 2.0
Financial,insuranceandbusiness
0.5 1.8 0.4 1.1 1.1 2.5 0.2 0.7
Otherservices 0.3 3.3 0.6 3.6 0.6 5.2 0.5 2.6
Bilateral trade share (% of trade with world) 28.5 1.6 27.1 1.4
Source:Sheng2016.
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Table 3.5: Actual and projected share of exports by sector in alternative scenarios
2025 Reform 2025 stagnation
AustoChina
AusTotal
ChinatoAus
ChinaTotal
AustoChina
AusTotal
ChinatoAus
ChinaTotal
GrainsandCrops 3.4 4.8 0.1 0.3 2.8 4.6 0.3 0.9
LivestockandMeatProducts
10.3 8.0 0.0 0.0 6.2 6.5 0.5 0.5
MiningandExtraction 62.2 41.5 0.4 0.2 59.1 39.1 1.2 0.6
ProcessedFood 0.7 2.3 0.8 0.5 0.8 2.4 1.1 0.8
TextilesandClothing 0.0 0.2 16.5 10.7 0.0 0.2 21.1 15.5
Leather,WoodandPaperproducts
0.5 0.9 2.5 1.7 0.5 0.8 4.7 3.4
PetroleumandChemicalproducts
3.2 7.3 12.9 9.5 6.6 8.1 10.2 8.2
Metalproducts 1.5 2.7 8.3 5.9 2.5 3.3 7.4 5.8
Motorvehiclesandtransportequipment
0.1 1.7 2.1 1.7 0.1 1.7 5.0 4.3
Electronicequipment 0.1 0.3 14.2 21.6 0.1 0.3 16.5 27.4
Othermachineryandequipment
0.2 2.4 34.8 28.9 0.7 3.4 27.1 25.1
Othermanufacturing 0.1 4.0 0.8 0.6 0.1 3.8 1.9 1.6
Utilitiesandconstructionservices
0.1 0.4 0.1 0.6 0.1 0.4 0.1 0.6
Transport,travelandtourism
16.8 17.3 3.1 2.5 18.8 18.3 2.1 2.0
Financial,insuranceandbusiness
0.9 2.2 0.3 0.8 1.1 2.3 0.2 0.7
Otherservices 0.1 4.0 3.1 14.5 0.6 4.8 0.5 2.6
Bilateral trade share (% of trade with world) 31.1 1.3 24.1 1.4
Source:Sheng2016.
UndertheChinareformscenario,totalAustraliantradeandChinesetradearelargerthanthebusiness-as-usualscenario.ChineseexportsincreasetoUS$4.48trillion,comparedtotheUS$4.04trillioncaseunderthebusiness-as-usualscenario.ChineseexportstoAustraliaareroughlythesameunderbothscenarios,atUS$59.1billionin2025.TotalAustralianexportsareprojectedtobeUS$595billionin2025,largerthanthebusiness-as-usualcaseanddrivenmostlybytheincreaseinexportstoChina.AustralianexportstoChinaincreasefromUS$84billiontoUS$185billion,orjustover120percent,inconstantvalueterms.
Australia’sexportstoChinaareprojectedtobeUS$185billionin2025underthereformscenariocomparedtoUS$145billionayeargivenbusinessasusual.UnderthestagnationscenariowithChinesegrowthsignificantlycontractingafter2020,AustralianexportstoChinaareprojectedtobeUS$107billion,stilla28percentincreaseinconstantvalueterms.YettotalChineseexportswillbeoverUS$1trillionlessin2025underthisscenario.
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ThestructureofAustralianexportstoChinadoesnotchangesignificantlyundereachscenariobecauseunderallscenariostheimpactofstructuralchangeintheChineseeconomyispowerful.Theminingandextractionsectorwillbelessimportant,whileservicesandagriculturewillgrowinimportanceinallcircumstances(Table3.5).Thetotalshareofeachcountryintheother’stradewillnotchangegreatlyinanyscenario:theshareofChinainAustralia’sexportswilldeclineslightlyfrom28.5percentin2014to27.1percentinthebaselinecaseandincreaseto31.1percentinthereformcase;andtheshareofAustraliainChina’sexportswillfallfrom1.6percentin2014to1.4percentintheformercaseand1.3percentinthelatter.
TheshareoftextilesandapparelinChina’sexportstoAustraliawas22percentin2014.Thatisprojectedtofallto20percentunderthebusiness-as-usualscenarioand17percentunderthereformscenario.IfgrowthinChinastagnates,theshareisprojectedtobe21.1percent.Electronicequipment,withashareof14.2percentin2014,exhibitsasimilarpattern.TheshareoftextilesandapparelinChina’stotaltradetellsasimilarstory:highergrowthscenariosindicatesuccessfulindustrialtransformationandupgrading,withlow-skilledmanufacturingbecominglessimportant.AfailuretotransformthestructureoftheChineseeconomyresultsinthegrowthstagnationscenario.
EducationserviceswillbeamajorAustralianexporttoChinaunderallthreegrowthscenarios,accountingforbetween10percentoftotalexportsinthestagnationscenarioandcloseto12percentinthereformscenario.EvenifgrowthstagnatesinChina,educationexportswilltripletoUS$12billionin2025.Underthereformscenario,educationexportswillbeashighasUS$18.6billion.
The transformation of China’s trade with Australia
China’sindustrialup-skillingisalreadyunderway,asshownbytheshiftingcompositionofChineseexportstoAustralia.Twenty-fiveyearsago,ChineseexportstoAustraliawerepredominantlylowervalue-addedgoodssuchashouseholdequipment,textiles,clothingandfootwear.Overthattime,China’sexporteconomyhasprogressedfrombeingalow-endproduceroftextilesandassemblerofsimplegoods,tobeingahigh-endproduceroffarmoresophisticatedelectricalandmachineryproducts.
Muchofthelowest-skilledfactoryworkthatboomedinChina’scoastalprovincesandspecialeconomiczoneshasnoweithermovedtoless-developedinlandregionsortootherlower-wagecountries.WhiletheabsolutevalueofallcategoriesofChinesemanufacturingtoAustraliahasgrown,thesharecontributedbysophisticatedengineeringproducts,suchasmachinery,hasrisenfromlessthan10percenttoalmosthalfofallimportssince1990(Table3.6).
Australia’sfallingbarrierstomanufacturingimportshaveassistedthisevolution.In1991,theweightedaverageofeffectivelyappliedtariffsonmanufacturedimportsintoAustraliawas10.5percent;by2002ithadmorethanhalvedto4.3percent,andin2014stoodat2.5percent(WorldBank2016).ChAFTAwilleliminatealmostalltariffsonimportsofChinesemanufacturesafter1January2019.
TheeffectivemanufacturingtariffsappliedtoChinesegoodsaroundtheworldalsofelloverthisperiod,loweringthecostofChina’sentryintoregionalandglobalproductionnetworks.Weightedaveragetariffsonimportsofmanufactureswere36percentin1992,
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fallingto13percentin2001and4percentin2014(WorldBank2016).Loweringthecostofmanufacturedimportsprovidescheaperpartsandcomponentsforsubsequentexportsofmoreelaborategoods.
Table 3.6: The changing nature of Chinese manufacturing exports to Australia
1990 2000 2010 2014
A$ Percentagesharein
total
A$ Percentagesharein
total
A$ Percentagesharein
total
A$ Percentagesharein
total
Simplytransformedmanufactures
77,509 6.5 461,961 5.4 1,942,412 5.2 2,879,711 5.8
Engineeringproducts
100,168 8.4 1,907,341 22.1 17,255,046 45.8 23,279,101 47.0
Otherelaboratelytransformedmanufactures
1,014,804 85.1 6,245,133 72.5 18,494,832 49.1 23,335,877 47.1
Source:DFAT2015c.
upgrading chinese manufacturing through regional supply chains
Chinesemanufacturedgoodsarenotstrictly‘madeinChina’butrather‘madeinAsia’,or‘madeintheworld’onceglobalsupplychainsinvolvingparts,componentsandintellectualpropertyareconsidered.YetwhileacontractorinChinaassemblesApple’siPhoneandiPadproducts,thecontributionofChineselabourtotheseproducts’finalretailvaluewaslessthan2percentin2011(Kraemeretal2011).EvenforatinycomponentsuchasaLightEmittingDiode(LED)manufacturedinChina,28percentofthevalue-addedisestimatedtocomefromoutsideChina(UNCTAD2015).ForaproductassimpleasarubbertyremadeinChina,theChineseshareofvalueaddedisjustunder77percent.
Theemergenceofregionalandglobalsupplychainsrevealsthelimitsofbilateraltradearrangementsthatfocusonlyonremovingformaltariffbarriersamongpotentialexportmarkets(ProductivityCommission2010).Whentariffsonintermediateandunfinishedgoodscascadethroughmanydifferentcountriesbeforeproducingafinishedproduct,theunilateralreductionorremovalofimporttariffshelpsaneconomyremainacompetitivebaseforglobalproductionnetworks.
Tradeagreementsthatseektoentrenchpreferentialtreatmentforparticularbilateraltradeflowsfurthercompoundtheseinefficiencies,andencourageothernationstocompeteonthebasisofpolicydistortionsratherthaneconomicfundamentals.Inaddition,thecostsofdelaysatcustomsanddisruptionstologisticsmakeitdifficulttoreapthefullefficienciesfromtrulyintegratedtrade.
Broadertradeagreementsprovidethegreatestwelfaregains,andsomultilateraltradeliberalisationthroughtheWTOwouldprovidethegreatestgaintoglobalwelfare.TheconsolidationofexistingbilateralpreferentialtradeagreementsintoRCEPisapracticalintermediatestep.RCEPcouldformthefoundationfordefiningthepathwaytowardsaFTAAPthatisnotjustregionallybutgloballyliberalising.
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OnepromisingprospectforimprovingbilateraltradelogisticsisChina’sOBORinitiative,whichaimstoimproveinfrastructureconnectivityintheregion.Thisshouldhelpboosttradebyloweringtransactionandtransportcosts.AustralianandChinesecooperationintheAIIBisalsoawelcomeandpracticalsteptowardreducingtransportcosts.TheAIIBwasfoundedtohelpfinanceinfrastructureinvestmentintheregion,whichcouldincludefinanceforinfrastructuredevelopmentinNorthernAustraliaunderOBORarrangements.MoredetaileddiscussionofareasinwhichAustraliaandChinacancooperatetoadvanceregionalandglobaleconomicdiplomacyissetoutinChapters7and8ofthisReport.
Delivering services to chinese consumers
China’sdomesticreformagendaprovidesastrongcaseforallowingAustraliancompaniestocompetedirectlyinChina’sservicesmarkets.TheDecisionofthecurrentCentralPartyCommittee’sThirdPlenumin2013—ameetingthatintroducesafive-yeareconomicreformagenda—focusedonthedevelopmentoftheservicessector,includingfinanceandhealthcareservices.Thishasbeenencapsulatedinthefiveprioritiesforthe13thFiveYearPlanofinnovation,coordination,greendevelopment,opening-upandsharing.
ThegrowthofChina’smiddleclassisdrivinggrowthinthebilateralservicestrade(ProductivityCommission2015).Accordingtoonelong-termestimate,theproportionofChina’spopulationinthemiddleclasscouldrisefromaround10percentin2009toover40percentin2020,andmorethan70percentin2030.Thisequatestoover850millionChinesepeopleenteringthemiddleclasswithinthenexttwodecades(KharasandGertz2010).ThismeansthatChineseconsumerswillspendmoreoftheirdiscretionaryincomeonservices.Someoftheseservices,suchastourismandeducation,maybeprovidedtoChineseoverseas.ButAustraliacanalsoassistChinaindevelopingitsdomesticservicessector(seealsoChapter5).
ThepotentialforincreasedservicesimportsinChinatakesonaddedsignificanceforAustraliagiventheparticularlyhighcontributionofvalue-addedservicestotheAustralianeconomy.WhilealargeproportionoftheprofitsoftheAustralianresourcesboomaccruedtooverseasinvestorsinminingcompanies,moreservicesexportstranslatedirectlyintomoreAustralianjobs.From2002–2011,fromthestarttonearthepeakoftheresourcesboom,thevalue-addedinAustralia’sservicesexportsactuallyexceededthatofmineralsexports(KellyandLaCava2014).
tourism and education services in Australia
ChinesedemandforAustralianserviceshassofarbeenconcentratedintravelservicesforeducationandtourism(Box3.5).
In2015,education-relatedtravelfromChinatoAustraliawasworthA$4.8billion(ABS2016a).Therearemorethan136,000ChinesestudentsinAustralia,morethanone-quarteroftheinternationalstudentpopulation(DFAT2016b).Thelong-runsignificanceofthissectorisevenhigherthanthesestatisticssuggestgiventheAustralianbrandawareness,familytourismexpenditure,professionalrelationshipsandmigrationopportunitiesthataccompanyinternationaleducationalexchange.ThisstoryistoldingreaterdetailinChapter4.
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BOx 3.5: CHinese TOuRism in AusTRALiA
In2015,annualChinesetouristarrivalstoAustraliaexceededonemillionforthefirsttime,accountingfor13.8percentoftotalinternationalarrivals.AccordingtoTourismResearchAustralia,intheperiodthroughto2025,Chinawillaccountfor60percentofgrowthininboundtourismexpenditureinAustralia.By2017–2018,ChinaisexpectedtobecomeAustralia’slargesttourismmarketintermsofinboundtouristnumbersandtouristexpenditure,overtakingNewZealand(TourismResearchAustralia2016).
ChinesevisitorshavebeenthedrivingforcebehindrecentincreasesintouristarrivalsandspendingtrendsinAustralia,withChinanowAustralia’sprimarysourceofinboundtourismexpenditure(TourismResearchAustralia2014).In2000,travelfromChinaaccountedforjust3.5percentofinternationaltravelexpenditureinAustralia;in2015,itaccountedfor22percent(ABS2015b,2016a).In2014–2015,totalexpenditurebyChinesevisitorsincreasedby29.8percentinrealtermsandthenumberofvisitornightsrose18.8percentto39million(TourismResearchAustralia2016).
Thesetrendsareencouraging,butcomealongsidepotentialchallengesaswellasopportunitiesforfurthergrowth.Sincetheglobalfinancialcrisis,theAustraliandollarhasweakenedmoresharplyagainsttheNewZealanddollar,theSingaporedollarandtheChineserenminbi,thanithasagainsttheUSdollarortheBritishpound.ThishasmadeAustraliarelativelymoreattractivefortourismthanothercountriesintheregioninrecentyears(Terlato2015).Buttheshort-termnatureofsuchadvantageshighlightstheimportanceofdevelopingatourismindustrythatisrobusttoglobaleconomicuncertainty.
DespiteChineseconsumersrankingAustraliafirstoutofallcountriesin‘aspiration’,‘awareness’and‘intention’tovisit,Australiaranksonly10thinactualvisitation,behindmore-establishedcompetitorssuchastheUnitedStatesandFrance(TourismAustralia2015b).Theexpansionofairconnections,widermarketingoperationsinChinaandtheaccessibilityoftailor-madetravelexperiencestoChinesevisitorswillbeessentialinnarrowingthisgap(TourismAustralia2011).Australia’stourismsectormustseizetheopportunitiesofferedbyrecenttouristactivityandthefavourableopinionofChinesevisitorstocementAustraliaasapremierdestinationinthelongerterm.
TourismResearchAustraliaforecaststheshareofChineseleisurearrivalsinAustraliatogrowfrom13percentin2014–2015to17.9percentin2017–2018and27.2percentin2024–2025.ThiswouldseethenumberofannualChineseleisuretouristarrivalsmorethantreblefrom684,000in2014–2015to2.6millionin2024–2025(TourismResearchAustralia2016).
In2011,theChinaNationalTourismAdministrationandtheAustralianGovernmentsignedaMemorandumofUnderstanding(MoU),continuingAustralia’sApprovedDestinationStatus(ADS)andcommittingtosupportcooperationintourismthroughanannualdialogue.AustraliaandNewZealandwerethefirstWesterncountriestobegrantedADSin1999andAustralia’sdeliveryoftheschemeishighlyregardedinChina.Theofficial-levelAustralia–ChinatourismpartnershipwasreaffirmedinApril2016,withanewMoUonStrengtheningTourismCooperationbeingsignedaspartofAustraliaWeekinChina.The2016MoUbuildsonthe2011agreementandcoversindustrycooperation,labourandskillsdevelopment,investment,researchandinfrastructure.
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Duringthe2016AustraliaWeekinChina,nationalleadersannouncedthebilateralYearofTourismfor2017.Designating2017a‘TourismYear’isanexcellentopportunitytoincreasepeople-to-peoplelinksthroughtourism.ItwillfocustheChinesegovernment(andmedia)onAustraliaandstrengthentheAustralia–Chinatourismrelationship.Anumberofeventsareplannedfor2017,includingAustralianparticipationintheBeijingInternationalFilmFestivalandChineseparticipationintheVirginAustraliaMelbourneFashionFestivalandAustralia’sChineseNewYearcelebrations.
InordertoensurethecurrentrapidgrowthintheinboundChinesetourismmarketremainssustainable,andthebenefitsofthisgrowtharedistributedbeyondAustralia’sgatewaycitiesofSydneyandMelbourne,theAustraliangovernmentisstrivingtoincreasethegeographicdispersionofChinesevisitors.Dispersalspreadstheopportunity,prosperityanddemandfromChinesetourism,andisbeingachievedthroughmeasuressuchasimprovingtourisminfrastructureinruralandregionalareasandtheintroductionofaWorkandHolidayArrangementthatallows5000Chineseparticipantseachyear.ThisprogramenablesChinesewithtertiaryeducationandEnglishskillstoexperienceaworkingholidayinAustralia.ItwillboostdemandfortourismservicesandhelpaddressshortagesofbilingualworkersavailabletothetourismindustryastheindustryseekstoservicegrowingnumbersofChinesevisitors.
WhileAustraliaisattractivetotouristsbecauseofitsnaturalenvironment,tourismaroundtheworldisfiercelycompetitive.Thescopeofpeople-to-peoplelinksbetweenChinaandAustraliaareahugeassetforAustralia.ChinesevisitingtheirfriendsorrelativesinAustralianotonlystrengthenedthesepeople-to-peopleties,butspentanaverageofalmostA$4000pervisitin2015(Figure3.7).Bycontrast,ChineseholidaymakerscomingtoAustraliajustfortourismspentA$2389pervisit,closetotheaveragespendofallholidaymakersinAustralia.
Figure 3.7: Total average spend of foreigners visiting friends and relatives in Australia, 2015
0 $
500 1000 1500 2000 2500 3000 3500 4000 4500
China Other Countries
Indonesia Switzerland Hong Kong
Scandinavia Singapore
United Kingdom Other Europe Netherlands
Canada Total
Malaysia France Taiwan
Italy Germany
Korea United States of America
Thailand Other Asia
Japan India
New Zealand
Source:TourismResearchAustralia2016.
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WhenChinesevisitorsarenotcomingtovisitfriendsandfamily,thenAustraliawillhavetocompeteforChinesetouristswithestablisheddestinationsinSoutheastAsia,EuropeandNorthAmerica.ThismeansthatAustraliantourismprovidersneedtofocusonensuringaqualityexperiencethatisadaptedtotheChinesemarket.ButthepayoffsfromattractingnewvisitorscanbelargeoncetheconnectionbetweenChinaandAustraliaisestablished.Ina2016surveyof514recentChinesevisitorstoAustralia,nearlyhalfwererepeatvisitors.Three-quartersofsurveyedvisitorsintendedtovisitagainorcomebackfortertiaryeducation,48percentwereinterestedinrealestateinvestment,while41percentand24percent,respectively,wereinterestedinthefurtherpurchaseofAustraliangoodsandservicesinChina(LEKConsulting2016).
Thesurveyfoundthattourismisafirststeptomuchdeepereconomicengagement.Chinesevisitors’averageannualspendonAustralianproductsroseby40percentaftervisitingAustralia.ThereportrecommendedthatAustraliangovernmentandbusinessesneedtoacttoharnessthefullpotentialofChinesetourismandthatAustralianeedstoensurethat:itremainsanattractivetraveldestinationsothatvisitornumberscontinuetogrow;visa-applicationprocesses,whereappropriate,aresmoothandeasytonavigate;Australia’sairportsandtransportfacilitiesareamongtheworld’sbest;andtheAustralianworkforcegrowsitsChinese-languagecapability.
AustraliaisinanAsiantimezone,butBerlinandParisarebothclosertoBeijingthanBrisbane.Thishighlightstheimportanceofdirectairconnectionsthatrespondtotravellerdemands.ManyflightsfromChinatoAustraliastillrequiretime-consumingconnectingflights,bothdomesticallyandviaAsia.AuthoritiesinAustraliaandChinasignedamilestoneairservicesagreementinJanuary2015,triplingandinsomecasesabolishingcapsonthenumberofseatsforpassengersfromsomeofChina’sbiggestcities(MinisterforTradeandInvestment2015).TourismagreementsbetweenSouthAustraliaandChinaSouthernAirlinesareanotherwaytofacilitatethis(Williams2016).ButAustraliacoulddomoretoensurethatprofitableroutesareavailabletoChinesecarriers.Thiswouldincluderemovingrestrictionsthatpreventforeigncarriersfromflyingdomesticpassengersorcargoondomesticlegsofinternationalflights—effectivelytriplingaviationcapacitybetweenChineseandAustralianmajorgatewaylocations.TheairservicesagreementalsoprovidesforunrestrictedaccessbetweenChinaandAustralianregionalairports.Whilethisarrangementhasmadesignificantaviationcapacityavailable,ChinaisoneofAustralia’sfastestgrowingvisitorsourcesandmorecanbedonetoensureaviationcapacitywillfosterfuturegrowthinvisitationfromChina.
RemovingtheserestrictionswouldmakeiteasierforChinesetouriststoseemoreofAustralia,andexpandcapacityinAustralia’sdomesticaviationmarketswithoutrequiringadditionalcapitalinvestmentfromAustralianairlines.GiventhatthisreformisdirectlybeneficialtoAustralia,itshouldnotbecontingentonreciprocationinthedevelopingChineseaviationmarket.BetterconnectivitywouldalsofurtheropenuptheChinesetourismmarkettoAustralianswantingtoexperienceChinesefood,cultureandhistory,aswellaseconomicandsocialprogress(Box3.6).
ToprovidebetterservicestoChinesevisitors,Australiahasimprovedvisaarrangementsbyreducingdocumentaryrequirementsandwaivinginterviewrequirements.Australiahasintroducedathree-yearmultipleentryvisaasstandardforeligibleChinesebusinessvisitors,andeligibleChinesetouristsapplyingthroughanagentviaanonlinetrial.Additionally,Australiaisnowtriallingtheonlinelodgementofvisitorvisaapplications;thisserviceisexpectedtoberolledoutfullybytheendof2016.Atrialof10-yearvisitorvisasforeligibleapplicantsinChinaisalsoexpectedtobeginbytheendof2016,alongwiththeimplementationofaChineselanguagelodgementoption.UndertheDevelopingNorthernAustraliaWhitePapervisainitiatives,Australiabeganapriority48-hourprocessingtrialforvisitorvisaapplicationsfromChinesepassportholdersinMarch2016.
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BOx 3.6: AusTRALiAn TOuRisTs in CHinA
Australianoutboundtourismisrelativelylargerbyvolumethanitsinboundtourism(TourismResearchAustralia2016).In2015,Australianresidentsmade9.5millionoverseastrips,spendingatotalofA$32billionabroad.In2015,Australiaranked10thininternationalinboundtourismexpenditure,valuedatUS$23.5billion(behindItalybutbeforeHongKong).
In2015Australianresidentsmade422,800tripstoChina,meaningChinaisAustralia’ssixth-largestdestinationmarket.ThosedestinedforChinacomprised4.5percentofAustralia’stotalresidentdepartures,behinddestinationssuchasThailand(5.8percent),theUnitedKingdom(6.3percent),theUnitedStates(10.7percent),Indonesia(11.7percent)andNewZealand(13.4percent).TourismResearchAustraliaforecaststhatAustralianoutboundtourismwillgrowatanaverageof3.7percentperannumfrom2014–2015to2024–2025,reaching13.3millionoverseastripsin2024–2025.
From2000to2015,visitstoChinahaveincreasedfrom2.7percenttotheircurrent4.5percentofAustralianinternationaltravel(ABS2016c).ThevalueofgoodsandservicesacquiredthroughAustralians’traveltoChinaforpersonalreasonsincreasedby392percentbetween2000and2015.Overthesameyears,businessandeducationtravelgrewsignificantly,butatslowerrates—203percentand115percentrespectively(ABS2015,2016a).
AsofDecember2015,Australiaisthe16thmostcommonsourcecountryofChina’sinboundtourism.Percapita,itranksseventh,aheadofJapan,Canada,theUnitedStatesandtheUnitedKingdom(CNTA2016).
AirconnectivityimprovementsareamajorfactorbehindthegrowingnumbersofAustraliantouristsinChina,asisthesizeofAustralia’sChinesediasporaandtheextentofpeople-to-peoplelinks.WendyWu,ownerofAustralia’slargesttouroperatortoChina,took10,000passengersin2013(upfromjust16in1994).‘Themajorityofourcustomers,’saidMsWu,‘saytheywanttogotoChinabecausetheirChineseneighbours,friends,relativesandcolleagueshavetalkedaboutitandsaidtheyhadawonderfultimethere’(Karnikowski2013).
Againstthisbackdrop,thereshouldbegreatpotentialforChinatocompeteforalargershareofAustraliantourismexpenditure.LikeAustralia,Chinacouldimproveitscompetivenessthroughmeasuresfacilitatingtouristmobility,includingmoreflexibleandpreferentialvisaarrangements(seeChapter4).ManysucharrangementswouldrepresentreciprocationofexistingAustralianinitiatives.ThebilateralYearofTourismin2017alsoprovidesanexcellentopportunityforChinatopromoteitstourismattractionstoAustraliantourists.However,thesepromotionscouldgobeyondtraditionalrealmslikefood,culture,historyandnaturalscenery,toshowcasenewattractionsincludingChina’sstate-of-the-artinfrastructureinhigh-speedrailandmetropolitansubwaysystems.ThesenewtouristattractionswouldnotonlyincreaseconvenienceforAustraliantravellers,butalsoprovideopportunitiesformoreAustralianstoexperienceChina’seconomicdevelopmentandsocialprogress.Deepercommunityunderstandingiscriticaltothebuildingofmutualtrustandpartnershipsandfacilitatingflowsofcommercialopportunitiesbetweenthetwoeconomies.
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Developing China’s services sector
ThenextstepinimplementingChAFTA,whichhasthepotentialtohelpdrivethetransformationofChina’sdomesticservicesindustry,istofurtheropenuptheChineseservicesmarkettocompetitionfromAustraliancompanies.TheChineseservicesmarketisnotasopentoforeigncompetitionasChinesegoodsmarkets,andevenabsentformalbarrierstotrade,serviceprovidersoftenfacestiff‘behindtheborder’barriersintheformoflocalrestrictionsonlicensingandprofessionalaccreditation.Thedomesticprovisionofservicesoftendependsoncomplementaryarrangementsallowingforeigndirectinvestment,aswellasrulesfacilitatingthemovementofpeople.
MuchofthehardworkinenhancingthesesectorsrequiresmajordomesticpolicyreformsthatarealreadyunderwayinChina.Thesereformsrecognisethatthebiggestgainsfromtradeliberalisationoccurnotfrommarketaccessoverseasbutfromallowingothercountriestoparticipateindomesticmarkets.AustralianservicesprovidersarenotbigenoughglobalplayersthattheywillbeabletoswampChineseincumbents.Nevertheless,theiragilityandexperienceindevelopedmarketscanhelpbringcompetitivepressureandknow-howtoChinesedomesticmarkets,andhelpprepareChinesecompaniesforfuturecompetition.Australiasuccessfullyexecutedasimilarstrategyinliberalisingitsfinancialmarkets30yearsago.
WhileAustralianfinancialinstitutionsmaybeabletoplayaroleindeliveringfinancialservicesdirectlytoChineseconsumers,theyhavemoreofaroletoplayinloweringthecostsoftradebetweenAustralianandChinesecompanies.ThisincludesbysupportingsettlementortradedirectlybetweentheChineserenminbiandtheAustraliandollar,providingproductstohedgecurrencyrisk(particularlyasChina’sforeignexchangeregimebecomesmoreflexible),andfosteringintegrationwithChinesepaymentsystemssuchasUnionPayandAlipay.ChAFTAalsocreatedaCommitteeonFinancialServices.OpportunitiesforcooperationinfinancialservicesarefurtherexploredinChapter5.
ChAFTAremovesmany‘attheborder’constraintsonbothestablishedandemergingaspectsofthetraderelationship.Thechallengenowistoaddressresidual‘behindtheborder’barriers—thesizeabletradeconstraintsthatgobeyondthescopeoftraditionalbilateraltradenegotiations.ThekeywaytodothiswillbethroughChAFTA’sTradeinServicesCommittee,whichwillreviewthestateoftheservicestradewithintwoyearsandproposemeasurestoincreasetradeinservices.AnexampleofbilateralopportunitiesisdeliveringhealthcareservicestoChina’sageingpopulation(Box3.7).
PartofitsroleistoensurethatthecommitmentsthatAustraliaorChinamightmaketothirdpartiesinothernegotiationsareautomaticallyextendedthroughChAFTA.Australia’sMostFavouredNationcommitmentextendstoallservicesectors.China’sislimitedtoeducation,tourismandtravel-relatedservices,construction,engineering,securities,environmentalservices,servicesrelatingtoforestry,computerandrelatedservices,andcertainscientificandconsultingservices.ThismeansthatifAustraliaorChinaextendsmorefavourableaccessconditionstoothertradepartners,thensuppliersintheothercountrywillautomaticallyreceivethisbettertreatment.
Onereformthatofferslargepotentialgainswouldbetoestablishrecognitionofprofessionalservicesqualificationsfromtheotherjurisdiction.Bytheendof2017,thesidelettertoChAFTAonskillsassessmentandlicensingisdueforreview.Tohelpmakethemostofthis
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review,theAustralianandChinesegovernmentsshouldcoordinateengagementbetweenaccreditingregulatorybodies,suchasCertifiedPublicAccountantsAustraliaandtheChinaInstituteforCertifiedPractisingAccountantsinthefieldofaccounting,andAustralianStateBarAssociationsandtheAll-ChinaLawyersAssociationinthelegalprofession.TwootherfieldsthatcouldprovideearlygainsareengineeringandTCM(ProductivityCommission2015).
BOx 3.7: HeALTHCARe seRviCes
China’sdevelopinghealthcaresectorisstrugglingtokeepupwiththedemandplaceduponitbyChina’shugeandageingpopulation(Austrade2016a).Thereareover202millionChinesewhoareover60,representing15.5percentofthepopulation.Andthisshareisprojectedtoincreaseto24percentby2050(Xu2016).
Australia’shealthcarefacilitiesareamongthebestintheworld(BrownandvanNieuwenhuizen2016),andChAFTAwillgivethemanadvantageagainsttheirmaincompetitorsinthemarket:JapanandtheUnitedStates.AustralianexportershavetheopportunitytoservicetheChinesemarketbyproviding:
• trainingandeducationprogramsforhumanresources;
• homecareservices;
• operationandmanagementofseniorsliving/retirementvillages/resorts;
• conceptualdesignandplanningofinstitutionalagedcare,seniorsliving,retirementvillagesandresorts;
• qualityhealthcareproducts(thatis,functionalfood,additivesandnutrition,healthyfood,assistedlivingande-healthproductsfortheelderly);and
• infrastructureinvestmentandoperation(Austrade2016a).
traditional chinese medicine
ChinaisalsocontributingtothedevelopmentofnewsectorsinAustralia.TCMinAustraliaisstillanascentindustry,yetithassucceededinattractingsignificantattentionfromgovernmentbodiesandbusiness.Therangeofrecentadvancementsinregulation,collaborationandexchangewillonlyleadtogreateropportunitiesforAustralianTCMresearch,developmentandexportinyearstocome.
InNovember2014,theUniversityofWesternSydney(UWS)andtheBeijingUniversityofChineseMedicinesignedaMoUtodevelopAustralia’sfirstTCMintegrativeclinicalservice.TheAustralianprimeministerandtheChinesepresidentattendedthesigningceremony.
TheUWSNationalInstituteforComplementaryMedicine(NICM),whichwilloperatethenewservice,hopesitsresearchwillleadtonewtreatmentsforoutstandingmedicalneedsandnewmedicinesforglobalexport.TheNICMwillalsopartnerwithChineseresearcherstorunclinicaltrialsonTCM(CRI2015).Theinstitution’scapabilitiesshouldalsobeofinteresttointernationalcomplementarymedicinecompanieswishingtoprepareregulatoryfilingsforothermarkets,suchasintheUnitedStatesandEurope(ATC2014;Austrade2014).
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ThisMoUisoneofarangeofinitiativesinrecentyearsthathavemadeAustraliawellplacedtoadvancetheproduction,regulationandmarketaccessofTCMinthefuture.InJuly2012,AustraliabecamethefirstWesterncountrytoinstitutemandatorynationalregistrationofTCMpractitioners,amajorinstitutionalstepforTCMdevelopmentandqualitycontrol(CMBA2012).
ChAFTAincludesanumberofprovisionsencouragingbilateralTCMcollaborationandexchangebetweenregulators,professionalbodiesandrelevantgovernmentdepartments.TheagreementencouragesthedevelopmentofmutuallyacceptablestandardsforTCMlicensingandcertification,aswellasprovidingsupportforpersonnelmovement,grantingentryandtemporarystayforfouryearstoaquotaofTCMpractitioners.
Inadditiontotheexportofservicessuchasclinicaltrials,someagriculturalandmedicalbodiesareexploringprospectsfortheAustralianexportofTCMgoods.TheWesternAustralianDepartmentofAgricultureandFoodhasencouragedthegrowingofjujubesorChinesedates,acommonfoodandmedicinalproduct,whichcanbegrowninAustraliacounter-seasonallytoChina(DAF2016).UniversityofQueenslandpharmaceuticalresearchershavepointedtothepossibilityoftheexportofcanetoadproductsforTCMuse(Milman2015).
Building trust to achieve potential trade
Abusiness-as-usualapproachtothebilateralrelationshipwillnotbesufficienttocapitaliseonitsfullpotential.TheresourcestradeispredominantlyconductedthroughlargeminingcompaniesontheonesideandChineseSOEsontheotherside.Butthistradegoesbeyondthesupplyofbulkcommoditiestoincludetargetedmarketing,integratedsupplychainsandcross-culturalhumanresourcemanagement.Thistradeisbuiltonafoundationofstrategictrusttoensurethatgovernmentsdonotarbitrarilyinterferewithcommercialrelationships.Goingbeyondthis,intheservicestradesforexample,willrequiredeeperunderstandingandinstitutionalrelationsbetweenAustralianandChineseorganisationsandpeople.
High-level official engagement
TheAustralianandChinesegovernmentshavearoletoplayinremovingbarrierstotrade,catalysingthecommercialandsocialrelationshipsfromwhichbeneficialexchangescanemerge,andestablishingtheinstitutionsandtrustrequiredtolowerbarrierstotrade.Thisisahardtaskgiventheexpandingpoolofbilateralstakeholders.Alargernumberofsmaller-valuedtradetransactionsmeanthatindustryplayerswillbelessorganisedandfindithardertoattractattentionattheofficiallevel,meaningthatgovernmentsonbothsideswillneedtotakegreaterefforttoconsultwithbusiness.
Atthehighestlevel,ajointcommitmenttotradeliberalisationshouldbeproactiveandextendbeyondtheimplementationofChAFTA.ThisworkcanbedevelopedaspartoftheagendafortheStrategicEconomicDialogue(SED)betweenthetwocountries(Box3.8).ThisdialoguebringstogethertheAustralianTreasurerandMinisterforTradeandInvestmentforannualtalkswiththeChairmanofChina’sNationalDevelopmentandReformCommission(NDRC).
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BOx 3.8: THe AusTRALiA-CHinA sTRATegiC eCOnOmiC PARTneRsHiP
WhenthenChineseexecutivevicepremierLiKeqiangvisitedtheAustralianprimeministerKevinRuddinOctober2009,hestressedtheroleof‘dialogue,coordinationandcooperation’inbuildingAustralia–Chinarelations(ChineseEmbassyAustralia2009).TheAustralia–ChinaStrategicEconomicDialogue(SED),whichprovidessuchanopportunityforAustralia,wasannouncedin2013.ThefirstmeetinginJune2014wasattendedbytheAustralianTreasurerandTradeMinister,andtheChairmanofChina’sNDRC.
AtthisinauguralSEDinBeijing,thetwocountriesestablishedanInvestmentCooperationFramework.TheFrameworkgoesbeyondChAFTAandcreatesnewpathwaysforpromotingtheexportoffinancialservices,two-wayinvestmentinnewsectorsandidentifyingroadblocksforinvestorsfrombothcountries.Thereistremendousopportunitytodeepentherelationshipatanumberoflevels,includingbyexpandingservicesexportsfromAustraliatoChinaandimprovinginvestmentopportunities.
ThesecondSED,heldinCanberrainAugust2015,sawthetwogovernmentsagreetofurther‘two-wayinvestmenttodiversifyourtraderelationshipandcreateopportunitiesintheservicessector’(TreasurerofAustralia2015a).
Thishigh-levelpoliticalcooperationispracticallysupportedbyaMoUforcooperationbetweentheNDRCandtheAustralianTreasury,whichwasfirstsignedin2008(AustralianTreasury2008).Chapter6discusseshowtoenergisetheseinstitutions.
Whilemuchhasbeendonebothintermsofinternationaltradelawandbilateralnegotiationstoremoveformalbarrierstotrade,manyofthebarriersthatremainoccuratstate/provincial,municipalandmorelocallevelsofgovernment.Itisoftenattheselevelswherenationallawshavetobeimplemented,andwherelocallicensingpracticesandenforcementcanhavetheeffectofproducingmajor,ifsometimesunintended,barrierstointernationaltrade.
Thepremierforumforbilateralengagementatthestate/provinciallevelistheAustralia–ChinaState/ProvincialLeadersForum.TheAustralianprimeministerandtheChinesePresidentopenedtheForum.Thisinstitutionshouldmeetregularly,andpossiblyestablishastandingsecretariatthatisabletosupportitswork,shareknowledgeandcoordinatetheimplementationofitscommitmentsandinitiativesbetweendifferentlevelsofgovernment.
Theenvironmentformanagingandwelcomingforeigninvestmentprojectsissignificantlyinfluencedbyhowtheyaremanagedatthelocallevel.Astrongpartnershipbetweenprovincialandstategovernments,anddialoguewithlowerlevelsofgovernmentsandcommunitystakeholdersassistsfirmstodiscovertradeopportunitiesandfacilitatetheinvestmentthatsupportstrade.Australianstateshavelonghadsisterstate–provincerelationshipswithChina’smostoutward-orientedprovinces(Table3.7),andtherearemorethan70sister-cityrelationships.TradedelegationsledbythepoliticalleadersofAustralianstatesandterritoriestoChinacanhelpcementcommercialties(Box3.9).
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Thiscanbetakenfurther—althoughChinaonlyestablisheddiplomaticrelationswithSouthKoreain1992,thetwocountriesalreadyhave154sister-cityrelationships(Ren2014).TherelationshipbetweenWeihai,atownof600,000people,inShandongProvince,andIncheon,acityof3millioninSouthKorea,isanexemplarofasister-cityrelationship.Morethan800SouthKoreancompaniesoperateinWeihai,whichisalsohometo40,000SouthKoreans(Zhao2015).
Stateandprovinciallevelgovernmentscanfurtherbilaterallinksthroughmoreexchangeprogramsforstudents,businesspeopleandgovernmentofficials.Victoriaiscurrentlytakingtheleadinestablishinga‘PartnershipsforProsperity’strategywithChina(GovernmentofVictoria2016).Thisinvolvesstrengtheningcooperationoninnovationwithitsexistingsister-province,Jiangsu,aswellasformalisinganewsister-provincerelationshipwithSichuan.Thestrategyincludestargetedcapacitybuildingwithinbusiness,governmentandeducation,aswellasculturalengagement.Victoriawantstobethedestinationfor20percentofChineseinvestmentinAustraliaby2026.Overthesametimeframe,theVictoriangovernmentexpectsexportstoexpand,revenuefromChinesetouristsinthestatetoincrease,andpost-graduatetertiaryenrolmentsfromChinatogrowbyaquarter.
Table 3.7: sister state–province relationships between Australia and China
Australian state or Territory Chinese Province or municipality Relationship established
NewSouthWales Guangdong 1979
Victoria Jiangsu 1979
Tasmania Fujian 1981
SouthAustralia Shandong 1986
WesternAustralia Zhejiang 1987
Queensland ShanghaiMunicipality 1989
NorthernTerritory Anhui 2000
AustralianCapitalTerritory Beijing 2000
Queensland* Guangdong 2004
Source:ACCCI2001;AHFAO2015;GFAO*referstoaFriendlyCooperativeProvinceratherthana‘sister’relationship.
TheAmericanChamberofCommerceinChina(AmCham)conductsannualsurveysofChina’sbusinessenvironment,andreleasesanannualwhitepaperforAmericanbusiness(AmCham2015).ManyofthedetailedconcernsraisedbythisorganisationarelikelytoreflecttheexperienceofAustralianbusinessinChina.AmChamfindsthatforeigncompaniestradinginChinareportthatlocalregulatoryenvironmentsandconditionsmatter.CentralpoliciesarenotalwaysuniformlyenforcedacrossChina,andtheinstitutionsandinfrastructureneededtogetproductstomarket,andthefinancialservicesrequiredtofacilitatetrade,arenotalwayswelldevelopedbeyondChina’sfirst-tiercities.Inparticular,foreigncompaniesoftencomplainthatregardlessoftarifflevels,theirexportoperationsbecomecomplicatedbyinconsistentandinefficientcustomsproceduresandregulationsatthelocallevel.AmChamreportsthatthereisaperceptionamongforeignbusinessesthatlocalgovernmentsfavourlocaldeveloperswithregardstoaccesstolandandrealestate.
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Beyondthefirst-tiercities,anabsenceofinternationalschools,multilingualhealthcentresandinternationalfinancialinstitutionscanmakeitdifficultfornon-Chinesespeakingforeignershopingtodobusiness(AmCham2015).Someareasimposeregulationsandfeesforimportinginternationaleducationalresources,includingtextbooks.Furtheropeningupofthemarketforhealthcareandeducationserviceswouldmakeiteasierforinternationalproviderstooffertheseservicestoforeignvisitors,thereforefacilitatingmorebusinessandinvestmentconnections.Atapracticallevel,evendifferentregionalbureauxoftheExit-EntryAdministrationofChina’sPublicServiceBureauinterpretandapplyregulationsdifferently.Thiscancausevisaproblemsforstudentsandprofessionals.
Statesandprovincescanplayaleadingroleindrivingpracticalcooperation(Box3.9).Australianstategovernmentsalreadyhaveanon-the-groundpresenceinChina—NewSouthWales,SouthAustralia,QueenslandandWesternAustraliainShanghai;NewSouthWalesinGuangzhou;VictoriainNanjing,BeijingandChengdu;SouthAustraliainShandong—whichcanhelpdeliverthisengagement.Victoria’sChinastrategyincludesincreasingresourcesforitsnetworkofgovernmentbusinessofficesbyA$66million,includingtheappointmentofanewdeputycommissionerresponsibleforWesternChina(PremierofVictoria2016).TasmaniaalsorecentlycapitalisedonavisitbytheChinesePresidentbylaunching‘Tasinvest’,apromotionthatattractedover100representativesofChinesecompanies.TasmaniaalsosignedaMoUonplanningandcooperationwiththeChinaDevelopmentBank,inordertofacilitateChineseinvestmentinTasmanianmining,agriculture,tourismandinfrastructure(PremierofTasmania2014).
State–provincialandsister-cityrelationshipsshouldbeforumsinwhichtonegotiateandresolvetheseissues,aswellastorecogniseprofessionalaccreditations(suchasrealestatebrokerlicenses),andensuretransparencyandconsistencyingrantinglocallicensesandgovernmentapprovals,includinginbankingandfinance.AustraliancompaniesoperatinginChinadonotneedanykindofpreferentialtreatment,buttheydoneedanassurancethattheinterpretationoflawsandregulationsatthelocallevelisnotbeingusedtorestrictcompetition.Opportunitiesforofficialvisitsandexchangesofstateandprovincialgovernmentofficials,includingwithjudicialandprosecutorialorgans,cancontributetothetrustandunderstandingneededtoidentifyandresolvelocalregulatorydiscrepancies.
BOx 3.9: sTATe AnD PROvinCiAL Ties
Thefirstsisterstate–provincerelationshipwasestablishedin1979betweenNewSouthWalesandGuangdongprovince,andtheannualNSW–GuangdongJointEconomicMeetinghasbeenakeycomponentoftherelationship.InJuly2008,theNSWgovernmentalsosignedaformalMoUwiththeFinancialServicesOfficeoftheShanghaimunicipalgovernmenttostrengthentheirrelationship.Sincethen,thetwocitieshaveheldanannualfinancialservicessymposiumtogrowtheirpositionsasfinancialhubsintheAsiaPacific.InJune2012,Guangdong’sformerpartysecretaryvisitedSydney,andin2015,theNSWPremierMikeBairdhostedthecurrentGuangdongPartySecretaryHuChunhua,whowasthenreceivedbytheAustralianprimeministerasaguestoftheAustraliangovernmentinCanberra.PriortotheNSWpremier’sfirstofficialvisittoChinain2014,NSWreleaseditsownChinaEngagementStrategy.ThepremierledadelegationtoGuangzhouinNovember2015inordertodiscussopportunitiesunderChAFTA.InApril
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2016,theNSWhealthministertravelledtoChinatopromotenewopportunitiesforhealthcareprovidersandmedicaldevicemanufacturersunderChAFTA.Duringthisvisit,theministeralsoattendedAustrade’sAustraliaWeekinChina2016.
TheVictoria–JiangsuJointEconomicCommitteefirstmetin1987.AnumberofVictorianprojectsinChinahaveprogressedthroughthisCommittee,particularlysomerelatingtosustainableurbandevelopment.Tocelebratetherelationship’s35thanniversary,aMoUwassignedbetweenRegionalDevelopmentVictoriaandtheJiangsuForeignAffairsOfficeinJuly2014,launchingtheVictoria–JiangsuRegionalCityAlliance.Theallianceaimstostrengthenmultiplecity-to-citytradeandinvestmenttiesbetweenthetwostates.Over60governmentandbusinessleaders,includingJiangsu’svicegovernor,attendedthelaunch.FollowinghisvisittoChinain2015,VictorianPremierDanielAndrewsproposedtosendeverymemberofhisministrytoChinabeforethenextstateelectioninNovember2018.ThepremierintendstovisitChinaeveryyearinordertoboosttradeandexplorefurtherinvestmentopportunities.
Ontopofthis,JiangsuandVictoriahaveaformalpartnershipbetweentheVictorianDepartmentofEducationandTrainingandtheJiangsuProvincialDepartmentofEducation,andtheHamerScholarshipprogramforyoungVictorianstostudyChineselanguageandcultureinJiangsu.Moreover,MonashUniversitywasthefirstAustralianuniversitylicensedtoopenacampusinChina,inpartnershipwithSoutheastUniversityinSuzhou.AspartofVictoria’snewChinaStrategy,Victoriawillalsoformaliseitsnewsister-provincerelationshipwithSichuanbytheendof2016.
TasmaniaandFujianprovincehavehadanactiverelationshipsince1981.Afterthe2014AustraliaG20Summit,ChinesePresidentXiJinping(aformergovernorofFujian)visitedTasmaniaaccompaniedbytheFujianpartysecretary.TheTasmanianpremierandtheFujianpartysecretarysignedtheAgreementonEstablishingtheJointCommitteeforCooperationandDevelopment,anorganisationalbodyoverseeingbilateralexchange,andcommittedtoholdbiannualmeetingstodiscusstrade.ThedelegationwasaccompaniedbyrepresentativesfromeightFujiancompanies,includingXiamenAirlines,theZijinMiningGroupandXiamenConstructionandDevelopmentGroup.TheinauguralmeetingoftheJointCommitteewasheldinMarch2015inFujianandattendedbytheTasmanianpremier.TasmaniaalsosignedaMoUwithFujianwhenChinesePresidentXiJinpingvisitedTasmaniainNovember2014,establishingaJointCommitteeforCooperationandDevelopment.
In2013,theSouthAustraliaShandongCooperationandDevelopmentForumwasestablished,withtheinauguralForumheldinJinanthatApril.TheForumischairedbytheSouthAustralianpremierandthevicegovernorofShandong.Thedelegationincludedbusinessleadersfromthemineral,energy,agribusiness,wineandeducationsectors.MoUsadvancingeconomicrelationsweresignedwiththeShandongCommerceBureauandtheQingdaoBureauofCommerce.InMay2015,theGovernorofShandong,GuoShuqing,welcomedSouthAustralia’slargestevertradedelegationledbytheSouthAustralianPremierJayWeatherill.Thepremierreleasedthestate’supdatedChinaEngagementStrategyinMay2016(PremierofSouthAustralia2016).
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WesternAustraliahashadasisterstate–provincerelationshipwithZhejiangprovincesince1987.In1995,theWesternAustralia–ZhejiangSister-StateEconomicExchangeCommitteewasestablishedtooverseetheeconomicaspectsofthepartnership.InSeptember2012,adelegationledbytheZhejianggovernorvisitedPerthtocelebratethe25thanniversaryoftherelationship.InApril2014,aMoUwassignedbetweenthetwopartiesonlivecattleexports.TheWAministerforregionaldevelopmentledadelegationinAugust2015toChinatomeetwithZhejiangprovincialgovernmentofficials.
QueenslandandShanghaihavemaintainedasisterstate-cityrelationshipsince1989.Tomarkthe25thanniversaryofthisrelationshipin2014,theirtwogovernmentsagreedtoworktogetheronurbandevelopmentissues,strengtheninformationsharinginrelationtotheShanghaiFreeTradeZone,andexpandcooperationandexchange.
TheAustralianCapitalTerritory(ACT)hashadaformalsister-staterelationshipwithBeijingsince2000.ThescopeoftheACT’sengagementwithChinawasexpandedin2014withaneconomiccooperationagreementsignedbytheACTchiefministerandthemayorofShenzhen.
grassroots engagement
Thenextroundoftradeopportunitiesinservicesrequiresmuchmoresophisticatedengagementbytensofthousandsofenterprisesandentrepreneursoneachside(seeChapter6).TheAustralia–ChinaCEORoundtableisthepremierforumforthisatthepeakbusinesslevel.
Opportunitiesexisttoimprovebilateralcapacityinmanyservicesindustries,includingtourismandeducation,andprofessionalservices,wherethedeliveryofhigh-valueproductsdependsontailoringservicestomeetthedemandsofspecificconsumers.Adeepunderstandingofconsumerpreferencesisessentialtoprovidingnicheservices,andmembersofAustralia’sChinesediasporacommunityareideallyplacedtoplayaleadingrole(Box3.10)Thiscommunityisgrowing—thenumberofChinese-bornAustralianresidentsmorethandoubledfrom2004to2014(ABS2015b).TheestimatedChineseresidentpopulationiscurrentlyaroundhalfamillion(ABS2015b).OngoingmigrationfromChinatoAustralia(discussedinChapter4)helpsmeetAustraliandemandforhumancapitalinfast-growingareas.Chineseaccountants,advertisingandmarketingprofessionals,ITspecialistsandeducatorsdonotjustbringtechnicalskills,butalsopossessup-to-dateknowledgeofconsumerpreferences,businesspracticesandmarketopportunitiesinChina.
WhetherChinese-born,orraisedinAustraliawithanawarenessofChinesecultureandsensibilities,theChinesediasporacommunitybringswithitnewandvaluableopportunitiestotailorlocalproductsandservicestosuitChineseconsumerdemands.WhenChinese-Australianbusinessleadersmakeuseoftheirlinguistic,networkingandentrepreneurialadvantages,theircolleaguesandcollaboratorsgainfirsthandexperienceoftheimportanceofdevelopingculturallyspecifichumancapital,andtheopportunitiespresentedbyChina’scontinuedtransformationandgrowth.
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Forexample,thepresenceofChineseworkersintheSouthAustralianwineindustryhasalreadybeguntotransformit.WineproducersthroughoutAustralia,especiallysmall-andmedium-sizedbusinesses,arekeentocaptureashareofthegrowingChinesemarket,buttheyhavelimitedabilitytoidentifymarketopportunitiesandadapttoChinesetastes.Chineseworkerscanprovidethelinguisticability,multiculturalbusinessperspectiveandnetworkingadvantagesneededtomatchproducerstointernationalconsumers.SomerecentChinesegraduateshaveevenstartedtheirownexport-focusedwinebusinesses.
TheAustralia–ChinaYouthAssociation(ACYA)andtheAustraliaChinaYoungProfessionalsInitiative(ACYPI)areexemplarnon-governmentorganisations.ACYAissupportedbytheAustraliangovernmentthroughtheAustralia–ChinaCouncilandhasmanyinstitutionalpartners,particularlyinAustralianandChineseuniversities.ACYAisdedicatedtoimprovingpeople-to-peopletiesthroughcareerandeducationservices.Itoperatesacross22chapters,17inAustralianuniversitiesandfiveinChinesecities,andin2010launchedtheannualhigh-levelAustralia-ChinaYouthDialogue(ACYD).
InOctober2015,theACYPIsurveyedmorethanonehundredofitsownmembersaswellasparticipantsinthe2015SouthAustralia–GreaterChinaFutureLeadersDialogue.MoreimportantthanthebusinessenvironmentineitherAustraliaorChina,participantscitedthe‘lackoftrustinandunderstandingoftheothercountry’asthemostimportantissueinthebilateraleconomicrelationship.Australia’srelationshipswithJapanandtheUnitedStateswereregardedastheleastimportantissueintheAustralia–Chinarelationship(Eganetal2015).
InitssubmissiontothisReport,ACYPIrecommendedinvestingineducation(particularlysecondary,tertiaryandongoingprofessionaldevelopment),encouragingdevelopmentofpeople-to-people-tiesandmaintaininganongoingbilateraldialogue(oneconomicsandothermatters)asthekeymeansofbuildingthistrust,anddevelopingtherelationship-specifichumancapitalthatiscrucialtoprovidingtailoredgoodsandnicheservicestoeachother’smarkets.
BOx 3.10: CuLTuRAL COnneCTiOns AnD Business OPPORTuniTies FROm THe CHinese DiAsPORA
ChinesegraduatescanhavetransformativeeffectsonAustralianbusinesses.Atonemedium-sizedwineproducerintheAdelaideHills,aChinese-speakingemployeebeganaddressingoccasionalenquiriesfromChinaandtranslatingtastingnotes.Theemployee,awinebusinesspostgraduate,soontookonapermanentpositiondevelopingthebusiness’‘strategyforChina’—apositionshehad,accordingtothegeneralmanager,effectivelycreated‘forherself’.Now,36percentofthatbusiness’totalrevenue(approximatelyA$2million)isaccountedforbyChina.
Chinese-Australianbusinessleaderscanplayacentralroleinstrengtheningandconsolidatingsupplychains.OneChinese-Australianbusinessownerdescribedsourcingcardboardpackagingforaclient:‘They’resoexpensivehere,butinChinait’ssocheap…[What’s]reallyimportantforbusinessisyouhavetohearthepeople.Youhavetoknowwhatthey’rethinking.Andyouhavetoknowwheretheneedis’(Rizvietal2016).
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Theseformsofstate–provincial,sister-cityandcivilsocietycooperationareanunderutilisedresourceforimprovingtheoverallbilateralrelationship—asarepeakbusinessgroups.TheroleofthesebodiescouldbeexpandedandformalisedintoanewAustralia–ChinaLeadersForum,whichwouldbetaskedwithidentifyingpracticalareasforcooperation,andcontinuebuildingtheunderstandingandtrustthatisthebasisofatruepartnership.
Programsofcooperationamongdifferentlayersofsocietywillalsobecrucialinthedevelopmentandmaturationofeachnation’s‘brand’intheothercountry(Box3.11).
BOx 3.11: BRAnD AusTRALiA AnD BRAnD CHinA
Acountry’s‘brand’representsthepromise,inherentvalueandreputation,realorperceived,thatitsnamepossessesintheeyesofoverseasconsumers,tourists,businesspeopleandotherforeignentities.WhatisChina’sideaof‘brandAustralia’,and,conversely,howdoAustraliansperceive‘brandChina’,ineconomic,cultural,politicalandothersenses?
AustraliaenjoysapositivebrandimageinChina.ManyChinesebelievethatAustraliaisa‘friendly’placewithpleasantweatherandmanyopenspaces.Inrecentyears,Australianconsumerproducts,includingfood,agriculturalgoodsandhealthsupplements,havebecomeverypopularwithChineseconsumersastheyareconsideredtobehighquality,healthyandmostimportantlychemical-free,whereastheequivalentChineseproductsarenot.Australiaisperceivedasnon-threatening,andtherearefewnegativeperceptionsofthecountryinmostChinesepeople’sview.Butthatcanchange.IncidentssuchastheproblemssurroundingChinalcoinvestmentsinAustraliahaveanadverseimpactonChineseperceptionsofAustralia’s‘brand’,aswouldproblemswithAustraliangoods.
InAustralia,thereisawiderrangeofperceptionsofChina.AustraliansrespectChina’sachievementsinmoderndevelopment.Arecentpollacrossseveralcountriessuggeststhat80percentofAustralianrespondentsacknowledgedChinaasarisingpower.ElementsofChineseculturelikeChinesefood,kungfuandthehard-workingethicoftheChinesearealsowidelyadmiredandwelcomedinAustralia’smulticulturalsociety.China’spoliticalsystemevokesanxietiesandthereareoftennegativereactionstoChineseinvestmentinAustralia,particularlyinrealestate.Howeverunfairly,China’sconsumerbrandsareoftenperceivedascheapandofinferiorquality,eventhoughChinanowmanufactures—andAustralianowbuysfromChina—avastrangeofworld-classproducts,suchastheiPhone.EventhoughthesearesometimesdesignedintheUnitedStatesorJapan,theyare‘madeinChina’.QualitywhitegoodslikeHaierandMidea,aswellasotherforeignbrandsmadeinChina,provethatChinaiscapableofmakingworld-classconsumerproducts.ThiscouldhelpChinaenhanceitsownnationalbrandintheprocess.
Governmentscanplayaroleinbuildinganationalbrand.OrganisationslikeAustradeandTourismAustraliaworktoenhancethetradeopportunitiesinChinaofproductsandservicesthatplayontheAustralianbrand:milkpowder,educationandtourism,forexample.ForChinesecompanies,theChinaCouncilforthePromotionofInternationalTradeorganisesChinesetradedelegationstovisitothercountries.ItalsomanagesoverseastradeshowsforChineseorganisationsandassistsChinesecompaniestoattendoverseaseconomicconferences,exhibitionsandforums.
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Developinganationalbrandisonewayofdevelopingsoftpower.Thiscansometimestaketheformofculturaldiplomacyinitiatives,suchastheConfuciusInstitutessetuparoundtheworldtopromoteChineseculture.
OntworecentglobalsoftpowerrankingsAustraliawaslistedasthesixthmosteffectivecountryatdeployingitssoftpower,behindmuchmorepowerfulcountriessuchasUnitedStates,theUnitedKingdom,France,GermanyandJapan(Monocle2016;PortlandCommunications2016).Chinalagsbehindontheserankings,withthecountry’ssoftpowerrankedat21stand30thintheMonocleandPortlandCommunicationsranking,respectively.ThisimpliesthatChina’ssoftpowerscoreisoutofsyncwithitsoveralleconomicandpoliticalaccomplishments.
WhiletheserankingsarebothconductedbyWesternorganisationsandmaynotportraysentimenttowardsAustraliaorChinaacrosstheentirespectrumofcultures,itdoesringtruethat,comparedtothesizeofitspopulationandeconomy,Australiacarriessignificantweightintermsofsoftpower.
Nationalbrandchanges,ascountriesdevelopandchange.BoththeAustralianandChinesegovernmentshavearoletoplayinfosteringthisfamiliaritythroughmorepeople-to-peopleandculturalexchangesthatwillreconfigureperceptionsandplayanimportantroleintheevolutionofeachcountries’nationalbrandintheothercountry.ThenuancedmutualunderstandingthatemergesfromthiswillallowbothChineseandAustraliancitizenstogainthemostinworkingtogetherontherelationship.
Thescopeforamaturinganddeepeningofthebilateraltraderelationshipisclear.Australiawillexpanditsexportsinhighvalue-addedgoodsandservices,thoughitsresourceabundancewillcontinuetomakeitanimportantsupplierofenergyandmineralstoChina.However,realisingthefullpotentialofthisrelationshipdependsonactiveengagementonthepartofpublicandprivatesectorsinbothcountries,andonthevigorousprosecutionofrespectiveagendafordomesticreform.
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CHAPTER4investment, human capital and labour movement
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Key messAges
Two-wayflowsofinvestment,peopleandideasareessentialtoadvancingeconomic,politicalandsocialtiesbetweenAustraliaandChina,andtorealisethefullpotentialforexpandingtradeinhighervalue-addedgoodsandmoresophisticatedservices.Chinahasbecomeamajorsupplierofinternationalcapital.Australia’sresourceendowmentsmadeitanaturaldestinationforChineseinvestmentduringtheminingboom.Australianowfacesglobalcompetitiontoattracttheforeigncapitalitneedstoservicegrowthinagriculture,tourismandinfrastructure.
China’sdomesticeconomictransformationisprioritisingdevelopmentoftheservicessector.InthesamewaythatforeigninvestmentintoChina’smanufacturingsectormadeChinaahighlycompetitivegoodsproducer,foreigninvestmentintoservicesindustrieswillimprovequality,reducecostsandfurthertheChinesereformagenda.Thefreerexchangeofpeopleandideaswillbecrucialtostrengtheningbilateralinvestmentandtrade.MorecanbedonetoleveragediasporacommunitiesinfacilitatingeconomicexchangeandinensuringthatChineseandAustralianstudents,touristsandbusinesspeopleenjoygreaterfreedomofmovement.
Theargumentinthechapterconcludesthat:
• TheChAFTAframeworkopenstheopportunitytoupgradetheexistingAustralia–ChinaBilateralInvestmentTreaty(BIT)byadoptingtheprinciplesofnationaltreatmentandanegativelistoninvestmentaccess.TheearlynegotiationsofanewAustralia–ChinainvestmentagreementinthisframeworkwillalsoassisttheprogresswithRCEPinvestmentprotocolsandChina’sBITnegotiationswiththeUnitedStatesandtheEU.
• Australia’scurrentforeigninvestmentreviewregimerisksdeterringbeneficialChinesecapitalbyincreasingthecostsandtheuncertaintyofdoingbusinessinAustralia—especiallyascapitallookingtoinvestinmanufacturing,agriculture,tourismandservicesisfarmoremobilecomparedtothatseekingresourcesinvestment.Australiashouldinstituteamorepredictableandtransparentinvestmentreviewprocessthatfocusesonongoingriskmanagementratherthanapre-approvalprocess,andmovetoa‘notificationandcompliance’systemforcommerciallycertifiedstate-ownedenterprises.ForeigninvestmentpolicyinChinaisintheearlystagesofliberalisation.Chinashouldapproachforeigninvestmentfromtheperspectiveofnegative-listingandnationaltreatment,andshouldreconsidersector-specificinvestmentrestrictionsthatapplytobothdomesticandforeigninvestors.
• Bothsideswouldbenefitfromclearframeworksforcooperationonthebilateralmovementofpeopleandideas.Abilateralworkingpartyconsistingofofficial,business,tourismandeducationrepresentativesshouldbeconvenedtoreviewtheadequacyofvisaarrangementsonbothsides.Existinginitiatives,suchasAustralia’sSignificantInvestorVisaprogram,couldbemorewidelyadvertisedtopromoteuptake.Bothcountriesshouldconsidermakingiteasierforoneanother’scitizenstoliveandworkineithercountry.
• Forexample:AustraliashouldconsiderrelaxingthecaponChineseworkingholidayvisas;AustralianstudentsshouldbeextendedmoreopportunitytoaccessAustralianincomecontingentloansfordegreestudyattop-rankingChineseuniversities;andAustraliashouldexpanditsnetworkofbilingualEnglish–Chineseschools.
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Fullyrealisingthepotentialfortradeinhighervalue-addedgoodsandmoresophisticatedservicesrequiresChinaandAustraliatogobeyondatransactionalrelationshipbasedonresourcesandmanufacturedgoods,towardapartnershipthatsupportslong-termtwo-wayinvestmentandtheexchangeofideasandtalentinbuildinginnovativeandmoreproductiveeconomies.Whiletheresourcestraderemainscentral,thefuturerelationshipcannotbefocusedonlyonresourcesorcontainedtoprescribedsectors.Rather,itisarelationshipthatinfuturemustencompassconnectionsbetweenalldimensionsofthebroadereconomicrelationship—tradeingoodsandservices,investmentandpeople-to-peopleconnections.
Thischapterconsidersthebenefitsfromdirectinvestmentandfrompeople-to-peopleconnectionsbetweenthetwocountries(Box4.1).Chapter5discussestheevolvingframeworkwithinwhichportfolioinvestmentandotherfinancialflowswillgrowandcapitalmarketswillintegratemorefully.
BOx 4.1: THe BeneFiTs OF FOReign DiReCT invesTmenT
Foreigninvestmenthelpsmeetthegapbetweenwhatdomesticresidentsareabletosave,andtheproductiveinvestmentopportunitiesintheeconomy.Itimprovestheglobalallocationofresourcesbyincreasinginvestmentinthecountriesthathavelowerdomesticsavingsandincreasingreturnsincountrieswithexcesssavings.
Investorsprimarilyseekareturnonthecapitaltheyinvest.Butinvestmentisalsogoodforworkers,asitequipsthemwithmorecapitalandthereforemakesthemmoreproductive.Thisincreaseswagesandlivingstandards.Localasset-holdersbenefitfrombeingabletoselltothehighestbidderontheworldmarket,makingitmoreprofitabletodevelopnewassets.
Theextentofthis‘capitaldeepening’effectappliestoallforeigninvestment,andwillbeinfluenced,amongotherthings,bytheratesoftaxationoncapital,thegeneralbusinessenvironmentandtheperceivedpoliticalriskofinvestingoffshore.
Thebenefitsofdirectinvestmentgobeyondsimplyprovidingloansorbuyingsharesinaforeigncompany,toestablishingorbuyingacontrollinginterestinthecompany,injectingnotonlycapital,butalsocruciallinkagestoforeignmarketsandtechnologies,whichfurtherexpandsexportopportunitiesforproducersandopensupawiderrangeofcheapergoodsforconsumers.
Unlikeportfolioinvestment,whichcanbeeasilyliquidatedandtransferredinresponsetofinancialmarketfluctuations,directinvestmenttendstobuildlonger-livedassetsthatprovidereturnsoveryearsorevendecades,includinglong-terminvestmentininfrastructure.Foreigndirectinvestment(FDI)createspowerfullong-termcommercialinterestsinmaintaininggoodrelationsbetweencountries.
Directinvestmentabroaddeliversbenefitsthatcanspillovertothewholeeconomy—includingfamiliarisinglocalswithnewproductiontechniquesandbringinginternationalstandardsintodomesticproduction.
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Australia’spopulationislowrelativetoitslandareaandnaturalresources.Foreigninvestmentinmines,ports,transportinfrastructure,technology,landandfactoriesisessentialtotransformresourceendowmentsintorealwealth.ForeigncapitalinAustraliacamefirstfromtheUnitedKingdom,butmorerecentwaveshavecomefromtheUnitedStates,JapanandnowChina.Australiahashistoricallyrunasmall,butpersistent,currentaccountdeficit.ThatmeansthatAustraliansinvestmorethantheysave,withthedifferencemadeupbyborrowingfromabroad.ReducingforeigninvestmentwouldmeanthatmanyproductiveinvestmentsinAustraliacouldsimplynolongerbefunded.Thatwouldlowerproductivity,andreducethestandardoflivingandtheeconomicstrengthofthecountry.
DespitebeingafoundationofAustralia’seconomicprosperity,theroleofforeigninvestmentisnotalwaysfullyorwidelyunderstoodinthecommunity.ConcernsinAustraliaabout‘sellingoffthefarm’andshiftingprofitsoverseasmissthepointthatforeigninvestmentenhancestheproductivityoflocallabour,liftswagesandincreasesthevalueofdomesticassets.InvestmentininfrastructureandbetterlinkagestoforeignmarketsfurtherexpandexportopportunitiesforAustralianproducers,andopenupawiderrangeofcheapergoodsforAustralianconsumers.Australianasset-holdersbenefitfrombeingabletoselltothehighestbidderontheworldmarket,makingitmoreprofitabletodevelopnewassets.
ForeigninvestmenthasalsoplayedacrucialroleinChina’sreformandopeningsince1978.InvestorsfromHongKongandTaiwanwerethefirsttodevelopChina’semergingcoastaltradinghubs.FDIhelpedtransplanttherulesandinstitutionsofamodernmarketeconomyintoChina.Forexample,whenaspecialeconomiczonewasestablishedinShenzhenin1980,thatcitywasasmallfishingtown.ItisnowoneofChina’slargestandwealthiestmetropolises.
Despitephenomenallyhighratesofinvestmentoverthepasttwodecades,Chinahasrunacurrentaccountsurpluseveryyearsince1994.Thismeansthat,unlikeAustralia,Chinadoesnotdependonglobalsavingstomeetitsinvestmentneedsbecauseitsownsavingsareveryhigh.ButChina’seconomicgrowth,particularlyinitsexport-orientedmanufacturingsector,hasreliedheavilyonthetechnologytransferandadvancedlabourskillsthatcomewithFDI.
OnewayofdealingwithpersistentcurrentaccountsurpluseswasfortheChinesegovernmenttoallowChinesecompaniestoinvestabroad.This‘goingout’policywaslaunchedin1999andformallyincludedinChina’ssubsequentFiveYearPlans.AswellasprovidingahigherreturnonChinesesavingsthanthatavailableonUSgovernmentdebt,thestatedgoalsofthispolicyaretoensurethatChinacanaccessthenaturalresourcesitneedsforeconomicdevelopment,accessexportmarketsandacquireforeigntechnologyneededtoimproveeconomiccapacityinChina(GovernmentofChina2006).
Morerecently,China’sOBORinitiative,anditsleadershipinestablishingthemultilateralAIIB,seeknotjusttoconnectChinatoforeignmarkets,butalsotobuildconnectivity—andthereforeprosperity—acrosstheregion.ThiswillprovideinvestmentopportunitiestoexpandinfrastructureinvestmentsinAustralia,includingreapingthebenefitsofagriculturalinvestmentinNorthernAustralia.
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The benefits of opening up to foreign investment and services
Tocapturethegainsfromthesepolicyinitiatives,therewillneedtobefurtherpolicyengagementofthekindrecommendedintheargumentofthisReport.
TheeconomicbenefitsofChina’sopeninguptoforeigncapitalandtocompetitionintheservicessectorareverysubstantial.
Inordertogivearoughquantificationofthesebenefits,modellingcanbeusedtosimulatetheeffectofservicessectorandfinancialmarketreformthatmightbesetintrainbyastrongpolicycommitmenttoopeningup,utilisingtheGTAPmodelintroducedinChapter3(Gretton2016).
Domesticreformsacrosstheservicessectorswouldimprovetheproductivityofvalue-addinglabourandcapitalinproductionandwouldbetradeliberalising.Themodellingsuggests,forexample,thatforevery1percentimprovementintheproductivityofserviceprovisioninChina,ChineseGDPcouldbeincreasedby0.68percent,withasmallbutpositiveflow-oneffecttoAustralia.ThesameproportionalincreaseintheproductivityofserviceprovisioninAustraliacouldgenerateanincreaseinAustralianGDPof1.13percent.
Barrierstotheefficientfunctioningofthefinancialsystemariseforavarietyofreasons,includingownershiprestrictions,governmentdirectivesontheuseoffinance,domesticmarketpracticesandregulationsfavouringdesignatedactivities,aswellasdiscriminationbetweenforeignanddomesticinvestors.Higherinvestmentcostsraisethepriceofaneffectiveunitofcapitalusedinproductionandreducethecompetitivenessofcapital-usingactivitiesandpotentialoutput.AreductionintheriskpremiumofinvestmentinChinaachievedthroughdomesticfinancialsystemreformswouldlowertherateofreturnrequiredbydomesticandforeigninvestorstoundertakenewinvestment.
Themodellingestimatessuggestthata10percentreductioninthecostofcapitalthroughfinancialmarketreformcouldincreaseChina’sGDPby5.7percentabovelevelsthatwouldotherwisebeachievedinthelongerterm.Thisprojectiondoesnotnecessarilyrepresenttheeffectsofasinglepolicy,butratheraconcertedefforttoimprovetheoperationofthefinancialsystem.Thetimehorizonoverwhichthebenefitscouldbeachievedwould,inturn,dependonthepaceofreform,therateatwhichbusinessestookupnewopportunitiesandthetransitionoflabourtothesenewactivities.
WhiletheseprojectionsprovideanindicationofthepotentialeconomicbenefitsoftradeliberalisationandeconomicreformtowardsbetterfunctioningmarketsforgoodsandservicesandamoreefficientfinancialsysteminChinaandinAustralia,theydonotdirectlycapturealleffects.Beyondreducingtherisksassociatedwithinvestment,forexample,awell-functioningandefficientfinancialsectorinChinashouldalsoallocatecapitaltothemostprofitablefirmsandexertpressureonthosefirmstomaintainhighstandardsofcorporategovernance,affordingadditionalpotentialproductivitybenefits.DistributionaleffectswithintheChineseeconomycouldalsofollow,suchasbetweengovernment-ownedorcontrolledsectorsandothersectorswithintheeconomy,andbetweentheChineseeconomyandothereconomies.Overall,aloweringofinvestmentriskinChinawouldbeexpectedtoraiseglobaleconomicactivityandincomes.
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Thesesimulationsoftheeffectsofalternativepolicydirectionsillustratetheimportanceofleveragingbroaderregionalandglobaltradeliberalisationagendastothebilateralagenda,andpressingaheadwithatradeliberalisationagendathatgoesbeyondmerchandisetradetoincludetheservicessector,thefinancialsectorandinvestmentreform.CapturingthesegainswillbecentraltorealisingthepotentialofthenextphaseofAustralia–Chinaeconomicengagement.Therestofthischapterconsidersinmoredetailthechallengesthatpolicymakersmustnavigateandthespecificreformsthatwillbenecessaryforsecuringthebenefitsfromliberalisation.
Adapting to Chinese FDi in Australia
Inthe1980s,China’stwolargestinvestmentsoutsideofHongKongwerebothinAustralia—ChinaInternationalTrustandInvestmentCorporation(CITIC)investedinthePortlandaluminiumsmelter,andtheChineseMinistryofMetallurgicalIndustrytooka40percentstakeinanewironminewithRioTintoatMtChannarinWesternAustralia.ThesetwoinvestmentsoperationalisedimportantaspectsofChina’sreformandopeningtradeandeconomicstrategy.Today,investmentfromChinaintotheAustralianmarkethasdiversifiedintoothersectors.Lastyear,China’soutboundinvestmentreachedUS$118billion,anincreaseof15percenton2014.AustraliaisamajorinvestmentmarketforChina.In2015,ChineseinvestmentinAustraliaamountedtoUS$11billion—a33percentincreaseontheyearbefore(Figure4.1).
TheKPMG–UniversityofSydneydatabaseonChinesedirectinvestmentinAustraliadetailsthechangingtrends.Withtheresourceboomover,Australiahasfallenbacktobeonlythesecond-largestdestinationforChinesedirectinvestmentaftertheUnitedStates.Butrelativetoeconomicsize,AustraliaisChina’smostimportantultimatedestinationforforeigninvestment.WithareductioninChineseinvestmentinresourcesastheresourcesboomends,45percentoftherecordedinboundinvestmentin2015wasinrealestate.TheshiftawayfromresourcessawprivateChineseinvestorsexceedingChineseSOEinvestmentforthefirsttimein2014(KPMG2016).The2015sharewas49percentSOE,48percentprivate,3percentSOE–privatejointventure.
MOFCOMandMFAidentifyopportunitiesforChineseinvestmentinAustralianagriculture,aquaculture,dairy,ironore,naturalgas,coal,bauxiteminingandaluminiumsmelting,shaleoil,pharmaceuticalproduction,trade,retail,transport,research,finance,telecommunicationsandtourism(MFA2014).Thepromotionofbilateralinvestmentgivesmomentumtothedevelopmentofbilateraltrade.
ThelegacyoftheplannedeconomyhasmeantthatallmajorChineseinvestments—whetherprivateorstate-owned,domesticorforeign—historicallyrequiredgovernmentapprovals.Ontopofproject-levelapprovals,restrictionsontheChinesecapitalaccounthavelimitedtheabilityofChinesefirmstoinvestoffshore.However,therequirementsforproject-levelinvestmentapprovalshavebeenrelaxedovertime,andasrestrictionsonthecapitalaccountareremoved,theflowofChineseinvestmentislikelytoexpanddramatically.AccordingtoABSdataforforeigninvestmentstocksin2015,Chinaisonlythefifth-largestdirectinvestorinAustraliabehindtheUnitedStates,Japan,theUnitedKingdomandtheNetherlands.However,ChinesedirectinvestmentinAustraliahasbeenincreasingrapidlyfromalowbase,growingfromA$3.6billionin2008toA$35billionin2015(ABS2016f).
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Figure 4.1: stock of foreign direct investment in Australia by source (2014 A$ billion)
0 20 $
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Japan
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Source:ABSCat.No.5352.0,table2,2016f.
ThespeedwithwhichChinahasexpandeditsglobalinvestmenthasraisedsomeconcernsintheAustraliancommunity.Theseconcernsarenotnew,andnotuniquetoChineseinvestment(Box4.2).TheForeignInvestmentReviewBoard(FIRB)processhashelpedallaypopularconcernsaboutnewwavesofforeigninvestmentinAustraliasince1976.ButthediscretionaccordedtotheAustralianTreasurertoblockcertainproposalson‘nationalinterest’groundsmeansthatindividualcasescanbecomehighlypoliticised.Whileinpractice,theformalpowerisrarelyused,itneverthelessaddstotheuncertainty,andthereforetherisks,forforeigncompaniesseekingtoinvestinAustralia.
AslongasAustraliawascompetingforinvestmenttodevelopitsrichnaturalresourceendowments,thisriskmayhavebeentrivialcomparedtothesovereignrisksinvolvedinmanyotherresource-richnations.Internationalcapitallookingtoinvestinmanufacturing,agriculture,tourismandservicesismuchmoremobile.Inthesesectors,Australia’scompetitorsareadvancedeconomiesinEurope,AsiaandNorthAmerica.AmongstitsOECDpeers,Australia’sregimeranksasthesixth-mostrestrictivebasedontheOECD’sindexofforeignequityrestrictions,screeningandotherpriorapprovalrequirements,rulesforkeypersonnelandotherrestrictionsontheoperationofforeignenterprises(Figure4.2).Itisonlyslightlymoreliberalthantheaverageofnon-OECDmembersthatareassessed.TheChineseinwardinvestmentregime,whichisdiscussedlaterinthischapter,isthemostrestrictiveofallcountriessurveyedonthismeasure.
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BOx 4.2: POPuLAR ATTiTuDes TOWARD FOReign invesTmenT
SuccessivewavesofforeigninvestmentinAustraliafromtheUnitedKingdom,theUnitedStates,JapanandnowChinahaveallcausedcommunityanxieties(Groot1990).AGalluppollinJune1972,whichreferencedBritishandAmericaninvestors,reportedthatalmost90percentofAustralianswouldlimitthesharesthattheseforeignerscouldpurchaseinAustraliancompanies.AsurveyconductedbytheJapaneseembassyin1988foundthat36percentofAustraliansbelievedthattheirgovernmentshouldactivelydiscourageJapaneseinvestment.A1996Newspollrecorded56percentofAustraliansagreeingthatforeigninvestmentlevelswerealready‘toohigh’.
AnnualsurveysconductedbytheLowyInstituteforInternationalPolicyfrom2009to2014,afterChineseinvestmenthadbecomeprominentinAustralia,consistentlyfoundthatmorethanhalfofrespondentsagreedwiththepropositionthattheAustraliangovernmentallows‘toomuch’investmentfromChina(LowyInstitute2015).AnEssentialReportfromAugust2012suggeststhatmostAustraliansarewaryaboutinvestmentfromanyforeigngovernment-relatedentities—Chineseorotherwise(LewisandWoods2012).
AforeigninvestmentstudybyUTSresearchersin2015suggeststhattheAustralianpublicismoreconcernedabouthowlargetheshareofanAustraliancompanybeingboughtbyaforeigninvestorisratherthanwhetherthatinvestorisastate-ownedentityorwhethertheforeigninvestorisfromaparticularcountry—althoughChinaispreferredsignificantlylessthantheUnitedStatesorJapan(Laurencesonetal2015).
CommunityapprehensiontowardsFDIisequallypresentinChina—aPewGlobalAttitudessurveyfoundthat50percentofChinesebelievethatforeigncompaniesbuyinglocalcompaniesis‘bad’(PewResearchCentre2014).However,ACRI-Zogbypollingin2015foundthatChinesebusinesselitesviewAustraliaasamoreattractiveplacetoinvestthanGermany,theUnitedStates,Singapore,Canada,NewZealand,SouthKoreaandRussia(ZogbyResearchServices2015).
Potentialinvestors,andgovernments,haveanimportantroletoplayinensuringthatthedirectandindirectbenefitsofforeigninvestmentprojectsareunderstoodthroughoutwidercommunities.
SinceChAFTAcameintoforce,privateinvestmentsfromChinainmostsectorsonlyrequirescreeningwhenthetotalprojectvalueisaboveanA$1094millionthreshold.ThiseffectivelyremovesmuchofChineseprivateinvestmentfromscreening.Nevertheless,thereareexceptionsonasectoralbasis,includingmedia,airports,telecommunications,transport,defenceanduraniummining,whicharesubjecttomorerestrictivethresholds.Allapplicationstoinvestinresidentialorvacantcommerciallandarereviewed,andinvestmentsinAustralianagribusinessandpurchasesofagriculturallandalsohavestricterthresholds.
Mandatoryscreeningalsoappliestoinvestorswhichareatleast20percentownedbyaforeigngovernment.ThisprovisionhasbeenalongstandingfeatureoftheFIRBprocess,andisnotformallydirectedatChineseSOEs.GiventhatChina’sresourcessectorsandpublicutilitiesarelargelystate-owned,theseprovisionsaremorelikelytoaffectinvestorsinthesesectorswhocomefromChina.
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Figure 4.2: OeCD foreign direct investment regulatory restrictiveness index
0
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Australia Average for selectednon-OECD
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Note:Averagesareunweighted.Othernon-OECDcountriesratedbyOECDare:Argentina,Brazil,Colombia,CostaRica,Egypt,India,Indonesia,Jordan,Kazakhstan,Kyrgyzstan,Latvia,Lithuania,Malaysia,Mongolia,Morocco,Myanmar,Peru,Romania,Russia,SaudiArabia,SouthAfrica,TunisiaandUkraine.Source:OECDFDIRegulatoryRestrictivenessIndex2014b.
Forprojectssubjecttoscreening,theTreasurermayapproveaprojectsubjecttoconditions.Inthepast,thishasincludedconditionsthatproscribeparticularcorporatestructuresonforeigninvestors.Investorswhocontravenetheseorderscanfacecivilpenaltiesandpossiblecriminalprosecution,althoughinvestorscanlaterapplytochangetheconditions.
Afterreceivingapproval,andsubjecttoanyconditions,Chineseinvestmentreceivesthesametreatmentasadomesticinvestorwithrespecttodomesticlaws(‘nationaltreatment’).Chinesecompaniesfacethesamecompetition,taxation,labour,environmental,andworkplacehealthandsafetyregulationsasAustraliancompanies.Investmentsinpubliclylistedcompaniesdemandevenhigherstandardsofcorporategovernanceandtransparency.Nationaltreatmentinthiswayissubjecttorobustprotectionunderanimpartiallegalframework.
Veryfewforeigninvestmentapplicationshavebeenexplicitlyrejected(AustralianTreasury2015).Between1July2008and30June2014,theAustraliangovernmentapproved67,582suchapplications(themajoritybeingapplicationstobuyrealestate)andrejectedonly65applications,mostlyrelatingtorealestate.Thevalueofrejectedproposalsisverylowrelativetothevalueofapprovals,althoughin2010–2011thegovernmentrejectedA$8.8billion(5percent)worthofproposalscomparedtotheA$176.7billionitapproved.In2013–2014,Chinabecamethelargestsourcecountryintermsofvolumeofinvestmentapprovals(14,716),aswellastotalvalueofproposedinvestment(A$27.7billion).
Whiletheformalrejectionrateislow,itisnotclearhowmanyinvestmentproposalsarewithdrawnbeforeaformalrejectionisdelivered,ormoreimportantly,howmanypotentiallysuccessfulinvestmentprojectsaredeterredbytheuncertaintiesofthescreeningregime.SuchuncertaintyisrootedinthediscretionoftheTreasurertorejectprojectsorapplyconditionsbasedonthe‘nationalinterest’.
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TheAustralianGovernment’sDecember2015foreigninvestmentpolicyprovidessomeguidanceastothefactorsthatthegovernmentwouldtypicallyconsider.Theseincludenationalsecurity,competition,tax,theeffectontheeconomyandthecommunity,competitionandthecharacteroftheinvestor,alongwithspecificconsiderationsforagriculturalinvestment,investmentinresidentiallandandnon-governmentinvestors(FIRB2015).However,thispolicyisnotbindingontheTreasurer,andadditionalconsiderationscanbeincluded,asthepolicyisinterpretedonacase-by-casebasis.WhilethismaybereassuringfortheAustraliancommunity,itdoessoatthecostofuncertaintyforpotentialinvestors.Specifically,itcreatesanapplicationriskthatdoesnotapplytodomesticinvestors.Inparticular,asaseniormemberofgovernmentoftheday,theTreasurermayonlyconsiderthenationalinterestinresponsetoshort-termpoliticalissuesorpopularpressure.
AsAustraliaincreasinglycompeteswithotheradvancedeconomiesonthebasisofitsbusinessenvironmentratherthanitsnaturalresourceendowments,thereisnobenefitfromthegovernmentcreatingregulatoryuncertainty.Forthemostpart,Australiancompetitionlaw,labourstandards,corporategovernanceandenvironmentalregulationsshouldbeenoughtoensurethatforeigninvestorsfollowthesame‘rulesoftheroad’asdomesticinvestorsintheAustralianeconomy.
Therecenthigh-profiledecisiontorejectanapplicationforaChinesecompanytoacquirean80percentstakeinAustralia’slargestprivateland-holding,ownedbyS.Kidman&CoLtdonaccountofits‘sizeandsignificance’createsuncertaintyforChineseandotherforeigninvestors(TreasurerofAustralia2016).ThepropertyportfolioisAustralia’slargestintermsoftotallandarea,including10cattlestationsacrossfourAustralianstatesandterritories,coveringover100,000squarekilometresandsocollectivelyaccountsformorethan1percentofAustralia’stotallandarea,and2percentofitsagriculturalland(TreasurerofAustralia2015).ThepublicexplanationgivenbytheTreasurernotesthatforeignacquisitionsoflandthislargewouldnotbepermittedinmanyothercountries.ThiswouldincludeChina.
ThisReportdoesnottakeaviewonthemeritsoftheargumentinlimitingthesizeoflandparcelsavailableforforeigninvestments.However,thiscaseillustrateswelltheproblemthatthecurrentFDIregimedoesnotspecifysuchlimitsclearlyinadvance,whichwouldhaveallowedallpartiestoproceedwithmorecertaintyandavoidtheadditionalcosts,delayanduncertaintyofthereviewprocess.Italsosuggeststhatconsiderationofthebenefitsofforeigninvestoracquisitionsshouldbeproperlyjudgedindependentlyofthechoicesmadebyothercountriesonsimilarinvestmentacquisitions:itmakesnosensetoreplicatedecisionsthataredamagingwherevertheyaremade.Amarketenvironmentthatallowsthefreeentryandexitofcompanies,togetherwithsoundmarketregulationandnon-discriminatoryenforcementofAustralianlaws,islikelyabetterguaranteeofnationaleconomicwellbeingthanone-timeapprovalsofbusinesstransactionsbyFIRBinanadhocscreeningprocess.
Dealing with sensitive sectors
WhilenationaltreatmentforforeigninvestorslookingtocometoAustraliaisasoundprinciple,therewillbesomesectorswheretheAustraliangovernmentmightstillreservetherighttoimposesector-specificrestrictionstoguaranteenationalsecurityorprotectotherlegitimatepublicpolicyconcerns.Australiaalreadyidentifiesthesectorsinwhichadditionalrestrictionstoforeigninvestmentapply(a‘negativelist’),buttherearenobindingprinciplesthattheTreasurermustconsiderwhendecidingthesematters.
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Theforeigninvestmentregimeshouldprovideaclearlinebetweensectorsinwhichforeigninvestmentiswelcome(thereforeremovingapplicationrisk),andthoseinwhichthegovernmentretainsdiscretion.Insectorswherediscretionisretained,thenatureofthenationalinterestconsiderationsbeingappliedshouldbewellspecifiedanddefinedastightlyaspossible.Sector-specificregulatorsratherthantheTreasurermightimposetheseconsiderations.Prioritydevelopmentareasmightstillbedesignatedinwhichforeigninvestmentinlandandagribusinessisaccordedlessrestrictivetreatment.
ClearlydefiningboundariesandprovidingguidanceforpotentialinvestorsinAustralianinfrastructureisalsoimportant.Giventhelong-termnatureandverylargecapitalrequirementsofinfrastructureinvestment,thisisanidealcandidateforforeigndirectinvestment(Box4.3).ChineseinvestmentinAustralianinfrastructureassetshasbeenthecauseofpublicdebateinAustraliaonthegroundsthatsomeinfrastructureassetsmaybecriticaltoAustralia’snationaleconomicandstrategicsecurity.
BOx 4.3: inFRAsTRuCTuRe invesTmenT in AusTRALiA
Priorto1945,neithertheprivatesectornorthefederalgovernmentwereinvolvedintheprovisionofinfrastructureinAustralia:stategovernmentsprovidedthevastproportionofinfrastructure.Inthepostwaryears,federalinfrastructureinvestmentunderpinnedAustralia’srapidindustrialexpansionandurbanisation.Sincethe1950s,thepublicinvestmentshareofAustralia’stotalinfrastructureinvestmenthasremainedfairlystableatjustunder6percentofGDP.
Sincethemid-1990s,therehasbeenadeclineinpublicsectorinfrastructureinvestment.Thishasbeenmorethanoffsetbyprivatesectorinvestmentininfrastructure.
Australia’spopulationisexpectedtoreachover30millionpeopleby2031—withthree-quartersofthisgrowthoccurringinSydney,Melbourne,BrisbaneandPerth—whichwillputpressureonurbaninfrastructurethatisalreadyinhighdemand.Inordertoaddresssomeoftheseconcerns,InfrastructureAustraliareleasedanAustralianInfrastructurePlaninFebruary2016,whichoutlinesreformsforimprovinginvestment,deliveranceandusageofAustralia’sinfrastructure.
TheAustralianInfrastructurePlanhighlightsthetelecommunications,transportationandenergysectorsaswellasurbancongestionandinter-urbanconnectivityaskeyareasforinfrastructureinvestment(InfrastructureAustralia2016).ThequestionforAustralia,however,iswherewillthemoneycomefrom?
Giventhefederalgovernment’sdebtpositionisexpectedtoworsen,theavailabilityofpublicinfrastructurefundingwillbeincreasinglylimited.Fundingforinfrastructureinvestmentfromforeigninvestmentshouldthereforebemobilisedtoplayamuchlargerrole.
Thisriskmanagementisbestapproachedasamatterofbroadpolicythatensuresongoingmonitoringandmitigationofrisks,regardlessoftheidentityoftheassetowner.Foreignoperatorsinthisareacanbelegitimatelyrequiredtonotifygovernmentoftheirinvolvement,andabidebyallrelevantlawsandregulations,includinglicensingconditionsfortheoperationofkeyinfrastructure.Wherethebehaviourofaforeigninvestorbreaksthelaworthreatensnationalsecurity,thentheAustraliangovernmentshouldreservetherighttoforcedivestmentoftheasset.
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Suchanongoing,risk-managementapproachtomanagingAustraliancriticalinfrastructurewouldbemoreeffectivethanone-offscreeningatthepre-establishmentphase.ReformsalongtheselineswouldthereforeenhancethesecurityofAustralianinfrastructureassets,whilereducingtheuncertaintythatotherwisedetersforeigncapital.
AsmoreChineseconstructionandpublicutilitieslooktoexpandabroad,thereisalargeopportunitytoattractmoreChinesecapitalininfrastructure.ThepolicydirectionsuggestedinthisReportshouldnot,ofcourse,berestrictedtoChineseinvestors,orbepreferentialtothem.Wherestategovernmentschoosetopartnerwithinternationalinvestorstobuildorupgradestateinfrastructureassets,thiscanusuallybepresumedtobeinthenationalinterest.Oneoptiontoexplorewouldbetoallowthestategovernmenttoissuesomeformof‘conclusivecertificate’thataninvestmentisinthestate’sinterestandthereforedoesnotrequirethesameforeigninvestmentapprovalsthatcurrentlyapplytoforthesaleofstategovernment-ownedinfrastructureassets.
TheUnitedKingdommightprovideausefulmodelforAustralia.ThereisnolegislativeframeworkdistinguishingforeignfromdomesticinvestorsintheUK.However,certainsectorshavetheirownregulatorybodies,throughwhichforeigninvestorsmayhavetoapplyforauthorisation.Thesesectorsincludewater,gas,financialservices,mediaanddefence,allofwhichrequirepermitstosetuporacquirecompanies.ThesebodiesdonotrestrictFDIinparticular,butenforceanumberofobligations,suchastheneedtonotifysubstantialchangesinshareholdings(Box4.4).
BOx 4.4: FOReign invesTmenT in THe uniTeD KingDOm
Inthelastthreedecades,theUKhasconsistentlybeenoneofthemostsuccessfuldevelopedcountriesinattractingFDI(Driffieldetal2013).Ratherthanpre-screeninginvestors,itreliesonstrongdomesticlegalandregulatoryframeworkstoprotecttheUK’snationalinterests.IntermsofitsstockofFDI,theUKrankedthirdintheworldin2014,behindChinaandtheUnitedStates.Thatyear,whileglobaldirectinvestmentflowsfellby11percent,theUKachieveda50percentincreaseinitsinflows.TheUKledEuropeintermsofthestock,flowandprojectvolumeofFDI(UKTI2015).
InOctober2015,UKPrimeMinisterandChinesePresidentannounceda‘flagship’GBP6billionChineseinvestmentintheHinkleyPointCnuclearplantinSomerset.AChineseSOE,theChinaGeneralNuclearPowerCorporation,wouldbailouttheplant’smaindeveloper,France’sEDF.Inthesameweek,furtherinvestmentprojectswerestruckinareasasdiverseastheautomobileindustry(AstonMartin),creativeindustries(BBCWorld)andproperty(theAdvancedBusinessPark).
TheUK’sattractivenessforforeigninvestorscanbepartlyexplainedbyitslowcorporatetaxrates,aswellasadditionaltaxincentivessuchasresearchanddevelopmentandpatentcredits.TheUK’scorporatetaxrateisunder20percentandisthelowestintheG20andsignificantlylowerthanAustralia’scurrent30percentcompanytaxandtheAustraliangovernment’sannouncedtargetof25percentby2026–2027.Additionally,theUKdoesnotimposeexchangecontrolsthataffectFDIandtherearenogeographicalrestrictionsontheestablishmentofforeignbusinessesintheUK(Smith2012).
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investment from Chinese sOes
WhilenotexplicitlytargetedatSOEsfromChina,theeffectofAustralia’sforeigninvestmentregimetoscreenallforeigngovernmentinvestmentproposalshasadisproportionateimpactonChina.ThisisbecauseofthestillsignificantlegacyofSOEsinallsectorsoftheChineseeconomy,andtheircontinuedleadingroleinresources,financeandpublicutilities(Box4.5).InadditiontoSOEs,Chinacontrolslargesovereignwealthfundsthatseekfinancialreturnsaspartofadiversified,globalportfolio.Thesefundsprovideanadditionalandimportantpoolofnewinternationalinvestmentcapital,whethertheycomewithownershipcontrolthroughdirectinvestmentorwithoutownershipcontrolthroughequityinvestment.
BOx 4.5: unDeRsTAnDing CHinese sOes
DespitetheemergenceofadynamicprivatesectorinChinathatdominatesitsmanufacturingeconomy,SOEsplayanimportantroleinkeyareasoftheChineseeconomy,includingresources,energy,telecommunications,mediaandfinance.DoingbusinesswithChinainoneofthesesectorsmostlymeanshavingtodealwithSOEs.
SOEsarenolongermereinstrumentsofthegovernment,astheywerewhenChinabeganinvestingoverseasinthe1980s(forexample,intheMtChannarproject).SOEreformsinthe1990sand2000stransformedSOEsfromministriesandindustrialbureauxintomarket-orientedoperationswithcorporategovernance,commercialgoalsandassessmentsbasedonfinancialperformance.ManysubsidiariesofSOEsarepubliclylistedonsecuritiesmarketsinChina,HongKongorNewYork.ReformsannouncedinSeptember2014requireindividualSOEstobeclassifiedaccordingtowhethertheyarepursuingstrictlycommercialorbroaderpublicpolicyfunctions.
ThelargestSOEsinindustriesthatareconsideredmostvitaltothenationaleconomy,includingoilandelectricity,aresupervisedbythecentralState-ownedAssetsSupervisionandAdministrationCommission(SASAC).These106centralSOEsaremoderncorporatestructureswithhundredsofsubsidiaries.SASACoverseestheirinvestmentbehaviour,andplaysaroleinpreventing‘destructivecompetition’betweencentralSOEsintheiroverseasinvestments.InpracticethismeansdampeningwhatcansometimesbefiercecompetitionbetweentwoormoreSOEscompetinginthesamemarket.China’sprovinceseachhavetheirownprovincial-levelSOEsthatalsooperateinhighlycompetitivesectorsoftheChineseeconomy.TherearethousandsofSOEsthatcompetebothamongthemselvesandwiththeprivatesector.
OnereasontopaycloserattentiontoSOEinvestmentmightbethepotentialharmtothemarketenvironmentinthehostcountry.TheabilityofSOEstoborrowfromstate-ownedbanksandthepotentialforstatebailoutsleadstofearsthatSOEsmightacceptheavyinitiallossestodriveoutprivatecompetitorsinthehostcountry.Inreality,thecommercialconstraintsonoverseasinvestmentsbyChineseSOEshavebecomemorestringentandtheChinesestateislesswillingtobankrollandsubsidiseunprofitableprojects.
Inaddition,someSOEshaveverylargeassetholdingsand—insomesectors,includingelectricity,oilandtobacco—monopolisetheirsegmentoftheChinesedomesticmarket.Thiscanimprovethecreditworthinessofthesecompaniesevenonpurelyprivateinternational
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lendingcriteria.However,thisdomesticpositiondoesnotautomaticallyflowthroughtotheirbehaviourinoverseasmarkets.Forexample,evidencefromSOEinvestmentbehaviourintheresourcesmarketindicatesthattheyhavetendedtoincreasecompetitionandexpandsupply(Box4.6).Thegeneralapplicationofdomesticanti-monopolyprovisionsregardlessofownershiptypeisthemostappropriateresponse.
ButwhileSOEsdodominatesomeimportantsectorsoftheChineseeconomy,stateownershipisnotsynonymouswithmonopoly.SteelisoneofChina’slargestindustrialsectorsanditispredominantlystate-owned.Butthemostprominentplayersarelocal-levelSOEs,whichcompetefiercelyamongeachother.UsingthesamemeasureofindustrialconcentrationastheUnitedStatesappliestoanti-trustprovisions(theHerfindahl-Hirschmanindex),steelisnotaconcentratedmarketinChina.Moreover,onaccountofthehistoriclegacyoftheplannedeconomyinwhichalmostallindustrialproductionwasdonebySOEs,theystillcontinuetooperateinallkindsofindustrysectors.AroundhalfoftheassetsownedbylocalSOEs(whichaccountforaroundhalfoftotalstateassets)areinun-concentratedmanufacturingsectors,inwhichSOEscompetewithprivatecompanies(Hubbard2016).
BOx 4.6: CHinese gLOBAL invesTmenTs in iROn ORe
China’sglobalinvestmentsinironoreprovidevaluableinformationabouthowcompetitiveneutralityworksinpractice.From2002to2015,Chinamade30overseasdirectinvestmentsinironore,with25madebySOEs.Chinesestatebankinginstitutionsprovidedcreditbasedoninternationalbenchmarks,plusamargin,generallymakingthiscreditcheaperthaninternationalcommercialfinance.
Butdidthisdeparturefromcompetitiveneutralityharmthemarket?
TheseChineseironoreinvestorsincreasedratherthandecreasedpartnershipopportunitiesfornon-Chineseironoreinvestment.Ofthese30investments,21weremadebyfirmswithanoperatingcompetencyinmining.Onlyoneoftheinvestmentswasmadebyaspecialisedironoreminer.ChineseSOEsmostoftentookminorityequitypositionsinpartnershipwithspecialisednon-Chineseironoreminers.Jointventuresandminorityacquisitionsmadeup22ofthe30investments.
ArelatedconcernisthatChineseironoreminersmightattemptto‘lockup’suppliesofironoreusinglong-termcontractswithChinesebuyers,inanattempttoreducethesupplytoothersteelproducersinJapan,TaiwanandSouthKorea.
Butananalysisof50Chineseironoreprocurementarrangementsshowsthatonly63.8percentofprojectedironoreoutputfromChineseprojectswasreservedthroughlong-termcontractsforChinesebuyers.TheeffectofChina’soverseasironoreinvestmentswasthereforetoincreasesupplytotheglobalmarket(Hurst2015).
AccordingtoFIRB’spolicyguidance,theAustralianTreasurerconsiderswhetheraforeigngovernmentinvestmentproposalis‘commercialinnatureoriftheinvestormaybepursuingbroaderpoliticalorstrategicobjectives’(FIRB2015).TheAustraliangovernmenthasalreadyreceivedandapprovedlarge-scaleinvestmentsfromsomeofthemoststrategicallyimportantcentralSOEs,includingfromtheStateGridCorporationofChina,ChinaPowerInvestmentCorporation,MinmetalsandChina’sthreenationaloilcompanies.
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ThedifferencesbetweentheAustralianandChinesesystemsofpoliticsandgovernance(seeChapter6)cangeneratecommunityconcernsinAustraliaaboutSOEs.Anupfrontandtransparentaccountofownershipstructuresandcorporategovernancearrangementsisimportanttoshowingthataninvestorhasnothingtohide.Overtime,goodcorporatebehaviouronthepartofSOEs,andfamiliarityonthepartoflocalcommunities,shouldmakeChineseinvestmentinAustralia’sdevelopmenteasier,asithasinthecaseofotherforeigninvestmentfromdifferentsources.
Thisextendsbeyondcompaniesthatareformallystate-owned.PrivateChinesecompaniessometimeshaveclosepersonneltiesorcontractualrelationshipswithstate,politicalormilitaryinstitutions.Thisisnotinanywaysurprising.TheCommunistPartyofChinahad87.8millionmembersattheendof2014(ChinaDaily2015),includingprivateentrepreneurs,whohavebeenallowedtojointhePartysince2002.AllSOEshavePartyCommittees,asdotheChineseoperationsofmanyprivateandforeigncompanies,includingglobalmarketleadersfromtheUnitedStatessuchasWal-Mart(ChinaDaily2016).
Ratherthanapplydifferentrulesonthebasisofformalownershiprequirements,foreigninvestorsinAustraliashouldbejudgedaccordingtotheiractualbehaviour.ForeigngovernmententerprisesinvestinginAustraliacouldstillbeexpectedtonotifyFIRBoftheirinvolvement.ButSOEsshouldhavetheopportunitytoprovetheircommercialcredentials,possiblybasedonanhistoricalaccreditationmodel(BCA2014),inwhichcasetherewouldbenoneedtotreatthemdifferentlyfromprivatelyownedChinesecompanies.Alternatively,investmentproposalsfromSOEsbelowthegeneralreviewthresholdcouldbegrantedanautomaticapproval,withautomaticconditionsimposedinrelationtolegalorcorporategovernancestandards.
ThisapproachwouldnotprovideChineseSOEswithpreferentialaccess;ratheritwouldremovediscriminationcurrentlyinplacethatdisproportionatelydetersanimportantclassofpotentialChineseinvestors.
investment to transform Chinese services
Inthe1970s,China’seconomywasclosedtoforeigninvestment.Theregimeisnowsignificantlymoreopen,andChinahasbecometheworld’slargestrecipientofforeigndirectinvestmentaftertheUnitedStates.ForeigninvestmentflowsintoChinain2014totalledUS$128.5billion(UNCTAD2015).Butinvestmentrulesandtreatmentvarybetweenindustries,andtheplayingfieldbetweendomesticcompaniesandforeignenterprisesseekingtoenterChinesemarketsisnotyeteven.
ForeigncapitalinChinahasbeenmostwelcomeinthemanufacturingsectorsthatfuelledChina’sexport-ledgrowththroughthe1990sand2000s.Almostthree-quartersofforeigninvestmentinChinagoesintothemanufacturing,wholesaleandretailsectors.ThelargestinvestorsinChinaareitsAsianneighbours,suchasJapan,whichhaveparticularexpertiseinsupply-chainmanufacturing.ThereisalsoalargeinflowofforeigncapitalintoChina’srealestatesector.
Four-fifthsoftheinvestmentfromcompaniesregisteredinChinaasforeign-fundedfirmsorjointventuresareincoastalprovinces.Halfoftheinvestmentisinthreeprovinces—Jiangsu,GuangdongandShanghai.Thisreflectshistoricalpatternsintheopeninganddevelopmentof
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China’sexportindustriesandindustrialproduction.Theseareallimportant‘sisterprovinces’forAustralianstates(seeChapter3),highlightingthehugeopportunityforstategovernmentstoleveragetheserelationshipsfurther.
ForeigndirectinvestmentinChinesecompaniesisalsoimportantforChina’sindustrialandregionaldevelopmentpriorities.TheNDRCandMOFCOMprovidesector-basedforeigninvestmentguidance.Asof2015,thereare349industriesinwhichforeigninvestmentis‘encouraged’,38industriesinwhichforeigninvestmentis‘restricted’,and36industriesinwhichforeigninvestmentis‘prohibited’,withforeigninvestmentinallotherindustriesdeemed‘permitted’.Thestatusofnewsectorsisundefined.RestrictedindustriesincludekeysectorsofinterestforAustralia,suchasfinance,healthandeducation.ForeigninvestmentinChinesemediaisprohibited.
In24oftherestrictedsectors,additionalconditionsareimposedthatpreventwhollyforeign-ownedinvestorsfromenteringtheindustry.ThisisusuallyintheformofarequirementthataChinesepartnermustbethemajorityshareholder.Dependingonthescaleofinvestment,inboundinvestmentscanbeapprovedornotedatthenationalandlocallevels.Afterthis,ordinarybusinesslicencesmustbeapprovedbeforeregisteringfortaxation,customsandforeignexchange.
BusinessesseekingtoinvestinChinafaceacomplicatedregulatoryenvironment.Therearethreeseparatelawsthatgovernthecreationofforeignenterprises—theChinaForeignEquityJointVentureEnterpriseLaw,theForeignCooperativeJointVentureEnterpriseLaw,andtheForeign-InvestedEnterpriseLaw.Therearealsohundredsofsubsidiaryandlocalrulesandregulationsthataffectforeigninvestors.
Sector-andregion-specificbarrierstoinvestment,including‘behindtheborder’regulatoryrestrictionsaretreatedcomprehensivelyintheAmericanChamberofCommerce’s2015(AmCham)WhitePaper,‘AmericanBusinessinChina’.ThisReportdoesnotendorsespecificrecommendationsmadebyAmCham,butinsteadencouragesAustralianinvestorsinChinatobevocaltobothMOFCOMandDFATtoensurethattheseprovisionsareontheradarforongoingconsultationsunderChAFTA.
Whileinvestmentinsophisticatedservicessectors,suchasinsurance,financeandlaw,issignificantlymorerestricted,AustralianbankshavebeeninChinaforalongtime(seeChapter5).ButdespiteChina’sWTOcommitmentstoopenupitsbankingsystemtocompetition,thelargestAustralianbankinChina,ANZ,hasjustfourChinesebranches,twosub-branchesandoneruralbank(AustCham2012).Eachofthebanks,exceptWestpac,holdsstakesinlocalbanksbutcannotincreasetheirequityshareabove20percent.Theserestrictionsinhibitthecross-borderfinancialinfrastructureneededtounderwritemoretradeandinvestment.
Despitethis,AustraliandirectinvestmentinChinahasalsogrownsignificantlyoverthepastdecade.SuccessfulAustralianinvestmentsofarhasbeeninnicheareasincludingbanking,medicaldevices,biopharmaceuticalsandwatermanagement,andthereiscurrentlyactiveinvestmentintherenewableenergysector(Au-Yeungetal2012).AccordingtotheABS,therewaslessthanA$500millionofAustraliandirectinvestmentinChinain2004.By2015,thisstockhadgrowntooverA$14billion(ABS2016f).ThisiswellbehindAustralia’sdirectinvestmentintheUnitedStates,theUnitedKingdom,NewZealandandevenSingapore(Figure4.3).
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Figure 4.3: Recipients of Australian direct investment, 2014 (A$billion)
0 20 40
(A$ billion)
60 80 100 120
United States
United Kingdom
New Zealand
Singapore
China
Canada
Other
Note:Aninvestmentisdeemedtobea‘directinvestment’wheretheinvestorholdsatleast10percentofequityintheinvestedentity.Source:CalculationsbasedonABSCat.No.5352.02016f.
investment in Chinese services sectors
InthesamewaythatforeigninvestmentinmanufacturingmadeChinaanindustrialpowerhouse,Chinanowwantstouseforeigninvestmenttohelpdrivethetransformationofitsdomesticservicessector.Fosteringforeignparticipationandgivingfullplaytothemarketwillhelpallocatecapitalmoreefficiently.ThisbenefitsChina’seconomicdevelopment,andprovidesanopportunityforexperiencedAustralianservicesfirmstoexpandtheirmarketinChinawhilecontributingtoitstransformation.
China’soverallpolicydirectioninrelationtoinboundinvestmentisclearlyarticulatedintheNovember2013DecisionoftheThirdPlenumoftheCentralCommitteeoftheCommunistPartyofChinaonSomeMajorIssuesConcerningComprehensivelyDeepingReform(‘theDecision’).TheDecisioncommitsChinato‘stimulatetheorderlyandfreeflowofinternationalanddomesticfactorsofproduction,highlyefficientallocationofresourcesandin-depthmarketintegration,andfosternewadvantagesinparticipatinginandleadinginternationaleconomiccooperationandcompetitionatafasterpace,inordertopromotereformthroughopeningup’.
TheDecisionacknowledgestheimportantrolethatFDIcanplayinChineseeconomicreform.Specifically,theCentralCommitteecommittedtoapply‘thesamelawsandregulationsonChineseandforeigninvestment’(nationaltreatmentforforeigninvestors),aswellas‘keepforeigninvestmentpoliciesstable,transparentandpredictable’.ConsistentwithChina’stransitiontoahigher-incomeservices-basedeconomy,theDecisionemphasisedopeningarangeofservicessectors,particularly‘finance,education,cultureandhealthcare’.
Chineseauthoritieshavelongtrialledpolicyreformsinparticulargeographicareasasawayoftestingthembeforenationwideimplementation.ThecreationofaPilotFreeTradeZoneinShanghai,followedbysimilarzonesinTianjin,GuangdongandFujian,hasprovidedanadditionalplatformfromwhichtotrialtheThirdPlenumreforms.Ifthesepoliciesarejudgedtobesuccessful,theyshouldbeexpandedtoanationalscale.
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TheDecisionalsocommittedChineseauthoritiesto‘exploreamanagementmodelforforeigninvestorswithpre-entrynationaltreatmentplusthenegativelist’.Ifrealised,thiswouldeffectivelygiveforeigninvestorsthesamerightstoinvestinChinaasdomesticinvestors,subjecttospecifiedexemptions(‘thenegativelist’).TobringthegreatestgainstoChina’seconomy,thelistofexemptionsshouldbeasnarrowlyspecifiedaspossibletocoreareasofnationalsecurityandotherconcerns.InJanuary2015,MOFCOMreleasedadraftlawonforeigninvestmentthatwouldconsolidateandreplacetheexistinglaws.
Thisdraftlawwouldenshrinethe‘negativelist’principleandwouldmoveChineseinvestmentapprovalsawayfromlistsofinvestmentsthatare‘prohibited’,‘restricted’and‘encouraged’towardapresumptionthatforeigninvestmentispermitted,subjecttoawell-defined‘negativelist’ofindustrieswhererestrictionsaremaintained,andahighmonetarythresholdabovewhichscreeningisstillrequired.This‘negativelist’hasalsobecomethebasisofChina’sBITnegotiationswiththeUnitedStatesandtheEU.AfterabusinessisestablishedinChina,theyaretobeaccordednationaltreatment.
Theinvestmentlawwouldalsointroduceanexplicitnationalsecuritytest,whichwouldgivetheStateCounciltheauthoritytoapprove,approvewithconditions,orrejectapplicationsthattouchonnationaldefence,keyinfrastructure(includingtelecommunications),keycommodityresources,investmentscontrolledbyforeigngovernments,orapplicationsthatthreateneconomicstability,publicstabilityor‘anyotherfactor’whichthegovernmentconsidersnecessarytoaddress.
Whiletheseproposedscreeningarrangementsimposerestrictions,thelawwouldforthefirsttimeallowfreeinvestmentinandoutofsectorsthatarenotlistedandthatdonottouchonbroadernationalsecurityquestions.Inthecontinuingrevisionofthedraftlaw,andwhenitisimplemented,itisrecommendedthatthresholdsforreviewareasliberalaspossibleandthatthelistofrestrictedandprohibitedinvestmentsisasshortaspossible.ThiswillmaximiseitspositiveeffectontransformingChina’sservicessectors.
ButanewinvestmentlawwillnotremovealltheobstaclestodevelopingChina’sserviceindustry.Investmentsinagriculture,energy,transportation,civilaviation,telecommunications,automobiles,tobacco,aerospace,urbaninfrastructureandlarge-scaletourismdevelopmentsarestillsubjecttovariousadditionalapprovalshurdlesthatapplytobothdomesticandforeigninvestments.Nevertheless,itwouldbeasignificantmilestoneforChina’seconomicdevelopment.
Opportunity for an enhanced investment agreement
BothAustraliaandChinahavetheirowndomesticpolicyinterestsinreformingtheirtreatmentofinvestmentflows.Thesecouldbepursuedunilaterally.CooperationinthespiritoftheComprehensiveStrategicPartnershipforChangegiveseachpartnertheopportunitytoleveragereformthroughcloserpolicycoordination.
DespitetheprogressChAFTAhasmade,theagreementretainstradebarriersinsectorsofboththeAustralianandChineseeconomies.Theserestrictionsgenerallyrequirefirmswishingtoenterthesesectors(Table4.1)tobeownedormanagedresidentsofthatcountry,orrunasajointpartnership.Liberalisingthesesectorscanprovidecommercialopportunitiesinbothcountries.
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AustraliaandChinahavehadaBITsince1988.Thishasprovidedthebasiclegalframeworkthatgovernsbilateralinvestmenttodate.ItwasadaptedtoanearlierstageofChinesedevelopmentwhenChinawasstillestablishingitsbasicmarketsystemtosupportthedevelopmentofitsownexportmanufacturingsectors.
Table 4.1: Remaining barriers to investment
in Australia: in China:
• Real-estateservices
• Telecommunications
• Fishing
• Professionalservices(patentattorney,trusteecompanies,auditororliquidator,architect(NT),migrationagentandcustomsbroker)
• Shipping/freightservices
• Aviation
• Banking
• Securityservices(NSW)
• Publictransport(NT,ACTandWA)
• Biologicalresearch(QLD)
• Wineproduction(QLD)
• Tourism(QLD)
• Alcoholandtobaccoretail(NT)
• Legalservices
• Medicalanddentalservices
• Advertising/marketresearchservices
• Technicaltestingandanalysisservices
• Agriculture,forestry,huntingandfishingservices
• Mining/oilextraction
• Photographyservices
• Conventionservices
• Telecommunications
• Audiovisual/cinematheatreservices
• Retail
• Natureandlandscape/environmentalprotectionservices
• Insurance/banking/securitiesservices
• Hospitalservices(notincludingBeijing,Tianjin,Shanghai,Jiangsu,Fujian,GuangdongandHainanprovince)
• Maritimeroadandaviationtransportservices
• Constructionandrelatedengineeringservices
Source:China–AustraliaFreeTradeAgreement,Annex3Part1:ScheduleofNon-ConformingMeasures2015.
ChAFTAnowprovidesanappropriatevehicletofosterChina’sservicestransformation,andtomaintainAustralia’sstatusasapreferreddestinationformobileinvestmentcapital.Italsoprovidesopportunitytodevelopcloserlinkagesbetweenthetwocountries’agriculturalsectors.ItincludesanagreementtoreviewtheBITwithinthreeyears,andconsiderthe‘negativelist’principlethatisthebasisofChina’sBITnegotiationswithotherpartners.
Anenhancedinvestmentagreement,whichmightproceedwithintheprocesssetupbyChAFTA(thoughmoreexpeditiouslythanforeshadowed),wouldprovidecommercialcertaintytobothsides,byremovingsomeoftheapplicationsrisksandtheuncertaintyaroundestablishmentofnewenterprisesthatcurrentlyplaguebiginvestmentdecisions.Bothpartieswouldmakecommitmentstoundertakethereformssuggestedearlier.Andbothpartieswouldcontinuetobeabletoapplydomesticlawstoprotectlegitimateinterestsinsovereignty,publichealthandsecurityonanon-discriminatorybasis.
Theconclusionofanenhancedinvestmentagreementcouldbeanappropriatemilestonetomarkthe30thanniversaryoftheoriginal1988BIT.
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Therearetwomajorbenefitsfromadoptingsuchanexpeditedtimeline.
First,Australiaisanadvancedmarketeconomywithahighlydevelopedservicessector,althoughitissmallrelativetotheEUandtheUnitedStates.ThismakesAustraliaanideal‘piloteconomy’forChina’s‘negativelist’and‘nationaltreatment’approachbeforeitconcludesdealswithmuchlargermarkets.AsuccessfulAustralia–ChinainvestmentagreementcouldthereforehelpbreakthelogjaminChina’snegotiationswiththeEUandtheUnitedStates.
Second,anenhancedAustralia–Chinainvestmentagreement,basedonthemutualapplicationofthe‘negativelist’principle,wouldsetthepaceforthedevelopmentnormsrelatingtoforeigninvestment.Unliketradeingoodsandservices,whichisgovernedbyWTOdisciplines,therearenowell-developeddisciplinesandnormsforFDIflowsexceptthoseappliedatanationallevel.TheprinciplesderivingfromanewAustralian–Chineseinvestmentagreementcouldnotonlyserveasamodelforfurtherbilateralnegotiationswiththirdparties,butalsoactasthepilotandthetemplatefornewmultilateralinvestmentliberalisationruleswithinRCEP.Amultilateralarrangementgoverninginvestmentflowswouldbesuperiortobilateralagreementsbecausetheyestablishconsistentrulesacrossmultiplejurisdictions.
ThiscouldhelpcreateopportunitiesforChinaandAustraliatocooperateinIndiaandIndonesia,forexample,andtoassistregionalgrowthbyensuringthatinvestmentflowsaccordingtoeconomicproductivityratherthanpoliticalpreference.ThisisaconcreteexampleofthetypeofengagementenvisagedbytheComprehensiveStrategicPartnershipforChangenotjustinthebilateralrelationship,butalsointheregionandbeyond.
movement of people
Fromtheearliestdaysofglobaltrade,themovementofpeoplehasbeenessentialtothemovementofgoods,servicesandfinance.Inthefuture,increasedbilateralFDIandtheprovisionofservicesrequireopportunitiesforthetwo-wayexchangeofskilledlabour.Therearecurrentlyaround15,000Australiansliving,workingandstudyingintheChinesemainland,manyofwhomareAustralian-Chinese(AustralianCentreonChinaintheWorld2015).ThereisafargreaternumberofChinesecitizensliving,workingandstudyinginAustralia(seebelow).Therearemanybenefitsfromexpandingthistwo-wayflow,bothdirectlyinsupportoftradeandinvestment,andindirectlytobuildthesocialtrustandculturalunderstandingthatwillbecrucialtothedeeperlevelofcooperationenvisagedbythisReport.Thisdoesnotentailapolicyofopenbordersormassmigration,asbothAustraliaandChinaunderstandeachother’ssovereignrighttocontroltheirbordersandensuresocialstability.Butthereareopportunitiestomakethebilateralflowsofpeoplemoreconducivetomutualprosperity.
ThisReportdoesnotattempttoprovideanexhaustivetreatmentofbilateralquestionsinrelationtotheissuingofvisasandthegrantingofvisa-freestatusforAustralianandChinesecitizensineachother’scountry.Itseeksonlytonoteafewkeyareasthatneedtobeconsideredinordertobuilduptheharmoniousandfriendlysocialrelationsthatwillunderpinthenextstageintherelationship.Thereisalreadyanofficialbilateralworkinggroupthatconsiderstourismissues.Abilateralworkinggroup,ledbygovernmentandinvolvingrepresentativesfrombusiness,education,tourismandcommunitygroups,shouldbecommissionedtoreviewvisaissuesmorebroadlyandtocomeupwithaspecifictimetablefortheimplementationofneededreforms.Thiswouldincludeconsideringthecostofvisas,particularlytouristvisas,toensurethatthepricechargedforvisaapplicationsdoesnotexceedtheexpectedadministrativecostsassociatedwithprocessingtheapplication.
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Permanent migration and citizenship
ChinesehavecometoAustraliasincethegoldrushesofthemid-19thcenturyandhavehadacontinuouspresenceeversince.IncreasedrecentmigrationfromChinahasgrowntheChinesediasporacommunityinAustralia(Box4.7).The2011Censusrecorded319,000AustralianresidentswhowereborninChina,andapproximately865,000peopleinAustraliareportedthattheyhadChineseancestry,or4percentofthetotalpopulation(ABS2011).Thisdiasporaisavaluablesharedassetforthebilateralrelationship.
BecauseofAustralia’sChinesediaspora,MandarinChinesehasbecomethesecond-mostwidelyspokenlanguageotherthanEnglishinAustralia.Accordingtothe2011Census,336,410peopleinAustraliaspeakMandarinathome.Significantly,thenumberofMandarinspeakershadincreasedbyover125,000sincethe2006Census.Morethanaquarter-millionpeoplespeakCantonese,meaningthatover600,000AustraliansalreadyspeakaChineselanguage.
BOx 4.7: THe CHinese DiAsPORA in AusTRALiA
TheAustralianCouncilofLearnedAcademies’(ACOLA)2015reportSmartEngagementwithAsiaand2016reportAustralia’sDiasporaAdvantagelookedattheroleofdiasporacommunitiesasoneaspectofthelong-termengagementneededforlastingsocial,economicandpoliticalbenefits(Angetal2015;Rizvietal2016).ACOLAstressesthatpolicymakersmustengagewithabroadlyconceived‘diaspora’thatincludesmigrants,subsequentAustralian-borngenerations,thoseofmixedculturalheritage,andtemporaryresidentsinAustraliaforworkorstudy.
Diasporasareimportant,notjustbecausetheycontributetosocialandculturaldiversity,butalsoforthebusinessandprofessionallinksthattheymaintainwiththeircountriesoffamilyorigin.Diasporasusetheirlanguagecapabilities,culturalunderstandingandglobalnetworkstocirculatebusiness,informationandresources.Particularlyindevelopingtradingrelationshipswithcountrieswherelegalprotectionsandmarketnormsarestilldeveloping,theinformalnetworksoftrustandreputationamongdiasporacommunitiesareabletofacilitateinvestmentandexchange.
Sincethedaysofthegoldrush,ChinesediasporacommunitieshaveplayedacontinuousroleinAustraliansociety.Since2000,thenumberofmainlandChineseresidinginAustraliahasgrowndramatically—overhalfoftheChinesemigrantpopulationinAustraliaarrivedafter2000.Today,AustraliaboastsoneofthelargestChinesediasporacommunitiesintheWesternworld.ProjectionsestimatethatAustralia’sChinese-bornpopulationwillreach1.3millionpeoplein2031.
FourpercentofAustralianresidentsreportsomekindofChineseheritage(ABS2011).ThisproportionisthesameinNewZealand(4.0percent;171,000),muchsmallerintheUS(1.0percent;3.14million)andEnglandandWales(0.7percent;393,000),andslightlygreaterinCanada(4.5percent;1.49million)(StatisticsCanada2011;StatisticsNewZealand2013).In2014,447,400Australianresidents,or1.9percentofthepopulation,wereborninChina.Chinaisnowthethirdmostcommoncountryofbirthforoverseas-bornAustralians,behindtheUnitedKingdomandNewZealand(ABS2016d).InCanada,Chinaisthesecondmostcommoncountryofbirthforrecentimmigrants,afterthePhilippines.InNewZealand,ChinaissecondtotheUnitedKingdomonthismeasure.
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Migration,tourism,educationandinvestmenttoAustraliaallprovidearouteforChinesetoformpermanentbondswithAustralia.In2014–2015,Australiaissued27,872permanentmigrationvisastoChinesenationals,makingChinathesecond-largestsourceofnewmigrantsafterIndia(DIBP2015a).ChinawasAustralia’sfourth-largestsourceofnewlynaturalisedcitizensin2014–2015,constituting7549(5.5percent)of136,572newcitizensinthatyear,withmoreChinesethanNewZealanderstakingupAustraliancitizenship(DIBP2016a).
ButthemovementofpeoplebetweenAustraliaandChinacansometimesbeproblematic.TheChineseLawonNationalitydoesnotrecognisedualnationality,andsomenewAustraliancitizensmaynotrenouncetheirChinesecitizenship.ThismeansthattheymaycontinuetobetreatedasChinesecitizenswheninChina,andthereforenotbeinapositiontoavailthemselvesofAustralianstatusandconsularassistanceintheeventoflegalissues.ThisisparticularlyanissueforAustralianbusinesspeopleofChineseoriginconductingcommercialactivitiesinChina.
Ultimately,itistheresponsibilityofindividualstoensurethattheircitizenshipstatusisclearwithrespecttothelawsofbothcountries,anditisintheinterestsofbothcountriestohaveclearunderstandingsandagreementsregardingtherightsandlegaltreatmentoftheircitizensineachother’scountry(seefurtherdiscussioninChapter6).
Visas for significant investors
TheAustraliangovernmentalsoprovidesvisasleadingtopotentialresidencyandcitizenshipforbusinessownersandinvestors.TheseprogramsaredominatedbyChineseinvestors,whoreceivedalmost90percentoftheSignificantInvestorVisasgrantedfrom2012toMay2016.
ThereareseparatestreamsforbusinessownersandinvestorsinAustralia(A$1.5millioninvestmentthreshold)and‘significantinvestors’(A$5millioninvestmentthreshold).SuchinvestorsneedtobenominatedeitherbyastategovernmentorbyAustrade.AnewPremiumInvestmentVisa,availableonlyoninvitationfromAustrade,providesapathwaytopermanentresidencyinAustraliaafter12monthsforaninvestmentofA$15million,andisinitiallytargetedatUSinvestors.
ThesevisatypesencouragewealthyChinesetomakeapermanentconnectionwithAustralia.Australiaisnottheonlycountrythatdoesthis.Otherdevelopedeconomies,includedtheUnitedKingdom(Box4.8),alsooffervisasforpotentialinvestors,withouttryingtodirectinvestmentintoparticularsectors.
BOx 4.8: visAs FOR invesTORs AnD TOuRism in THe uniTeD KingDOm
TherearenumerousvisacategoriesforpeopleinvolvedwithFDIprojects:investors(thoseoutsidetheEuropeanEconomicAreawhowanttoinvestGBP2millionintheUK);entrepreneurs(thosewhowanttostartabusinessintheUnitedKingdom);graduateentrepreneurs(graduatesofUKuniversitieswithanapprovedbusinessidea);representativesofoverseasbusinesses;andgeneralvisas.InvestorsfromwithintheEUhavetherighttoliveandworkintheUK(UKTI2011).InvestmentpromotionprogramssuchasthoseofferedbyUKTIservetoreducetheliabilityofforeignnessfacedbyoverseasinvestors(Driffieldetal2013).TheUnitedKingdomalsoextendsvisasto‘maximise’thespendingpowerofChinesetourists(Inmanetal2015).
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SinceJuly2015,Australia’sinvestorvisashavebeenlinkedtothegovernment’sinnovationpolicy.Thiscompelssubstantialinvestmentinventurecapitalorprivateequityfunds,managedfundsorothervehiclesthatinvestinemergingcompanies.Thisisintendedtodirectinvestmentawayfromareasthatalreadyreceivelargecapitalflowsintoriskierandless-establishedareas.
Whileitisdesirabletohaveamigrationpathwaythatisopentotalentedentrepreneurs,managinginvestmentdecisionsthroughimmigrationpolicyratherthangeneralmarketprovisionsriskscreatingbubblesanddistortionsratherthandevelopingasustainableinnovationagenda.Therefore,theSignificantInvestorVisaprogramshouldhaveregularreviewsthatcontinuetoimproveitsimplementation.
ChinaalsoprovidesavisaforsignificantforeigninvestorstoresideandworkpermanentlyinChina.InlinewithChina’sforeigninvestmentpolicy,investmentthresholdsareassociatedwithwhetheraninvestmentisan‘encouraged’sectorandwhetheritisinWesternChina(US$500,000threshold),CentralChina(US$1million)orotherregions(US$2million).Permanentresidencyisalsoavailableafteratimetohigh-rankingprofessionalsanduniversityresearchers.
Butuptakeofthisvisahasbeenverylow.In2012,only1202residencypermitsweregrantedtoallcountries.UnlikeAustralia’sinvestmentvisas,whichareheavilypromotedbyAustrade,thewebsiteoftheChineseEmbassyinCanberradoesnotprovideinformationaboutpermanentresidencyopportunitiesforsignificantinvestors.BetterpublicityandpromotionofthisvisaprogramcouldhelpChinaattractforeigninvestmentandencouragemoreinvestmentinservices.
temporary skilled labour flows
OneadvantageofFDIistheopportunitytoshareknowledge,businesspracticesandtechnologyacrossbordersbywayofthemovementofskilledlabour.The1988Australia–ChinaBITsecuredtherightofinvestorsfromeachcountrytovisittheothertocarryoninvestmentbusiness,andprovidesfortheappointmentofkeytechnicalandmanagementrolesregardlessofnationality.Thisprovidespracticalsupportfordirectinvestmentonbothsides,andprovidesenoughtimetoallowbusinessprofessionalstoestablishprofessional,personalandculturalbondsbetweenthetwocountries.TheAustraliantemporaryskilledmigrationprogramisdesignedtomeetonlygenuineskillsshortagesinAustraliabutgiventheissuesthatmanyChineseinvestorsencounterinAustralia,thoughtcouldbegiventoencouragingmoreChineseskilledprofessionalstoutilisethisprogram.ThenumberofskilledChineseprofessionalsworkinginAustraliaunderthesearrangements,however,isverylow.AccordingtotheAustralianDepartmentofImmigrationandBorderProtection(DIBP2016b),from1July2015to31March2016,2080applicantsfromChinaweregrantedtemporaryworkvisas.ChinawasthethirdmostpopularsourceofworkersafterIndia(8320grants)andtheUnitedKingdom(5750).
ChAFTAprovidedmorespecificcommitments,allowingfour-yearAustralianvisastotheexecutives,managersandspecialistsofChinesefirmsoperatinginAustralia,andthree-yearvisasfortheAustralianexecutives,managersandspecialistsofAustralianfirmsinChina.Inbothcases,familyvisasarealsooffered.ThesenumbersarealsolikelytoexpandthroughtheoperationoftheInvestmentFacilitationArrangement(IFA)thatcameintoforcewithChAFTA.
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TheIFAexpandedthescopeoftemporaryskilledlabourmovementtoAustraliatomeetthelabourneedsofChinese-registeredcompaniesinvolvedinlargeinfrastructureprojectsinpriorityindustrysectors,includingfoodandagribusiness,resourcesandenergy,transport,telecommunications,powersupplyandgeneration,environmentandtourism.WheretheChineseinvestorcannotmeettheirdemandforskilledlabourfromthelocallabourmarket,theymaynegotiatewithDIBPtoimportskilledlabourerstoworkinAustraliatemporarily.
Thisisclearlyawin–winarrangement.WhiletemporarymigrantworkersaresometimesseenasdeprivingAustraliansofjobs,undertheIFAtheyarecontributingtoprojectsthatinmanycaseswouldnothavegoneaheadbutfortheforeigninvestmentandtheavailabilityofskilledtemporarylabour.Importantly,theworkersaresubjecttoAustralianemploymentstandardsandassuranceofproperimplementationofthatprovisionisimportant.Inaddition,theycreatedemandforotherless-skilledlocalworkerswhiletheprojectisunderway.Tobolstercommunityconfidenceinthescheme,regulatingbodiesneedtohaveenoughresourcestobeabletoassesswhethercompaniesarecompliantwithsafeguardobligations.
tourism
TheprospectsfortheAustralia–ChinatourismtradearediscussedinChapter3.Torealisethepotentialofthismarketoverthenextdecade,thepromotionofAustralia’snaturalenvironmentneedstobecombinedwithinvestmentinfacilitiesandlabourthatareadequatetomeetthedemandsofChinesetourists.AnexampleofamajortourisminvestmentistheA$900millioninvestmentbyChinesecompaniesWandaandRidongGrouptobuildthreehoteltowersontheGoldCoast,anareathatisnowservicedbydirectflightsfromWuhan,acityofmorethan8millionpeople.
Inadditiontoincreasedinvestment,arrangementsfacilitatingincreasedtemporarymovementsoftouristsarewelcome.TheAustraliangovernment’sannouncementofa10-yearmultiple-entrytouristvisaforChinesetouristsisanenablerofthis.Tofacilitatebusinessandtouristexchanges,theChinesegovernmentshouldextendthesametreatmenttoAustraliancitizens.Attheleast,provisionsthatprovideshortvisa-freeentrytoChinatocitizensfromBrunei,JapanandSingaporeshouldbeextendedtoAustraliancitizensonthebasisofMFNtreatment.
From1July2014to30June2015,theAustraliangovernmentgrantedover226,812temporaryvisasforyoungpeoplefromothercountriestoworkandholidayinAustraliaforuptooneyear(thesevisascanbeextendedforonemoreyear).Theseworkingholidayvisasprovidevaluableopportunitiesforyoungpeopletolearnabouteachother’sculturesandgainworkexperience,oftenbeforefinalisingtheirlonger-termstudyandcareerplans.TheyhavebeenaseedbedofinnovationandcreativityinAustralia’sexternaleconomicandculturalrelations(Figure4.4).
AgreementswerefirstsignedwiththeUK,CanadaandIrelandin1975.WithinAsia,AustraliahasbilateralagreementswithJapan(1980),SouthKorea(1995),HongKong(2001),Taiwan(2004),Thailand(2005),MalaysiaandIndonesia(2009)andBangladesh(2010).AtthesametimeasconcludingChAFTA,AustraliaandChinasignedabilateralagreementallowing5000ChinesecitizenstocometoAustraliaonworkingholidaysvisaeachyear.
Almost2900workandholidayvisasweregrantedtoChinesebetweenthecommencementoftheprograminSeptember2015andtheendofDecember(DIBP2015b).ThereisenormousdemandfortheprograminChina,withthefirst1500visaapplications‘filledinminutes’(MinisterforImmigrationandBorderProtection2015).Butbasedonthegrantsofworking
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holidayvisastoapplicantsfromothercountriesoverthe2014–2015financialyear,the5000visacapmeansthatChinawouldonlybethetwelfth-largestsourceofworkingholidaymakers,accountingforjustover2percentofthetotal.
The5000visacapimposedonChinaisonlyaroundhalfthenumberofvisasgrantedtoChinesefromHongKong,andonlyone-fifthofthenumbergrantedtoTaiwanese.UnlikemainlandChina,bothTaiwanandHongKongofferreciprocalopportunitiesforyoungAustralians,andarenotsubjecttoaquota.
Thequotashouldbeexpandedatleastsix-foldtomatchthenumberofworkingholidaymakerscurrentlyacceptedfromTaiwan.GiventheopportunitiestoexpandAustralia’sdomestictourismindustryandtomeetthevacationingdemandsofthenewChinesemiddleclass,thiswouldbeasensibleapproachbothtoincreasedemandfortourisminAustralia,andtosupplyasourceoflanguage-equippedandculturallyawareseasonalworkerstomeetthatdemand.
ChinashouldmakereciprocalopportunitiesavailableforyoungAustralianstolive,workandstudyinChina.Stepstowardthisshouldcommenceimmediately,andneednotwaituntiltheformalreviewofthebilateralagreementin2018.
Figure 4.4: Working holiday visas granted from 1 July 2014 to 30 June 2015
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Education
AustraliaandChinahavealonghistoryofeducationalexchange.China’sfirstacademicexchangeagreementwithaforeignuniversityafter1978wasestablishedbetweenPekingUniversityandtheANUinDecember1980.Sincethen,therelationshiphasexpandeddramatically.Australianuniversitieshavesignedover1200agreementswithChineseinstitutions,evenmorethanwiththeUnitedStates(UniversitiesAustralia2014).Scientificexchangeandresearchcollaborationisburgeoning(Box4.9).
ExportincomerelatedtointernationaleducationistoutedasAustralia’sthird-largestexportafterironoreandcoal,worthalmostA$20billionperyear(DepartmentofEducationandTraining2015).Australiaisthethird-mostpopulardestinationforChinesestudentsafterthe
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UnitedStatesandtheUnitedKingdom.ChinahasbeenthelargestsourceofinternationalstudentstoAustraliasince2011.Nowone-fifthofforeignstudentvisaholdersareChinese,mostofwhomstudyathighvalue-addeduniversitiesratherthanatlanguageorvocationalinstitutes(Figure4.5).
AnexampleofanewdevelopmentistherecentlyestablishedGlobalBusinessCollegeofAustralialaunchedinMelbournebyaprivateChinesefirm.ThisisthefirstChinese-ownededucationalinstitutiontoopeninAustraliathathasstudentsfromAustralia,Chinaandothercountries.ItdemonstratesthepotentialforAustraliatotapintotheexpertise(andaccesstocapital)ofChineseeducationalinvestorstoexpanditsowneducationsector.
Bycontrast,thelargestsourceofforeignstudentstoChinain2014wasSouthKorea(62,923students),followedbytheUnitedStates(24,203)andThailand(21,296).Around4700AustralianstudentsstudiedinChinain2014(ProjectAtlas2016).
Australianeducationpolicyencouragesbothshortandlonger-terminternationalstudyexperiences.Chinawasthethird-largestdestinationforshort-termexperiencesin2013,with2614Australianundergraduatesgoing,placingitbehindonlytheUnitedStatesandtheUnitedKingdom.TheAustraliangovernment’s‘NewColomboPlan’mobilityprogramsupportsover1400Australianundergraduatestoundertakeshorteducationalorwork-basedplacementinChina.In2016,Chinawasthemostpopularofthe38possibledestinations.
TheNewColomboPlanallowsforoverseasstudyofuptooneyear,inadditiontosixmonthsofinternshipplacements.However,therearefeweropportunitiesforAustralianstoaccessChinesedegree-grantinginstitutions.TheChinaScholarshipCouncilprovidesscholarshipsforoverseasstudentstostudydegreesatChineseuniversities.Privateinitiatives,suchastheBHPBillitonAustraliaChinaScholarships,whichprovideuptoA$60,000peryearforAustralianspursuingpostgraduateeducationinChina,aremostwelcome(FASIC2016).Yetbytheirnatureaccesstothesescholarshipswillbeverylimited.
BOx 4.9: COLLABORATive ReseARCH AnD sCienTiFiC exCHAnge
Collaborativeresearchisfacilitatedthroughhigh-levelprogramssuchastheAustralia–ChinaScienceandResearchFund.TheDepartmentofIndustry,InnovationandScienceandtheChineseMinistryofScienceandTechnologyjointlymanagethisfund.ItsupportsJointResearchCentres,theAustralia–ChinaScienceAcademiesSymposiaSeries,aswellasaYoungScientistExchangeProgram.Themostrecentroundofjointresearchgrants,betweenAustralianandChineseuniversitiesandgovernmentresearchinstitutions,coversfieldsrangingfromdairymanufacturing,oceanography,mineralsensingandagriculture.TheseinitiativesconcurrentlysupporttheAustraliangovernment’sNationalInnovationandScienceAgenda(MinisterforIndustry,InnovationandScience2016),aswellastheinnovationstrategyinChina’s13thFiveYearPlan.
In2015,theAustralia–ChinaYoungScientistExchangeProgramsupported13AustralianresearchersvisitingChina,and16ChineseresearchersvisitingAustraliafortwoweeks.Thisisintendedtodevelopthepotentialofearlyandmid-careerscientistsas‘scienceambassadors’andtocatalysefutureresearchcollaboration(ATSE2016).
In2012,ChinaovertooktheUnitedStatesasthenationwiththemostformalagreementsbetweendomestichighereducationinstitutionsandAustralianuniversities.
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Theseagreementsincludestudentandstaffexchangearrangementsandresearchcollaborations(UniversitiesAustralia2014).InApril2015,Australia’sGroupofEightuniversitiesbecamethefirstuniversityumbrellagrouptosignanagreementwiththeChinaScholarshipCouncil,toincreasetwo-waymobilityofstudentsandacademics.
Theimportanceofscientificandresearchexchangetostayingabreastwiththefrontiersofinnovationrecommendsthesharpelevationoftheseandotherexchangesunderthenewbi-nationalAustralia-ChinaCommissionproposedinthisReport.
TheAustraliangovernment’sHigherEducationLoansProgram(HELP),whichprovidesincome-contingentloanstoAustraliantertiarystudents,alsoprovidesloansforexpensesforuptotwosix-monthstudy-abroadexperiencesthatcontributetoanAustraliandegree.ToensurethatAustralianswithstrongChinaskillsbuildastrongfoundationforfutureacademicandbusinessrelationshipswithChina,overseasHELPloansshouldbemadeavailableforAustralianstudentstoenrolindouble-structureddegreeprogramsathighlyregardedChineseinstitutions.
ThisinitiativerecognisesthecontinuedprogressofChineseeducation.AccordingtotheQSWorldUniversityRankings,ofthetop250universitiesworldwide,11areinAustraliaandnineareinChina.BecauseHELPloansaredesignedtoberepaidatthresholdincomes,regardlessofwhethertherecipientlivesinAustraliaornot,itwouldbealower-costwayofequippingAustralianstudentswithChinaskills.
Figure 4.5: student visa holders in Australia, 30 June 2015
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Goingtheotherway,theoveronehundredthousandChinesestudentswhoalreadystudyatAustralianuniversitieseachyearwillcontinuetobuildafirmfoundationforfuturebilateraleducation.Moreover,therearealready36universitiesinChinathathaveanAustralianStudiesCentre,providinganopportunityforongoingscholarshipinChinaconcerningAustralia.TheproposedAustralia–China(Ao–Zhong)Commissioncanservetosupportandfacilitatetheseinstitutionstodevelopcapacitiesthatallowthemtobeusedasasourceofnewpolicyideasforbothgovernmentsintheareasofeconomics,trade,publicpolicy,politicalscience,internationalrelationsandthehumanities.
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Language
WhilemanyChineselearnEnglishthroughouttheirschoolandtertiaryeducation,AustraliacannotexpecttohaveacloserelationshipwithChinabyrelyingonEnglishalone.Establishingdeeprelationshipsforofficial,businessandsociallevelsrequiresmutualcomprehensionoflanguage.Thisisdifficult.LearningChinesenotonlyinvolvesbecomingproficientatthetonesofthespokenlanguage,butalsocommittingtomemorythousandsofChinesecharactersthatarerequiredforbasicliteracy.ButthereareveryfewyoungAustralianswhoareinvolvedinthiscourseofstudy.Bytheirfinalyearofschooling,only0.1ofAustralianstudentsstudyChinese,andofthese,onlyaround400arefromanon-Chinesebackground(ACRI2016).
Allstudentsshouldhaveaccesstoappropriatelanguagestreamstoensuretheireffortsandinterestcanbeappropriatelyrewarded.ThosewhoseekanopportunitytostudyChineseinschooloruniversitybutdonothaveabackgroundinChineseoutsidetheclassroommayfindthemselvesatadisadvantageiftheymustcompeteforgradeswithstudentsfromChinesebackgrounds.Bycontrast,studentswhoarealreadyproficientinChinesecanbechallengedfurthertoensuretheyhavetop-levellanguageskillsnecessaryforprofessionalcompetenceinbusiness,governmentandeducation.
OnewaytohelpyoungstudentsachieveproficiencyisbyattendingschoolsthatareformallybilingualinChineseandEnglish.OnlyahandfulofAustraliangovernmentprimaryschoolsofferbilingualeducationinwhichclassroominstructionissplitbetweenEnglishandChinese.TherearetwoVictorianprimaryschools,andoneineachoftheACT,SouthAustralia,NewSouthWalesandWesternAustraliathatteachbilingualChinese–Englishprograms(ACRI2016).Buttheseareinsufficientandad-hocwhencomparedtonationalpolicygoals—therearemorebilingualJapanese–EnglishschoolsinVictoriathanthereareChinese–Englishschoolsnationwide.
GiventhestrategicimportanceoftheAustralia–Chinarelationship,thenetworkofbilingualschoolsteachingChineseinAustraliashouldbeexpanded.ThesecouldbenetworkedandlinkedwithanequivalentnumberofbilingualschoolsinChina.ItisestimatedthatinAustraliathecostofabilinguallanguage-programinaprimaryschoolisaroundA$500,000peryear(ACRI2016).AlthoughrunningschoolsisnotafunctionalresponsibilityoftheAustralianfederalorChinesecentralgovernments,itisappropriategiventhestrategicimportanceofthiscapacity,thataportionoftheseadditionalcostsisprovidedfrompublicfunds.
TheexpansionofChinese-languageeducationsuggestedhere—boththroughincreasingtheopportunitiestostudyChinesefornon-nativespeakersthroughtohighschoolandtheexpansionofbilingualschoolnetwork—alsorequiresanexpansionofsupplyoftalentedChineseteachers.ChAFTAdoesprovideaprovisionforalimitednumberofChineselanguagetutorsonuptofour-yearcontracts.
Thegainsfromservicesandinvestmentpolicyreformsareadditionalto,andpotentiallymuchmoreimportantthan,thegainsfrommerchandisetradeliberalisation.UsingtheopeningofservicessectorsinChAFTAtoleverageupproductivity-enhancingreformsinthesesectorsinChinaandAustraliadomesticallywouldaddconsiderablytobothcountries’incomes.And,asdiscussedinChapter5indetail,financialmarketreformwithintheservicessectorwillhelpintermediatesavingstoinvestmentswherethesesavingsaremostproductive,improveaccesstocapitalandreducetheriskpremiumoncapitalinvestmentgenerally.
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CHAPTER5Financial integration
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Key messAges
Chinaisatacriticalpointofitseconomictransition,committedtocontinuedfinancialreformandcapitalaccountliberalisationwhilesimultaneouslymanagingassociateddomesticandexternalchallenges.Financialreform,capitalaccountliberalisationandinternationalisationoftheRMBareinterdependentreformprocessesthatareoccurringsimultaneously.Capitalaccountopeningmustbesequencedcarefullywithreformstostrengthenthefinancialsystem,maintainmacro-financialstabilityandallowforexchangerateflexibility.Chinesecapitalandfinancearealreadymajorforcesininternationalcapitalmarkets,creatingnewopportunitiesforinvestmentaroundtheglobe.TheongoingopeningoftheChinesecapitalaccountrepresentsawatershedinthefinancialdevelopmentoftheAsiaPacificeconomy.Managingthischangewillrequireprudent,well-informedandstrategicpolicymakinginChinaandineachoftheregion’seconomies.
IfthegovernmentsandprivatesectorsofAustraliaandChinapositionthemselvesstrategically,thesereformsofferaonce-in-a-generationopportunitytodeepentheirrelationshipinfinancialservicesandfinancialflows.AustraliahastheunprecedentedopportunitytoexportfinancialservicesintolargeandgrowingChinesemarkets,andimportincreasedvolumesofChinesecapitaltofinanceinvestment.ChinahastheopportunitytouseAustraliaasatestinggroundasitdeepensitsfinancialreformsandopensitseconomy,gainingaccesstooneofthemostdevelopedfinancialsystemsintheregionandincreasingitsreturnoncapital.TheAustralianandChinesegovernmentsshouldengagewiththebusinesssectorsofbothcountrieswhiledevelopingaformalprogramonfinancialservices,developmentandreform.ItwouldcomplementtheStrategicEconomicDialogueandengageministers,officials,regulatorsandfirmsinaworkprogramtodeepenbilateralfinancialintegrationthatwouldbefocusedon:
• PilotingtheselectreleaseofregulatoryandlicensingrestrictionsonAustralianfirmsinChinaasaphase-inforregionalliberalisation,throughexpandingthefinancialservicescomponentsofChAFTA.
• Developingaregulardialogueandamutualrecognitionframeworkbetweenfinancialregulators,andfurthersupportingthedevelopmentofRMB-denominatedassetsandsecuritieslistingsinAustralia.
• Reviewingregulatorybarriers,includingaroundtaxationandtheimpactofmacroprudentialregulationsandtaxationpolicytoensurethatAustralianandChineseentitiesarebetterabletoengagewithoneanotherintheregion.
• Promotingthebilateralandregionalopportunitiesarisingfromfinancialtechnology(FinTech).
• ResearchbetweenAustralianandChineseinstitutionsonfinancialservicestradeandcross-borderinvestment.
• Astrongerfocusonbuildingfinancialinfrastructureintoregionalinitiativesthatseektoimproveconnectivity—suchasOneBelt,OneRoad(OBOR),theAsianInfrastructureInvestmentBank(AIIB)andtheAsianDevelopmentBank(ADB)includingpaymentsystems,creditinformation,collateralregistriesandfinancialinstitutions,andensuringChinasignsonto,andAustraliaimplements,APEC’sAsiaRegionFundsPassportandbothcountriesadvocateitsuseintheregion.
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Chinaisnowatacriticalpointofitseconomictransition.Itiscommittedtodeepeningeconomicandfinancialreforminachallengingdomesticandexternalenvironment.Economicgrowthhasslowedasaresultofbothcyclicalandstructuralfactors.Theglobaleconomyisexperiencingaprolongedperiodofbelow-trendgrowthaftertheglobalfinancialcrisis,whichisimpactingadverselyonexternaldemandandcreatingmacroeconomicconditionsthatmakeChina’sreformagendamorechallengingbutevenmoreessential.Againstthisbackground,theChinesegovernmentisaimingtoadvancereformswhilemaintainingastablemacroeconomicenvironment.
The13thFiveYearPlanstatesthatChina’sfinancialsystemreformaimstocompletetheestablishmentoffinancialinstitutionsandmarketmechanisms,topromotethehealthydevelopmentofcapitalmarkets,toestablishmonetarypolicytransmissionmechanisms,todeepenreformsofthefinancialregulationframework,toraisetheefficiencyoffinancialservicesinservingtherealsectors,andtoeffectivelymitigatefinancialrisks.
Thesereforms—howevercompletelytheyareimplemented—willprofoundlyshapethefutureoftheAustralia–Chinaeconomicrelationship.Theywillhaveimplicationsacrosseconomic,politicalandsocialdimensions.ButifthegovernmentsandprivatesectorsinAustraliaandChinapositionthemselvesstrategically,thesereformsofferaonce-in-a-generationopportunitytodeepentherelationshipinfinancialservices,financialflowsandtwo-wayinvestmentwhich,atpresent,isnascentcomparedtotherelationshipinmerchandisetrade.In2015,Chinaaccountedfor31.8percentofAustralia’smerchandiseexportsbutjust11.1percentofAustralia’sfinancialservicesexports(ABS2015a).
TheearlierreformchallengeoffullyintegratingChinesecommoditiesmarketsintointernationalcommoditiesmarkets,accomplishedafterChina’sentryintotheWTOin2001,tookthetimeanddeterminedleadershipofformerpremierZhuRongjiandformerassistantministeranddirector-generaloftheInternationalRelationsDepartmentoftheMinistryofForeignEconomicRelationsandTrade,LongYongtu.OpeningChina’sfinancialsystemissimilarlyanambitionthatwillnotbeachievedquickly.Itwillrequirepoliticalcommitmentatthehighestlevels.
FinancialservicesarethelargestsinglecomponentoftheAustralianeconomy.WithA$6.4trillioninassets,thefourth-largestsuperannuationsystemintheworld,arobustregulatoryframework,thefourthmost-tradedcurrencyintheworld,someofthelargestbanksintheworldbymarketcapitalisation,andoneoftheleastrestrictivefinancialindustriesintheregion,Australiahasaclearcomparativeadvantageinexportingfinancialservicesintotheregion(AusterandFoo2015).InvestingindeeperlinksandgreaterengagementwithgrowingChinesemarketsoffersanimmenseopportunitytotheAustralianfinancialservicesindustry.
Astheworld’slargestsaver,Chinawillplayamajorroleinshapingtheglobalfinancialsystemintothefutureasitsinternationalinvestmentpositiondeepensanditallocatesitssavingsglobally.TheroleofChinesecapitalintheglobaleconomyispoisedtogrowsubstantially.Basedonthehistoricalexperienceofothercountries,Chinawillbecomeoneoftheworld’slargestcross-borderinvestorsbytheendofthisdecade,withoffshoreassetstriplingby2020(HanemannandHuotari2016).InthesamewayChina’stradesurplushasshapedtheglobaltradingsysteminthepastfewdecades,China’soutboundcapitalwillprofoundlyshapetheglobalfinancialsystemoverthecomingdecades.
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ForChina,Australiacanhelpprovidethefinancialproductsandservicesinbanking,insurance,pensionservicesandwealthmanagementthatwillbeincreasinglydemandedbytheChinesepeopleasChina’sreformsdeepen.Moreimportantly,AustraliaoffersChinatheopportunityofatestinggroundforreformsthatwillsupportitscontinuedopeningandfinancialintegration,bothregionallyandglobally.Australia’ssophisticated,globallycompetitiveandwell-regulatedfinancialmarketscanactasaneffectivestepping-stoneforChina’scontinuedopeningtotheregion.AustraliacansupportChinaacrossmanyofthereformsitisundertaking,includingexpandingaccesstoinsurance,liberalisinginterestrates,continuingtheinternationalisationoftherenminbi(RMB),raisingtheproportionofdirectfinancialintermediation,promotinginclusivefinanceandhelpingstrengthenfinancialandprudentialregulationsandtheinstitutionsthatunderpinthem.
Butbuildingthisrelationshipwillnothappenonitsown.Itisanambitionthatwillnotbeachievedquicklyandwillbemuchmorechallengingthanwasthecaseinbuildingtherelationshipinmerchandisetrade.AustralianandChinesegovernmentsandprivatesectorsneedtostrategicallypositionthemselvesandbuildthepolicyinfrastructurenecessarytofosterthisrelationship.
Thereareanumberofmeasuresthroughwhichthispositioningcanbeachieved.TheAustralianandChinesegovernmentsshoulddevelopaprogramofformalengagementonfinancialservicesreform.ItwouldcomplementtheStrategicEconomicDialogue(SED)andengageministers,officials,regulatorsandfirmsinaworkprogramtodeepenbilateralfinancialintegration.
Therearealsoopportunitiesforpartnershipinregionalfinancialcooperation.ThisincludesbuildingabilateralfocusonfinancialinfrastructureinregionalinitiativessuchasOBORandtheAIIB,toimprovepaymentsystems,creditinformationbureaus,collateralregistriesandfinancialintermediariesandinstitutionsthroughouttheAsiaPacific.Chinashouldalsosignonto,andAustraliashouldimplement,APEC’sAsiaRegionFundsPassport.Bothcountriesshouldadvocateitsgreateruseintheregion.
Thesereformsalsoinvolverisksthatneedtobemanaged.Themostsignificantriskisassociatedwiththesequencingofthereforms.Thereisadangerofprecipitouslyremovingrestrictionsoncapitalaccounttransactionsbeforethedomesticfinancialsystemisabletomanagetheebbsandflowsofforeigncapital.Capitalaccountopeningmustbecarefullysequencedwithreformstostrengthenthefinancialsystem,safeguardmacro-financialstabilityandmaketheexchangeratemoreflexible(IMF2015b).Deepeningfinancialmarketsandincreasingcapitalflowscanalsocarryrisksfortheregion.Thesereformswillchangethenatureofregionalfinanciallinkages,astradeliberalisationdidtwodecadesago,withimplicationsnotjustforfinancebutalsofortheflowsoftrade,capitalandpeople.Finally,thereisariskthatslowinggrowthreducesthemomentumforreform,whichcouldthenslowgrowthfurtherandcreateevengreateruncertaintyandvolatility.
FinancialintegrationisthevitalnextstepinstrengtheningtherelationshipbetweenAustraliaandChina.ItcontinuesastrongtraditionintheAustralia–Chinarelationship,exemplifiedinthehistoryoftherelationship(seeChapters1and6).GiventhealreadycloseeconomicandtradelinkagesbetweenAustraliaandChina,AustraliahasaspecialroletoplayintheprogressingofreformandfinancialdeepeninginChina.
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integration to date: Australia, China and the region
AustraliaandChinaarehighlyintegratedintwo-waymerchandisetrade,butmuchlesssoinfinancialservicesandcross-borderfinancialflows.In2015,Chinaaccountedforalmost35percentofAustralia’smerchandiseexports,butjust11.1percentofAustralia’sfinancialservicesexports(ABS2015b).
Australiahasaservices-basedeconomy,withtheservicessectoraccountingforaround82percentoftheeconomy’srealgrossvalueadded(GVA)andmorethan85percentofemployment(AusterandFoo2015).Financialservicesplayaparticularlystrongrole.ThefinancialservicesindustryisthelargestsingleindustrialsegmentintheAustralianeconomyonaGVAbasis,generatingA$146.4billionor8.8percentoftotaloutputasatMarch2016—slightlymorethantheminingindustryat8.8percent(ABS2016e).
Despiteitslowbase,China’sshareofAustralia’sfinancialservicesexportsisgrowingrapidly.Forexample,exportsofinsuranceandpensionservicesfromAustraliatoChinaincreasedfromA$5millionin2000toA$49millionin2014(downfromapeakofA$53millionin2013),andnowmakeup9.1percentofallexportsinthatcategorycomparedto0.6percentin2000(ABS2015b).
GreaterfinancialintegrationbetweenAustraliaandChinahasbeenfacilitatedbyacombinationofofficialandprivate-sectorengagement.DirecttradingbetweentheRMBandtheAustraliandollarwasfacilitatedbyabilateralagreementsignedbytheAustralianprimeministerandtheChinesepresidentinApril2013inShanghai.Thepracticalimpactofthiswastoreducethecostsofcurrencyconversionbyremovingintermediarycurrencies.ThisagreementsawanincreaseintradingbetweenthetwocurrenciesintheonshorespotmarketfromUS$324millioninMarch2013tooverUS$3.1billioninMaythesameyear(Finsia2014).However,thistradehascomebacksincethen.
TheuseoftheRMBforcross-bordertradeandinvestmenttransactionshasincreasednoticeablyoverrecentyearsandthemarketfortheRMBinanumberofjurisdictionsoutsideofmainlandChina—knownas‘offshorecentres’—hasdevelopedfurther.ThistrendisalsoevidentinAustralia(Hatzvietal2014).TheuseofRMBbyAustralianentitieshasincreased,althoughthereremainsmuchscopeforfurthergrowth.AnumberofpolicyinitiativeshavebeenrecentlyagreedbetweentheChineseandAustralianauthoritiesdesignedtoallowthelocalRMBmarkettodevelop.TheseincludetheestablishmentofanofficialRMBclearingbankinAustraliaandaquotathatallowsAustralian-basedentitiestoinvestinmainlandChina’sfinancialmarketsaspartoftheRMBQualifiedForeignInstitutionalInvestor(RQFII)programdiscussedfurtherbelow(Hatzvietal2014).
HavinganofficialRMBclearinghubmeansthattherewillbeimprovedefficiencyinprocessingRMBpaymentsandconversions,therewillbebetterliquidityinthemarketand,mostimportantly,thiswillincreaseconfidenceforAustraliancorporatesindealingwithfamiliarlocalinstitutions.Similarly,in2014,theAustralianSecuritiesExchange(ASX)launchedanRMBsettlementservice,enablingAustraliancompaniestotakeormakepaymentsinChinesecurrencyinnearreal-time,reducingtheriskandthecostofdoingbusinesswithChina.ThesewillbecrucialstepsindrivingincreasedintegrationbetweenAustraliaandChina.
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Thesedevelopmentsbuildonexistinginitiatives,includingthelocalcurrencyswapagreementbetweentheReserveBankofAustralia(RBA)andthePeople’sBankofChina(PBoC)signedin2012andrenewedin2015,andtheRBA’sinvestmentofaportionofitsforeigncurrencyreservesinRMB-denominatedassets.TherehasalsobeenongoingengagementonRMBinternationalisationbetweenAustralianofficials(includingfromtheRBAandtheTreasury)andtheprivatesectorthroughforumssuchastheAustralia–HongKongRMBTradeandInvestmentDialogueandthenew‘SydneyforRMBCommittee’,aprivatesectorledinitiative(seeHatzvietal2014).
Thesepoliciesandrelatedprivate-sectorinitiativeshavepositionedAustraliatotakeadvantageofemergingRMBbusinessopportunities.Sydney,asthemainfinancialcentreinAustralia,hasemergedasafast,safeandreliablehubforRMBcashandsecuritiessettlementintheAsiaPacificregion.Butdespitetheseinitiatives,theAustralianuptakeforRMBsettlementbyimportersandexportersremainslow.TheRBAhasidentifiedseveralreasonsforthis,includingshortcomingsintheavailabilityofinstrumentsallowinghedginginRMB,unfamiliarityaroundtheRMBtradesettlementprocessandadministrativedifficultiesandconcernsregardingpaymentdelaysandrejections(WeirandWalsh2014).AmorerecentsurveyofChinesefirmsfoundthatawarenessanduseofRMBfortradesettlementremainslow,althoughthenumberofthoseusingRMBtradesettlementthatreportedpaymentdifficultieshadfallensignificantly(WeirandWalsh2015).
Financial integration in the Asia Pacific
ThefinancialintegrationofAustraliaandChinaneedstobeconsideredinthecontextofachangingfinanciallandscapeacrosstheAsiaPacific.Decadesofstrongeconomicgrowthhavegeneratedgreaterhouseholdwealthandincreasingcross-borderfinancialflows,leadingtosignificantgrowthindemandforfinancialservicesandproducts.Bankbalancesheetsareexpanding,householdwealthisincreasing,ageingpopulationsaredemandingmoresophisticatedservicesandproducts,andtechnologyisenablinggreatereaseoftransactionsacrossnationalborders.AllofthesetrendswillimpactAustraliaandChina.
FinancialintegrationintheAsiaPacificregionisdeepening,comparedwiththeadvancedeconomieswherefinancialintegrationhasbacktrackedsincetheglobalfinancialcrisis.Whilecross-bordercapitalflowsasashareofGDPhavefallenglobally,inAsiathemagnitudeofcross-borderflowsisgrowingfasterthanGDP,andinmanycasesexternalassetsandliabilitiesnowexceedGDP(AusterandFoo2015).TheincreasingsizeandsophisticationofthefinancialservicessectorthroughouttheAsiaPacifichasenabledrisingcross-borderflows.Cross-borderflowsintheregionarestrongestintheareasofbanklendingandforeigndirectinvestment,whileportfolioinvestmenttendstolag(AusterandFoo2015).
ThefinancialservicesindustryinAustraliaemploys450,000peopleandisthebiggestnetcontributortocorporateincometax.Australia’sfinancialsystemhasprovedtobesound,resilientandwellmanaged.IntheaftermathoftheglobalfinancialcrisisandtheAsianfinancialcrisis,boththeAustralianeconomyandthefinancialsystemoutperformedmostoftheirpeers(AusterandFoo2015).Australia’sfinancialservicesindustryhassignificantdepth,withassetsofaroundA$6.4trillion—overfourtimesAustralia’snominalGDP(Austrade2015).Australia’sA$2.0trillionsuperannuationsystemisthefourth-largestintheworld.ThispoolofassetsisexpectedtogrowtoA$7.6trillionoverthenexttwodecades,largelyduetothelegislatedsuperannuationscheme(AusterandFoo2015).
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Figure5.1showsthegrossvalueaddedofthefinancialservicesindustryacrosstheregionin2012.Itrangesfromabout3.3percentofeconomicoutputinIndonesiatoalmost16percentinHongKong.ThisgraphalsohighlightsthesignificantdifferencesbetweenAustraliaandChina.ForAustralia,grossvalueaddedisaround8.7percentwhileitisonly5.5percentinChina.But,unlikeAustralia,thegrowthoffinancialservicesinChinahasbeensubstantial,morethandoublingfrom2005to2012andreaching8.5percentin2015(NBS2016).
Figure 5.1: gross value added by the financial services industry as a percentage of total output
18
14
10
6
2
4 3.3
4.65.4 5.5 5.7 5.9
6.6 7.2 7.6
11.4
15.9
70.080.0
8.78
12
16
0
%
Indonesia
Vietnam
United Sta
tes
Japan
Hong Kong SAR
Singapore
Malaysia
Philippines
South K
orea
Thailand
Australia
United K
ingdomChina
India
2005 2012
Source:AusterandFoo2015,usingdatafromAggregatesandDetailedTables2013;UnitedStatesBureauofEconomicAnalysis;andUnitedNationsDepartmentofEconomicandSocialAffairs.FiguresforIndiaareat2005and2011becauseofalackof2012data.
Despiteahighrateofgrowth,thereisstilladegreeoffinancialsystemunderdevelopmentacrosstheAsiaPacific.Assetsundermanagementintheregionareonly15percentoftheglobaltotal,andChinaisonlythefifth-largestholderofassetsundermanagementintheregion,wellbelowitsrelativeGDPshare.Theseunderdevelopedfinancialsystemsareinefficientinchannellingcredittofirmsandhouseholds,andmaybothinhibiteconomicgrowthandreducetheeconomy’sabilitytoadjusttoexternalshocks.
Inaddition,theAsiaPacificregionremainsfairlyrestrictiveinrelationtomanyaspectsofcross-bordertradeinfinancialservicesandfinancialflows.TheOECDproducesaseriesof‘traderestrictiveness’indicesforservicesthatmeasuretherelativeopennessofeconomiesbyattemptingtoquantifytheeffectofrelevantlawsandregulations.
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Figure 5.2: OeCD services trade restrictiveness index for commercial banking, 2015
0 0.1 0.2 0.3 0.4 0.5 0.6 Indonesia
India China Brazil
Mexico Russia Iceland
South Africa Israel
Turkey Austria
Chile AVERAGE
Switzerland New Zealand
Finland Czech Republic
Colombia Poland Japan
Denmark Germany
Italy Norway
Korea Portugal
Netherlands Slovenia
United States Ireland
Australia Belgium Canada
Slovak Republic Luxembourg
Greece Estonia
Latvia United Kingdom
Sweden France Spain
Hungary
Source:OECD2015.
Intheareaoftradeinfinancialservices,theOECDevaluatescommercialbanking(Figure5.2)andinsurance(Figure5.3).TheseshowAsiahasamongthemostrestrictivepracticesinbothcommercialbankingandinsurance,withChina,IndonesiaandIndiabeingthemostrestrictive.Australiasitswellbelow(lessrestrictive)theOECDaverageinbothindices,withthelargestcontributiontorestrictivenesscomingfromAustralia’srestrictionsonforeignownershipandothermarketentryconditions.
Developments in China’s reform agenda and implications for the relationship
Theprocessesoffinancialreform,capitalaccountliberalisationandthecontinuedinternationalisationoftheRMBwillfundamentallytransformtheChinesefinancialsysteminthecomingyears,withthepotentialtobringsignificantbenefitstotheChinesepeople.
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The13thFiveYearPlanhasaspecialfocusonfinancialreform.Thisincludesacceleratingthepaceoffinancialsystemreform,completingtheestablishmentoffinancialinstitutionsandmarketmechanisms,deepeningreformsoffinancialregulationframeworks,raisingtheefficiencyofthefinancialsectorinservingtherealeconomy,furtherdevelopingcapitalmarketstolowerthefinancingcostsofmedium,smallandmicroenterprises,andeffectivelymitigatingfinancialrisks.
Figure 5.3: OeCD services trade restrictiveness index for insurance, 2015
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 India
Indonesia China
Russia Brazil
Iceland Finland Mexico
Colombia United States
Norway Denmark
Austria AVERAGE Portugal
South Africa Latvia Israel
Hungary Italy
Canada Spain
Slovak Republic Turkey Japan
Greece Czech Republic
United Kingdom New Zealand
Chile Germany
Switzerland Poland
Sweden Australia
Ireland Luxembourg
Slovenia Belgium
France Korea
Netherlands Estonia
Source:OECD2015.
ThebankingmarketinChinaislargeanddominant,accountingformostfinancialintermediationinthefinancialsystem.PensionandwealthservicesareanascentindustryandinsuranceisonlybeginningtopenetratetheChinesemarket.Furtherprogresswillallowthefinancialservicessectortoproperlyintermediatefundsbetweenhouseholdsandfirms,andacrosstheeconomy.Overtime,thiswillsupportdomesticinterestrateliberalisationthatwill,inturn,improvetheefficiencyofcapitalallocation,enabletransparentpricing,allowfor
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smoothersavings–consumptionpatternsandenableimprovedriskmitigationstrategies.AllofthesearenecessarydevelopmentsforChinatocontinueitseconomicrebalancing,andtomovefromamiddle-incometoahigh-incomeeconomy.
China’sdomesticmarketsarealreadylargebyglobalstandards.Evenwithoutanopencapitalaccount,Chinaalreadyaccountsfor6percentofglobalcross-borderfinancialtransactions(Finsia2014).China’sdomesticbankcreditstockislargerthananyotherintheregion,includingJapan’s(AusterandFoo2015).Itsequityandfixedincomemarketsarenowamongthelargestintheworld,althoughtheyplayarelativelysmallerroleintheoperationoftheeconomy.China’sequitymarkethasgrownsubstantiallytoapeakvaluationofoverUS$10trillion.Whilerecentvolatilityhassignificantlyreducedstockmarketvalues,thesereductionsneedtobeconsideredinthecontextoflongrungrowthinChina’sequitymarkets.FromJune2014toJune2015,theShanghaiCompositeIndexincreasedby154percent.Butthisincreasewasunsustainableandnotbasedonfundamentals.Despiterecentvolatilitythatsawa45percentreductionintheindexfromJune2015totheendofMay2016,theindexisnevertheless40percenthigherthanitwasinJune2014(Bloomberg2016a).
Throughinitialpublicoffering(IPO)listingsactivitywassuspendedfromJulytoNovember2015,China’sexchangesnonethelessledtheworldintermsofIPOsin2015.Therewere89IPOsvaluedatUS$17.6billionin2015inShanghaialone—anincreaseof107percentonthepreviousyear.MainlandexchangesreopenedinNovember2015toapipelineof690companiesreadytogopublic(EY2015).Howeverthis,inpart,reflectsadistortioninChina’sfinancialmarkets,asIPOsrequireanapproachtotheChinaSecuritiesRegulatoryCommission(CSRC),whichcancauseabacklog.
China’sfundmanagementandinsurancesectorshavealsogrownsubstantially.Thefundmanagementindustryfirstemergedintheearly1990sandhasexperiencedtremendousadvancesinscaleandsophistication.Bytheendof1998,therewerefewerthan10fundmanagementcompaniesmanaginglessthanRMB500billion.ByMay2014,therewere91fundmanagementcompanies,with48foreignjointventuresand43domesticChinesecompaniesmanagingtotalassetsofRMB5.13trillion.RMB3.73trillionwasmanagedbymutualfundsandRMB1.04trillionbyprivatefunds(Austrade2014).
TheChineseinsuranceindustry’stotalassetswereRMB8.3trillionin2013,whilenetassetswereRMB847.5billion(Austrade2014).ThelaunchoftheShanghai–HongKongStockConnectprogram(StockConnect)inNovember2014andtheannouncementofmutualrecognitionoffunds(MRF)betweenmainlandChinaandHongKongon22May2015markedsignificantdevelopmentsinaseriesofmoveswhichrelaxChina’stightcontrolofcross-bordercapitalflows(KingandWoodMallesons2015).
LaunchedinNovember2014,StockConnectisajointinitiativeoftheCSRCandHongKong’sSecuritiesandFuturesCommission.ItallowsmutualstockmarketaccessbetweentheShanghaiStockExchangeandtheHongKongStockExchange.StockConnectisnowcomplementedbyasimilarlinkformutualfunds.TheorganisationssignedaMemorandumofRegulatoryCooperationconcerningMutualRecognitionofFundsbetweentheMainlandandHongKongin2015,whichallowsretailpublicfundsinitiallyofferedintheMainlandorHongKongtobesoldtoretailinvestorsacrosstheborder(KingandWoodMallesons2015).
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ChinaalsohasaburgeoningFinTechsector(anareaalsoreferredtoas‘internetfinance’)thatnowsupportsanumberoflargefirmssupplyingfinancialservicesandproducts.CompaniessuchasAliPayandWeChatdemonstratetherisingdemandforsophisticatedfinancialproductsandservicesinChina.
china’s reform agenda
Financialreformisatthecentreofthenewreformagenda.Thisincludesdevelopingefficientcreditmarketstobetterintermediatesavingstoproductiveinvestmentatthelowestpossiblecost,improvingthefinancialsystem’sabilityandefficiencyinallocatingrisk,andensuringappropriateregulatoryandinstitutionalsettingsareinplacetosustainmacro-financialstability.
Arelatedbutseparateaspectoffinancialreformisfinancialintegration.ThismeansincreasingChina’sintegrationwithregionalandglobalmarketssothatsavings,investmentandriskcanbemediatedglobally,expandingthefrontiersofproduction,investmentandconsumption.ForChina,financialintegrationwillbeachievedthroughtworelatedprocesses:increasedtradeinfinancialserviceswithoverseastradingpartners,andopeningofthecapitalaccounttoallowforincreasedcross-borderinvestment.
Chinamaintainsarestrictivepostureinrelationtotradeinfinancialservices(AusterandFoo2015).Unliketradeingoods,therestrictivenessoftradeinfinancialservicescannotbemeasuredthroughtariffs.Aprimarymodeofdeliveryfortradeinfinancialproductsandservicesistheprovisionoftheseservicesthroughthebranchesorsubsidiariesofforeignfirmsoperatinginthecountry.Restrictionsontheopeningortheoperationsofbranchesorsubsidiariesrepresentasignificantbehind-the-borderrestrictiontotradeinfinancialservices.Therestrictionsmaylimitaforeignfirm’sabilitytogenerateaprofitinthecountry,ormaymakethecostofoperatinginthatcountrymoreexpensivethanwouldotherwisebethecase.Examplesofsuchrestrictionsinclude:limitationsonthenumberorsizeofbranchesorsubsidiariesofforeigncompanies;limitedlicensestoofferproductsorservicesin-country;requirementstohireacertainnumberofdomesticstaffperofficeortosetupaminimumnumberofofficesinordertoreceiveregulatoryapprovals;requirementstocontributeaminimumamountofcapitalinthecountry;orlimitationsontheprofitsthatcanberemittedfromthebranchorsubsidiarybacktothehomecountry.ThesetypesofrestrictionsaretypicalofwhathasbeeninplaceinChinaduringthelastthreedecadesofreform.
Capitalaccountliberalisation—thatis,easingrestrictionsoncapitalflowsacrossacountry’sborders—willbekeytoChinaaccessingforeignmarkets,increasingreturnsonitssavings,andusingforeignfinancingtobuilditscapitalstockandgrowtheeconomyintothefuture.TheinternationalisationoftheRMBispartoftheopeningofChina’scapitalaccount,andwillenabletheinterestrateandexchangerateflexibilitythatwillhelptheeconomytomanageanyshocksarisingfromsuddenshiftsincapitalflows.Todate,therehasbeenanincreasingopennesstosometypesofcross-borderinvestmentinChina,withflowsofbothforeigndirectinvestmentandbanklendingrisingsignificantlyoverthepasttwodecades(Robertsetal2016).Incontrast,cross-borderportfolioinvestmentremainshighlyrestrictedandabindingconstraintinthecapitalaccount.RMBliberalisationanditsincreasinguseoffshoredoesnotguaranteecapitalaccountopening—itisconnected,butnotsynonymous.RMBinternationalisationisbothacatalystandanoutcomeofaliberalisedcapitalaccount,andiskeytoChina’sfuturecapacityforsustainablegrowthandabilitytoplayalargerroleintheglobaleconomy.
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Financialreform,capitalaccountliberalisationandinternationalisationoftheRMBareinterdependentreformprocessesthatmustbesequencedcarefully.Inparticular,capitalaccountopeninghastobesequencedcarefullywithreformstostrengthenthefinancialsystem,maintainmacro-financialstabilityandallowforexchangerateflexibility.Themostimportantdifficultyinthesequencingofcapitalmarketliberalisationisthedangerofprecipitouslyremovingrestrictionsoncapitalaccounttransactionsbeforethedomesticfinancialsystemisabletomanagevolatilityintheexchangerateandcross-bordercapitalflows.
Financial reform in china
Chinahasquickenedthepaceofdomesticfinancialmarketderegulation,afterperiodsinwhichtheacceleratingdevelopmentofdomesticfinancialinfrastructureandrisingbankingsectorfragilityinthemid-1990sandearly2000sledtomoregradualisminreformduringthelate2000s.China’sfinancialreformshavebeenpartofthegradualandcloselymanagedtransitionfromacentrallycontrolledeconomytowardsamarket-basedeconomy.Therapidexpansionofdomesticfinancialinfrastructureinthe1980sand1990sresultedfromthesubstantialgrowthintheagriculturalsectorandtheemergenceofsmall-andmedium-sizedenterprisesaftertheinitiationofthereformandopeningpolicyin1978.
Chinahasmadesubstantialprogressoninterestratederegulation.Ithasmovedfromasituationwherebothdepositratesandlendingrateswerecentrallycontrolled,toonewheredepositrateceilingsandlendingratefloorsarenowbeingremovedfromofficialcontrol.Chinahaspartiallyshiftedawayfromarelianceonpublishedbenchmarkinterestrates.Overthereformperiod,theChinesegovernmenthascautiouslyproceededwithincreasingtheflexibilityofretailinterestratesaroundbenchmarkratesthroughpilotprogramsandexperiments,withtheobjectiveofprotectingtheprofitabilityofenterprises.
Interestrateliberalisationalsohasimportantimplicationsformakingthetransmissionmechanismofmonetarypolicymoreeffective.Chinaisinthemiddleoftransformingitsmonetarypolicyframeworkfromonebasedonaquantityruletoonebasedonapricerule.Theoldquantityrulebasedsystem,whichreliedondirectcontrolofcreditandlendingthroughstate-ownedbanks,andinterferedwiththemarketallocatingscarcecapitaltoitsmostproductiveuse,hasbecomeincreasinglyineffective.Thenewpricerulebasedsystemisnowbeingputinplace,althoughthePBoCisyettoindicatewhichinterestrateitwilltargetorwhatthetimingofthechangewillbe.
ThesereformswillalsorequireasignificantstrengtheningofChineseinstitutionstoensurethatregulatoryandinstitutionalsettingsareproperlycalibratedtosustainmacro-financialstability.Amongtheproblemsinthisareaare:
• ensuringadequateaccounting,auditinganddisclosurepracticesinthefinancialandcorporatesectorsthatstrengthenmarketdisciplinewithinarobustcorporategovernanceframework;
• avoidingimplicitgovernmentguaranteesthatleadtothemisallocationofcapital;and
• ensuringadequateprudentialsupervisionandregulationofdomesticfinancialinstitutionsandmarkets,whichmayhelpdefeatcorruption,connectedlendingandgamblingforredemption(thepursuitofhigh-returnbutlow-probabilityinvestmentsbyinstitutionswithlowornegativenetworth)(EichengreenandMussa1998).
Ofcourse,thesereformsarenotjustnarrowtechnicalchallenges.Theywillrequireamuchmoreopenandtransparentsetofinstitutionalarrangementsthatpushattheenvelopeof
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politicalreform.ThesechallengesareembeddeddeepinChina’spoliticaleconomy.TheyhaveapoliticaldimensionthatwillcutdeeplyintothecloserelationshipbetweenSOEsandthestate.Thepoliticaleconomyimplicationsofreformshouldnotbeunderestimated.
ThesuccessofChina’sdomesticfinancialreformswillbeparticularlyimportantforAustralia.Whencompleted,theywillenhanceregionalstabilityandthedepthofregionalmarketsbylayingthegroundworkforaliberalisedcapitalaccountandaninternationalisedRMB.Importantly,thereformsalsoprovidesignificantopportunitiestoAustralianfinancialfirmsinsupplyingfinancialservicesandproductsintoChinesemarkets.Australia,asaleadingregionalfinancialhub,hasthepotentialtobenefitsignificantlyfromthis.Australiaalsohassignificantexperienceinfinancialliberalisation,which,throughstrongerengagementofministers,officialsandfinancialfirms,couldbeanassettoChina.
capital account liberalisation in china
China’scapitalaccounthasundergonesignificantliberalisationsincethe1990s,withtheexceptionofportfolioinvestment,whichisstillunderstrictcontrol,althoughsignificantprogresshasbeenmadethroughinvestmentschemessuchasRQFIIandRQDII(Ballantyneetal2014).Figure5.4showsthereductionintheindexofcontrolsonthecapitalaccountandcurrentaccountfrom1999to2013.In1996,thecurrentaccountachievedfullconvertibility,whilethecapitalaccountremainedlargelycontrolledbythegovernment.CapitalaccountliberalisationwasslowedbybankingsectorfragilitythatemergedinthewakeoftheAsianfinancialcrisisofthelate1990s.Onlyrecentlyhasthisprocessresumed.
CapitalaccountliberalisationwillprovidesignificantopportunitiesforChina.Itislikelytoresultinahigherdegreeoffinancialintegrationwiththeglobaleconomythroughrisingvolumesofcapitalinflowsandoutflows.Greateroffshoreintegrationcomplementsinterestrateliberalisationandensuresamoreefficientallocationofcapitalacrossmarkets,diversificationofriskandinter-temporaltrade.Theexchangerateliberalisationthataccompaniestheopeningofthecapitalaccountalsoallowsforasmootherpathofadjustmentforexogenousshocks.
Figure 5.4: index of controls on China’s capital account (ka) and current account (ca) over recent years
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ForAustralia,theincrementalliberalisationoftheChinesecapitalaccountwillincreaseChina’sroleininternationalcommerceandfinance,includingtheprevalenceoftheRMBasaglobalcurrency.ItwillpotentiallyhaveimportantimplicationsinrebalancingtheglobaleconomyinthefutureasdemandforgoodsandservicesincreasesinChinarelativetoadvanceddeficiteconomies.Overtime,theintegrationofChina’sfinancialsystemintotheglobalmarketviaanopencapitalaccountwillalsofundamentallychangetheregionalfinanciallandscapeandthenatureoffinancialmarketlinkagesintheAsiaPacific.
Asoneoftheregion’skeyfinancialcentres,andasanetimporterofcapital,Australiastandstobenefitfromincreasedflowsofcapitalatpotentiallylowercost.This,inturn,helpsfundinvestment,buildtheAustraliancapitalstockandgrowtheeconomy.ThebigfourbanksinChinahavealreadyincreasedtheirpresenceinAustralia,whichwillhelpfacilitatethisincreasedflowofcapital(Box5.1).Liberalisationcan,however,causefluctuationsinassetpricesandinternationaltradeflows.Intheshorttomediumterm,capitalflowsmaybecomemorevolatileintheregionasChina’scapitalaccountisfurtherliberalised,andcapitalmovementsintoandoutofChinacouldaffectAustralia.
ThereisalotofuncertaintyastowhatthesizeanddirectionofcapitalflowswouldinitiallybeifChinaweretoliberalisefurther.RecentresearchbytheHongKongMonetaryAuthority(HKMA)andtheIMFonthelikelyimplicationsoffullcapitalaccountliberalisationinChinagenerallysuggestthatgrossportfoliooutflowsarelikelytobesubstantial,althoughthesepapersdisagreeonthenetimpact.TheriseinregionalcapitalflowswillalsotestAustralia’scapacitytoabsorbtheseflows,althoughAustralia’sfloatingexchangerateandstronginstitutionalsettingssuggestthatitiswellplacedtodoso.
InFebruary2016,thePBoCtookanimportantstepinliberalisingChina’scapitalaccountbyopeningitsinterbankbondmarkettoforeigninvestors(PBoC2016).Thisbuildsonthedevelopmentoftheonshore(‘panda’)andoffshore(‘dimsum’)primaryissuances.TheinterbankbondmarketaccountsforthebulkofChina’sfixedincomemarket.Previously,foreigninvestorswantingtoaccessChina’sdomesticbondmarkethadtousetheQFIIdiscussedaboveorsimilarprograms,whichplacedanumberofrestrictionsoninvestors(PBoC2016).ThePBoChasstatedthataccesstothemarketwillberestrictedtomediumandlongterminvestors.AllianceBernsteinestimatethatthisreformwillcauseaninflowofaroundUS$3trillionintoChina’sbondmarket(GriggandMurray2016).TheChinesegovernmenthasvalueditstotalbondmarketataroundUS$10.4trillioninsize,butanalystsprojectthatthiswillincreasesignificantlyincomingyearsastheChinesegovernmentrunslargerdeficits(GriggandMurray2016).However,aswithanyeconomy,ariseinChina’sdebt-to-GDPratioalsocarrieswithitcertainrisksthatinvestorswillneedtoassesscarefullyindecidingtheirlevelofexposure.AsoutlinedrecentlybytheIMF,badloanshavesincebeenpilinguponbanks’books.Theoveralldebt-to-GDPratioinChinaisestimatedtobe237percent,whiletheIMFestimatescorporatedebt-to-GDPat145percentandraisesconcernsaboutChinesefinancialfragility(DonnanandMitchell2016).
ThesebondmarketreformsshouldbenefittheChineseeconomyinanumberofways.Increaseddemandfortheexistingstockofbondswouldreducebondyields,allelsebeingequal.ThiswouldreducethefiscalburdenofthesedebtinstrumentsontheChinesegovernmentandreducethecostoffundingacrosstheeconomy.Totheextentthatincreasedflowsalsocontributetoimprovedmarketliquidity,offshoreparticipationmayalsoimprovemarketfunctioningandenablethefixedincomemarkettorepresentachanneloftransmissionformonetarypolicy.Thishighlightstheimportantstabilisationrolethatcapitalflowscanplayininternationalcurrencymarkets(McKibbinetal1999).
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BOx 5.1: CHinA’s ‘Big FOuR’ BAnKs in AusTRALiA
AlthoughChinesebankinghasarelativelylonghistoryinAustralia,thenumberofChinesebanks,branchesandtheservicestheyprovidehaveincreasedsignificantlyoverthelast10years.ThesebankshaveplayedakeyroleacrossanumberoffinancialmarketsandhavehelpedfinancemanysubstantialprojectsinAustralia.
industrial and commercial Bank of china (icBc) istheworld’slargestbankbymarketcapitalisation.ItopenedabranchinSydneyin2008andwasapprovedbytheAustralianPrudentialandRegulationAuthority(APRA)asaforeignauthoriseddeposittakinginstitution.ThesuccessfulestablishmentoftheSydneybranchwasregardedasasignificantbreakthroughinthebank’sprogresstowardsgreaterinternationalisation,improvingitsinternationalmanagementstandardsandprovidingacomprehensiverangeofbankingservicestotheAustralianandNewZealandmarkets,whichICBCidentifiesasoneofthemostprosperousregionsintheSouthernhemisphere(ICBC2016).ICBChassinceexpandeditsnetworktoPerth,MelbourneandBrisbane,offeringbankingservicesintradefinance,projectfinance,syndicatedloans,corporateloans,deposits,foreignexchange,derivatives,remittances,settlementandclearingservices.AthirdofitsSydneybranch’scorporateclientsincludeAustraliancompaniessuchasWestfieldandQantas,andithasprovidedcapitalfortheStateofVictoria’sdesalinationplant,theRoyalAdelaideHospitalrenovation,andcoalloadersinNewcastleandnearGladstoneinQueensland(IndustryNSW2015).
Bank of chinafirstestablishedoperationsinSydneyin1942andnowhasninebranchesinAustralia,themostofanyChinesebank—fiveinSydney,twoinMelbourne,oneinPerthandoneinBrisbane.ThefinancialservicesofferedbyBankofChinafocusontradefinance,expressremittance,localandforeigncurrencydeposits,residentialmortgages,commercial,constructionandsyndicatedloans,overdraftfacilities,foreignexchangemargintradingandAustraliandollarclearingandsettlementservices(BankofChina2016).TheAustralianFinancialReviewrecentlynotedtheimportantrolethatBankofChinaandotherChinese-ownedbanksareplayinginfillingthegapsleftintheareaofforeignlendingbythebigfourAustralianbanks(Tan2016).
china construction Bank (ccB)isthesecond-largestbankintheworldbymarketcapitalisation.CCBopenedarepresentativeofficeinSydneyin2007andinAugust2010,APRAapprovedCCBasaforeignauthoriseddeposittakinginstitution,authorisingittocarryonbankingbusinessinAustralia.CCB’sSydneyBranchisCCB’sfirstbranchinAustralasia.ItconductswholesalebankingbusinessinAustralia,includingcorporatelendinganddeposit,internationalsettlement,tradefinanceandAustraliandollarclearingandsettlementservices.CCBhasnotedthat‘theestablishmentofCCBSydneyBranchwillenableCCBtoexpanditsglobalnetworkandenhancecustomerservicecapabilitytofacilitatetheeconomicandtradecooperationbetweenAustraliaandChina’(CCB2016).
the Agricultural Bank of china (ABc)wasChina’sfirstcommercialbank.IthasthelargestnetworkofbranchesinChinaandthelargestcustomerbase,with350millioncustomersandassetsofUS$2trillion(IndustryNSW2015).TheABCSydneyBranchobtainedtheauthoritytocarryonbankingbusinessfromAPRAinMarch2014.Itconsistsofsevendepartmentsincludingcorporatebanking,treasury,tradefinance,operations,
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riskmanagementandcompliance,financeandaccounting,andadministration.ABCprovidesitsclientswithbankingproductsincludingcorporatelending,tradefinance,multi-currencysettlements,remittancesandotherservices.TheSydneyBranchconductsbusinessactivitieswithmultinationalenterprises,ChineseinboundinvestorsinAustralia,Australiancompaniesandotherfinancialinstitutions(ABC2016).
internationalisation of the RmB and the development of an offshore RmB market
TheinternationalisationoftheRMBandthedevelopmentofoffshoreRMBmarketsaretwoimportantgovernment-supportedpolicyinitiativesthathaveprogressedsignificantlysincebeinglaunchedmanyyearsago.TherehasbeenincreaseduseoftheRMBasatransactionalcurrencyoverthelastfewyears.Bytheendof2014,RMB-denominatedcurrentaccounttransactionsaccountedforaboutone-fifthofChina’stotalcurrentaccounttransactions.RMB-denominatedinvestmenthasalsoincreasedinrecentyears,butremainssmallrelativetothevalueofRMB-denominatedtradesettlements.
TheRMBhasgraduallymovedtowardsamoreflexibleexchangerateregimeoverthesameperiod(seeFigure5.5).In1994,theofficialandmarket-determinedexchangerateswereunified,leadingtoalargeRMBdepreciation.TheexchangeratewaspeggedtotheUSdollarfromduringtheAsianfinancialcrisisto2005toreducethevolatilityofthecurrency.From2005to2010,theofficialpeggingtargetoftheRMBwasswitchedfromtheUSdollartoabasketofcurrenciesandthepeggingwasmanagedwithinatradingbandof0.3percent(later0.5percent).From2012to2014,thePBoCwidenedthedailytradingbandoftheRMBagainsttheUSdollarfrom0.5percenttoeventually2percent.InAugust2015,thePBoCdevaluedtheRMBbyalmost2percent.Despitea2percentdevaluationbeingsmallbythestandardsofmostcurrencies,thismovecausedoneofthelargestcentralparityshiftsintheRMB’shistory(secondonlytothatfollowingthecessationoftheUSdollarpeg).Moreimportantly,whiletheRMB’sfixingratewaspreviouslypersistentlyhigherthanthespotrate,inAugust2015thePBoCdepreciatedthefixingrateandmovedtoasystemwherethefixingratereflectsthepreviousday’sspotcloseandovernightdevelopments.Thischangeindicatesanincreasinglymarket-drivenapproachtocurrencyreformfromthePBoCandalsoactstoclosethegapbetweenonshore(CNY)andoffshore(CNH)markets(Bloomberg2015).
TheinternationalisationoftheRMBhasanimportantmeaningforChina’sglobaleconomicstatus.CapitalaccountliberalisationisessentialtomakingtheRMBatrulyglobalcurrencyandincreasingChina’sroleininternationalfinance.ThisincludestheRMB’srecentinclusionintheIMF’sSpecialDrawingRightsbasket.ThisinclusionandinternationalisationoftheRMBbringsbenefitsfromreducingcurrencyrisksforChineseexportersandimportersascapitalaccountliberalisationandexchangerateregimereformproceeds.Inthelongerterm,thisalsohaspotentiallysignificantimplicationsforthestructureoffinancialandcommoditymarketsgloballyastransactionsandcontractsmaybecomeincreasinglydenominatedinRMB.
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Figure 5.5: nominal and nominal effective exchange rates — the RmB against the us dollar
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The opportunities for financial service providers in China
AustraliacanseektoengageactivelyintheprocessofChina’sfinancialreform,buildingoffthecloseandestablishedeconomicandtradelinkagesbetweenChinaandAustralia,andthegrowingpotentialforfurtherfinancialintegration.Australiamustadaptandpositionitselfstrategicallyifitistobenefitfromthesereforms.Onewaytodothiswouldbetoincreasethevolumeandvalueoftradeinfinancialservicesbetweenthetwoeconomies.
Atfirstglance,tradeinfinancialservicesdoesnotappeartobeanimportantpartofAustraliantrade,oroftheAustralianeconomy.AccordingtotheABS,totalexportsof‘financialservices’and‘insuranceandpensionservices’stoodatA$3.9billionin2014,orjust6.4percentofAustralia’sservicesexportsandslightlyover1percentofoverallexports.FinancialservicesaccountforA$3.3billion(86.4percentofthetotal),andinsuranceandpensionservicesaccountfortheremainingA$539million(13.9percent)offinancialsectorexports(ABS2015b).
TheseABSfiguresomitfinancialservicesthatareprovidedonshoreinChinabybranchesorsubsidiariesofAustralianfirms—theoffshoreoperationsofAustraliancompanies.Technicallythesearecalled‘foreignaffiliatesales’.Ifforeignaffiliatesalesareincluded,financialservicesarepossiblyAustralia’slargestsingleservicesexportcategory,withavaluethatislikelyoverA$50billionannually(AusterandFoo2015).Whenforeignaffiliatesalesareincluded,ChinaisamuchsmallerfinancialservicestradepartnerforAustraliawhencomparedwiththeUnitedStates,theUnitedKingdomandNewZealand—butalsoSingapore,Thailand,IndonesiaandJapan(Figures5.6,5.7and5.8).Highbarrierstofinancialservicestradeandcross-borderinvestmentinChinamaybeinhibitingAustralianfirmsandinvestorsfromgrowingtheirconnectionswiththecountry.AccordingtotheOECD,ChinahashighlyrestrictiveregulatoryandlegalregimesinbothcommercialbankingandinsurancecomparedtoOECDnations.AustraliaisamongthemostopeneconomiesintheAsiaPacificregion,withadegreeofopennessthatexceedstheOECDaverage.
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DoingbusinessinChina’sfinancialservicesindustryremainsverychallenging.Therearestronggovernmentregulationsandvastlydifferentbusinessculturesandmarketenvironments.Butthepotentialrewardsforcompaniesthataresuccessfularesignificant.AlthoughChinaisperceivedasachallengingmarketforforeigninsurers,Australianfinancialservicescompanieshaveenteredandmanyhaveestablishedlocalrepresentativeoffices(Box5.2)orjointventuresinnumerousareas(Box5.3).RecentresearchfromMunichRepredictsthatChina’srankinginglobalinsurancepremiumvolumeswillclimbfrom10thin2006tothirdin2020,behindonlytheUnitedStatesandJapan(Austrade2014).
Figure 5.6: Australia’s exports of financial services to the Asia Pacific region
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Figure 5.7: Australia’s exports of insurance and pension services to the Asia Pacific region
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Figure 5.8: Total sales of financial services and insurance and pension services by Australia by mode of supply, 2009–2010
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Financial services foreign a�liate sales Insurance and pension services foreign a�liate salesTotal cross-border exports (modes 1 and 4) Total mode of supply
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Note:CautionshouldbeexercisedininterpretingthischartastheABSdoesnotallocateFinancialIntermediationServicesIndirectlyMeasured(FISIM)toindividualcountriesformode3,butdoesformodes1,2and4.Source:AusterandFoo2015;fromABSCat.No.5485.0,Table4a,2011.
BOx 5.2: AusTRALiA’s ‘Big FOuR’ BAnKs in CHinA
Australia and new Zealand Banking group (AnZ) hasbeeninChinasince1986andtodayithassevenbranchesandfoursub-branchesaswellasanoperationshubinChengdu.Overthepastthreedecades,ANZhascontinuedtoexpanditsfootprintandremainsoneofAustralia’slargestinvestorsinChinawithsuccessfulpartnershipswiththeBankofTianjinandtheShanghaiRuralCommercialBank.In2010,theAustraliaandNewZealandBank(China)CompanyLimited(ANZChina)wasestablished,makingANZthefirstAustralianbanktobelocallyincorporatedinChina.ANZistheonlyAustralianbankwithbothlocalandforeigncurrencycapabilitiesinretailandcorporatebankinginmainlandChina.ANZChinahasaround500employeesasofApril2016.
commonwealth Bank (cBA),Australia’slargestbank,hasbeenoperatinginChinaforovertwodecades.IthasbeengrantedaRMBlicenceforitsShanghaiBranchbytheChinaBankingRegulatoryCommission(CBA2015).TheRMBlicenceenablesCBAtobroadenitsinstitutionalofferingstoincorporateallaspectsoftradeandinvestmentforclientsdoingbusinessinthefastgrowinganddeeptradecorridorbetweenAustraliaandChina(CBA2015).CBAhasabranchinShanghai,abranchinBeijing,apresenceintherecentlyexpandedShanghaiFreeTradeZone,anetworkof15branchesacrossHenanandHebeiprovinces,alifeinsurancejointventurewiththeBankofCommunicationsandtwootherkeyjointventures(Finsia2014).Theseare:
• JinanCityCommercialBank(QiluBank)inShandongprovince,northernChina,ofwhichCBAownsa20percentstakepurchasedin2004.Thisisthe10th-largest
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citycommercialbankbyassetsinChina,andCBA’spartnershipaimstointroducenewfinancialproductsandtechnicalskills,speedupcompliancewithinternationalstandardsandimprovethebank’scompetitiveness.
• BankofHangzhou:CBAhasowned19.9percentofthisbanksince2005,withA$100millioninvested.
national Australia Bank (nAB)providesarangeofcorporate,institutional,tradeandselectedpersonalbankingservicesfromabranchlocationinShanghaiandanewlyestablishedbranchinBeijing.ThesebranchessupportAustralianandNewZealandbusinesseslookingtotradewithorinvestinChinaandtherestofAsia.NAB’sstatedpurposeisalso‘tosupportinstitutionalandcorporatecustomersfromChinaandAsialookingtotradewithorinvestinAustraliaandNewZealand,particularlyinthebank’sareasofexpertise:theenergy,utilities,naturalresources,foodandagribusinesssectors’(NAB2015).
NABfirstopenedanofficeinChinain1982,andcurrentlyhasarepresentativeofficelocatedintheChinaWorldTowerinBeijing.NABhaspartnershipsandrelationshipswithnationalbankcardassociationChinaUnionPayandbanksincludingChinaDevelopmentBank,AgriculturalDevelopmentBankofChina,ShanghaiPudongDevelopmentBankandIndustrialBank.ItalsoworkswithwealthmanagementinstitutionsChinaInternationalIndustrialTrustandChinaHuarongAssetManagementCorporation(Finsia2014).InadditiontothenewBeijingbranch,NAB’srecentapprovalfromtheChinaBankingRegulatoryCommissionforaRMBlicenseforitsShanghaibranchwillalsohelpcustomersexplorewiderbusinessopportunities,bettermanageforeignexchangerisksandenhancebusinessefficienciesinChina(NAB2015).
WestpacfirstopenedanofficeinChinain1982,andsincethenhasestablishedofficesinHongKong,Beijing,ShanghaiandaShanghaiFreeTradeZonesub-branchwithspecialistteamsfocusedontrade,structuredcommodityandassetfinance,debtcapitalmarkets,derivatives,foreignexchangeandnaturalresources(Finsia2014;Westpac2016).IthasrecentlydeepeneditsofferingstosupportincreasingdomesticandinternationalRMBflows,andin2013wasawardedaRMB-dollarmarketmakerslicencetotradethecurrencypairsinmainlandChina,followedbyaderivativeslicence.WestpacestablishedanAsiaAdvisoryBoardinNovember2013tostrengthenitsconnectivityacrossAsia.
InApril2012,InsuranceAustraliaGrouppurchaseda20percentstake(sincedilutedtoa16.9percentstake)inChinesegeneralinsurerBohaiPropertyInsuranceCompanyLtdtoformastrategicpartnershipandincreaseitsfootprintinChina.Similarly,inJanuary2010,CBAandChina’sBankofCommunicationsformeda51:49percentlifeinsurancejointventure(Austrade2014).
Theseacquisitions,combinedwithorganicgrowthstrategiesamongsomefirms,suggestthattheAustralianfinancialsectorcanbeoneofthelargestdirectinvestorsintoChina.RecentlytherehasbeenaslowinginthisprocessassomeAustralianfinancialservicesprovidersreducetheirinvestmentsinChina.ANZ,forexample,recentlyreduceditsstakeinChina’sBankofTianjin,reportedlybecauseofonerouscapitalrequirementsandrestrictionsitfacedinoperatinginChina.Theseissuesarediscussedindetailinthesectionsbelow.
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BOx 5.3: AmP CAPiTAL AnD CHinA LiFe
InApril2006,AustralianfinancialservicescompanyAMPCapitalsecuredAustralia’sfirstQFIIlicence.PlatinumInvestmentCompanyandMacquarieBankfollowedin2008and2012respectively(ChinaXBR2016).TheQFIIprogramallowsselectedinternationalinvestorstoaccessRMB-denominatedcapitalmarketssuchasthe‘A-shares’tradedontheShanghaiandShenzhenstockexchanges.
ThoughAMPCapitalhashadapresenceinChinasince1997,itsengagementandcooperationwiththeChinesefinancialsectorexpandedsubstantiallyfollowingitsQFIIapproval.ThepartnershipbetweenAMPandChinaLife,China’slargestlifeinsurancecompany,beganin2006.AfterthreeyearsofcollaborationonQFIIinvestments,thetwocompaniesenteredaMoUtoexplorepotentialpartnershipsinpensionsandfundmanagementinlate2009(Somasundaram2013).
InJune2013,regulationscameintoeffectthatallowedinsurancecompaniesinChinatoestablishfundmanagementcompaniesofferingpublicmutualfundstoretailandinstitutionalinvestors(AMP2013).AMPwentintoapartnershiplaterthatyearwiththeChinaLifeAssetManagementCompany(aChinaLifesubsidiary),establishingtheChinaLifeAMPAssetManagementCompany.ByJanuary2014,thenewcompanyhadraisedRMB11.9billion(A$2.2billion)oninitialpublicofferingforitsfirstpublicmutualfund(AMP2014).AccordingtotheAssetManagementAssociationofChina,China’smanagedfundsmarketwasworthUS$2.5trillionin2015,upfromUS$100billion10yearsearlier(Smith2015).
In2014,AMPannounceditsacquisitionofa19.99percentstakeinChinaLifePensionCompany,thelargestpensioncompanyinChina.Theacquisition,worthA$240million,meantthatAMPwasthefirstforeigncompanyintheworldtopurchaseastakeinaChinesepensioncompanywithfulllicensesallowingend-to-endservicesthroughoutChina(Austrade2014).
NotallofAMPCapital’sventureshavebeenasstableasitscollaborationwithChinaLife.Thecompany’sChinaGrowthFundincreasinglycameunderfirefromactivistinvestorsduetoitsdiscountedtradingvalue,beforeinvestorsvotedtowinditupinJuly2016(Robertson2016).TheAMPCapitalAsiaQuantFund,along-shortequity-focusedfund,closedoperationsinFebruary2016(WilleandWaite2016).Onbalance,however,AMP’sinitiativesinChinahavecontinuallybeenoneofthecompany’smostsignificantenginesofprofit,withstandingthevolatileequitymarketperiodsinthesecondhalfof2015andJanuary2016.
Overall,AMPandChinaLife’spartnershipshavebeenasuccessstoryofongoingbilateralcooperation.TheChinaLifeAMPAssetManagementventure’sexceptionalgrowthwasamajorforcebehindAMP’srecordprofitsin2015(Letts2016).Flow-ongainsfromthepartnershiphaverunbothways.AMP’spropertyfundshavebenefitedsubstantiallyfromChinesecapitalsupport,whiletheAustraliancompanyisinitiatingapilotprogramforChinaLifeinsuranceagentstogainfinancialadvisoryskills(Smith2015).
Thesuccess,accordingtoformerAMPCapitalCEOStephenDunne,isduetotheclosenessofthepartnership.‘WecouldhavepartneredwithasecuritiescompanyoraregionalbankbutwetookastrongviewthatChinaLifewasagoodpartnerbecausewesharealotofsimilaritiesandweliketheirdistributionreach,’DunnetoldtheAustralianFinancialReviewin2015.‘Wecan’treallyputnumbersaroundtheopportunitythatexistsforusinChina’,saidDunne(Smith2015).
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A formal engagement program on financial integration
Australiahasastrongcomparativeadvantageinfinancialservicesintheregion.ItoffersChinatheopportunityofatestinggroundforreformsthatwillsupportChina’scontinuedopeningandintegration,globallyandregionally.ThecurrentreformprocessesinChinaofferAustraliaaonce-in-a-generationopportunitytoestablishthelinksnecessarytosupplythefinancialproductsandservicesthatChinaneedsandtostrengthenAustralia’spositioninglobalmarkets.
Thisoutcomewillnothappenofitsownaccord.ItrequirestheAustralianandChinesegovernmentsandprivatesectorstostrategicallypositionthemselvesandcreatethebilateralarchitecturenecessaryforcollaborationtooccur.Thisarchitectureshouldbecentredonaformalengagementprogramonfinancialservicesandreform.ThiswouldcomplementtheAustralia–ChinaSED,includingtheAustralia-ChinaInvestmentCooperationFramework(Box5.4),andengageministers,officialsandfirmsinaworkprogramtodeepenbilateralfinancialintegration.Theengagementprogramwouldhavefivekeyareasoffocus(eachisdiscussedinturn):
• pilotingtheselectreleaseofregulatoryandlicensingrestrictionsonAustralianfirmsinChinaasaphase-inforregionalliberalisation,expandingthefinancialservicescomponentsofChAFTA.
• developingaregulardialogueandamutualrecognitionframeworkbetweenfinancialregulators,andsupportingthedevelopmentofRMB-denominatedassetsandsecuritieslistingsinAustralia.
• reviewingregulatoryrestrictions,includingthoserelatingtotaxationandtomacroprudentialregulationsanddividendimputationschemestoensurethatAustralianandChineseentitiesarebetterabletoinvestandworktogetherintheregion.
• exploringthebilateralandregionalopportunitiesarisingfromFinTechanddigitalfinancetopromotefinancialinclusion.
• commissioningresearchbetweenAustralianandChineseinstitutionsonfinancialservicestradeandcross-borderinvestment.
Australiahasexperiencedthebenefitsandthecostsofeconomicliberalisation,havingopeneditseconomyanddevelopeditsfinancialinfrastructure,institutions,regulatorysettingsandmacro-financialframeworksoverthelastthreedecades.Thesereformshavebeendifficult,complexandtime-consuming.Theyhaverequiredyearsofcommitmentfromsuccessivegovernmentsandhave,attimes,resultedinsignificantfinancialandeconomicvolatility.Australia’sexperienceinundertakingthesedifficultreformsisanassetforChinaasitundertakesthedifficultprocessesoffinancialreform,capitalaccountliberalisationandRMBinternationalisation.
ThereissignificantscopeforAustralianministersandpoliticians,governmentofficials,corporateregulatorsandprivate-sectorfinancialfirmstocollaboratewiththeChinesegovernmentandChinesebusinessesonfinancialreform.ThereisgreatinterestwithinAustraliatosharethisexperiencewithChina.
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BOx 5.4: THe AusTRALiA–CHinA invesTmenT COOPeRATiOn FRAmeWORK
AsdiscussedindetailinChapter4,theelevationoftheComprehensiveStrategicPartnershipintoaComprehensiveStrategicPartnershipforChangewillbeimportanttodeepeningtheAustralia–Chinarelationship.Thiswilladdmomentumoverthenextdecadeformovingtoputinplaceatreaty-levelcommitmentcoveringbothcountries’mutualinterestsinopenmarkets,resourceandenergysecurity,sustainableagriculturaldevelopmentandfoodsecurity,andreliableaccessforforeigninvestmentinbothcountries.TheAustralia–ChinaStrategicEconomicDialogueprovidesanopportunityforAustraliaandChinatoexploreopportunitiesforclosereconomictiesandtodiscussissueswithintheglobaleconomicenvironment.TheinauguralSEDwasheldin2014inBeijingandwasattendedbythentreasurerJoeHockey,thenministerfortradeandinvestmentAndrewRobbandtheChairmanofChina’sNationalDevelopmentandReformCommission,XuShaoshi.
Attheinauguralmeeting,AustraliaandChinaestablishedanInvestmentCooperationFramework.TheFrameworkgoesbeyondChAFTAandcreatesnewpathwaysforpromotingtheexportoffinancialservices,forrealisingtwo-wayinvestmentinnewsectors,andforidentifyingroadblocksforinvestorsfrombothcountries.ThisallowssignificantopportunitytodeepentherelationshipatanumberoflevelsincludingexpandingservicesexportsfromAustraliatoChinaandimprovinginvestmentopportunities.
‘Theinvestmentcooperationframeworkgoesbeyondthefreetradeagreement’,AustralianTreasurerJoeHockeysaid.‘ThefocusistodeepentheeverydayengagementbetweenChinaandAustraliawithsomeidentifiableprojects,andthisisasmuchaboutinvestmentinAustraliaasitisaboutAustraliainvestinginChina’.(seeChapter4.)
Piloting the select release of regulatory and licensing restrictions
Australia’ssophisticated,globallycompetitiveandwell-regulatedfinancialmarketscanactasaneffectivestepping-stoneforChina’scontinuedopeningtotheregion.AustraliacansupportChinaacrossmanyofthereformsitisundertaking,bypilotingtheselectreleaseofregulatoryandlicensingrestrictionsforAustralianfirmsinChinaasaphase-infornon-preferentialregionalandgloballiberalisation.
TherearemultiplereformprioritiesthathavebeenoutlinedbytheChinesegovernment,andwhichAustraliacanassist.Thesearediscussedinmoredetailinthesectionsthatfollow,butinclude:
• loweringbarrierstoentry—forexample,byfast-trackinglicensingforAustralianfirmsandremovingrestrictionsonbranchlocations,thenumberofbranches,openinghoursandotherrestrictionsonforeignfinancialinstitutions.
• reformingpolicyinstitutions—bydeepeningofficialengagementbetweenAustralianandChinesefinancialregulatorsanddevelopingamutualrecognitionframeworkbetweenthem.
• raisingtheproportionofdirectfinancialintermediation—bypilotingtheselectreleaseofregulatoryandlicensingrestrictionsonAustralianfinancialintermediariesoperatinginChina.
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• expandingaccesstoinsuranceandreducingprecautionarysavings—byeasingrestrictionsonAustralianinsurancefirmsandreformingmacroprudentialregulationstofacilitatejoint-partnerships,suchasthatbetweenAMPandChinaLife.
• promotinginclusivefinance—bysharinginformationonfinancialinclusionandfinancialresilienceprogramsinAustraliaandbydevelopingaprivatesectorfundedgrantprogramonprogramstopromotefinancialliteracy.
• promotingfinancialinnovationthroughnewmarketsandproducts—byexploringthebilateralandregionalopportunitiesarisingfromFinTechanddigitalfinancetopromotefinancialinclusionandintermediation.
• liberalisinginterestrates,exchangeratesandgovernmentbonds—bysharingAustralia’sexperienceinundertakingsuchreformsthroughtheprogramofformalengagementonfinancialservicesandreform.
• achievinginternationalisationoftheRMB—bysupportingthedevelopmentofRMB-denominatedassetsandsecuritieslistingsinAustralia,includingforbondsbutpossiblyalsoextendingtocommoditiescontractsingold,coalandironore.
• strengtheningfinancialregulationandprudentialregulation—throughtheabove-mentionedmutualrecognitionframeworkandbyundertakingmutualreformstoallowbetterengagementbetweenAustralianandChinesefirms.
• developingthedepositinsurancesystemandresolutionmechanisms—byeasingrestrictionsonAustralianinsurancefirms.
• developingfinancialinfrastructure—bycollaboratingtogivetheOBORinitiativeandtheAIIBafocusonregionalfinancialinfrastructureinvestment(seebelow).
ChAFTAcanserveasabridgeheadfortheexpansionofbilateralfinancialservicestrade.ChAFTA,andtheinstitutionalmechanismsthatunderpinitandcanbebuiltaroundit,offersignificantopportunitiestobothcountriesindesigningeffectiveandefficientfinanciallinkagesthroughagradualandpragmaticprocess.ChAFTAsecuresarangeoffinancialservicescommitmentsbetweenChinaandAustralia.ThesecommitmentsrepresentthemostsubstantialmarketaccesscommitmentsthatChinahasagreedtowithanyFTApartner,andcouldcreatenewcommercialopportunitiesforAustralianbanks,insurersandsecuritiesfirms.TheyfacilitatedeeperparticipationbyAustralianfinancialinstitutionsinChina,strengthenfinancialservicestradeandinvestmentinbothdirections,andenablefuturegrowthinthebroaderbilateraleconomicrelationship(DFAT2014a).
UnderChAFTA,Chinaagreedtocomprehensivetreaty-levelcommitmentsonfinancialservices,includingagreementtoprovisionsontransparency,regulatorydecision-makingandstreamliningoffinancialserviceslicenceapplications.AfinancialservicescommitteewillbeestablishedunderChAFTAprovidingfordeepengagementbetweenChineseandAustralianfinancialregulatorsonissuesofmutualinterest,allowingissuestobeaddressedquicklyandefficiently(DFAT2014a).TheworkofthiscommitteeneedstobesupportedbytheformalengagementprogramonfinancialintegrationthroughtheAustralia–ChinaSED,toensurethatitadvancesreformprioritiesanddealswiththeregulatorychallengesoutlinedabove.Importantly,AustralianandChineseofficialsshouldengagemorecomprehensivelywithbusinessandindustryrepresentativespriortothesebilateralnegotiationssoastoprovideamechanismfortheirinputtobeconsideredascommitmentsaredeveloped.
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Bothsideshaveidentifiedarangeofareasforfurthercooperationtoreducebarriersinthesupplyoffinancialservices,whichcovermanyoftheissueslistedabove.TheseincludeAustralia’sforeigninvestmentregime,aswellasarangeofbarriersthatAustralianandotherforeignfirmsfaceinChina,suchaslimitationsonbankbranchopenings,minimumcapitalcontributions,maximumoffshorefundingfromwithinthesameinstitution,requiredonshorepresence,domestichiringrequirements,domestichousingofdata,andlimitedorlongwaittimesforlicensestotakeRMBdeposits.IssuesaroundtheserestrictionshavebeenraisedbymanyofthefinancialinstitutionsconsultedforthisReport.
strengthening dialogue and mutual recognition between governments and private sectors
AustralianandChinesepolicyleaders,ministersandseniorofficialshaveagreaterrangeofopportunitiesforengagementnowthaneverbefore.ThebilateralrelationshipisofficiallyaComprehensiveStrategicPartnership,whichincludestheannualAustralia–ChinaSED.
ButdespitethesignificantimplicationsofChina’sreformprocesses,andthesignificantopportunitiesforfinancialserviceproviders,thereisnodesignatedbilateralframeworkthroughwhichaspecificfocusontheseissuescantakeplacebetweenpolicymakersinbothAustraliaandChina.Bycomparison,inotherareassuchastourism,AustraliaandChinahaveaMoUonstrengtheningcooperation.
Theformalengagementprogramonfinancialservicesdescribedaboveneedstobeaproactive,strategically-ledprocess,withaframeworkforbilateralpolicydevelopmentsetoutthroughtheannualvisitsoffinanceandtradeministers(supportedbyotherrelevantministersforfinancialservices)followedthroughbytaskforcesofofficialsfromthreekeyareas:financeministries,centralbanksandfinancialregulators.
ThereisalsoscopeforexpandingbilateralengagementbetweenthecentralbanksofAustraliaandChina.ThiswouldcomplementexistingmultilateralengagementthroughinstitutionsandforumssuchastheG20,andwouldbuildonbilateralinitiativessuchasthelocalcurrencyswaplineagreedbetweenAustraliaandChina.AstrongerbilateraldialoguewillbeincreasinglyimportantasChinadeepensitsreformprocessandachievesgreaterfinancialintegrationwithAustraliaandtheregion.Aroutinedialoguecanbeparticularlyimportantintimesoffinancialvolatilityandcrisiswhensafetynetarrangements,includingbilateralswaplines,regionalarrangements(suchastheChiangMaiInitiativeMultilateralization,whichdoesnotincludeAustralia)andmultilateralarrangements(suchastheIMF),mayneedtobeaccessedandcoordinated.
InrecentyearstheAustraliangovernmenthasdevelopedmutualrecognitionframeworkswithothercountries.Mutualrecognitionmeansthattheregulatorsinonecountryrecognisetheregulationsofothercountriessothatbusinessesarenotrequiredtosatisfytwoparallelsetsofregulationswhentheyareworkingacrossborders.Mutualrecognitionframeworksimprovetheeaseofdoingcross-borderbusinessbyreducinginefficiencies,decreasingcompliancecostsandsavingtime.
Mutualrecognitionframeworkscancoverarangeofdifferentregulatorysettings,includingsecuritiesmarketregulations,fundmanagement,collectiveinvestmentschemesandlicensingrequirementsforfinancialadvisors,accountants,fundmanagersandlawyers.ThegeneralapproachoftheAustraliangovernmenttorecognisingforeignregulationoffinancialmarketsandfinancialservicesprovidershasbeenbasedonunilateralrecognitionoftheforeignjurisdiction.
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InJune2008,AustraliaundertookitsfirstmutualrecognitionagreementonsecuritiesofferingswithNewZealand.Issuersofsecuritiescannowuseoneprospectustooffershares,debenturesormanagedorcollectiveinvestmentschemestoinvestorsonbothsidesoftheTasmanSea,subjecttocertainrequirements.
Followingthis,AustraliaandHongKongextendedmutualrecognitiontoauthorisedcollectiveinvestmentschemes,whichwillfacilitatethesaleofretailfundsineachother’smarket.TheAPECAsiaRegionFundsPassport(discussedbelow)issimilarlyaformamutualrecognitionthatAustraliaisleadinginAPEC.
InAugust2008,Australianauthoritiessignedathirdmutualrecognitionarrangement,withtheUnitedStatesSecuritiesandExchangeCommission(SEC).ThemutualrecognitionarrangementprovidesaframeworkfortheSEC,theAustraliangovernmentandASICtoconsiderregulatoryexemptionsthatwouldpermitUSandeligibleAustralianstockexchangesandbroker-dealerstooperateinbothjurisdictions,withoutcertainneedfortheseentitiestobeseparatelyregulatedinbothcountries.ItreducesthebarriersthatUSandAustralianinvestorsfaceininvestingineachother’smarkets.
AsChina’sreformprocessesdeepen,agoalshouldbethedevelopmentofamutualrecognitionframeworkbetweenAustraliaandChina.Oneofthepre-conditionsofmutualrecognitionisthattheregulatoryframeworkofeachjurisdictionmustbesubstantiallyequivalent,thusensuringinvestorprotectionandmarketintegrityirrespectiveofthelocationoftheinvestor.Forthisreason,amutualrecognitionframeworkbetweenAustraliaandChinaisnotagoalthatwillbeachievedinthenearterm,butisagoalthatshouldbepartofthebroaderfutureengagementprogrambetweenthetwocountries.Importantly,thisengagementprogramandgreatercollaborationbetweenAustralianandChineseregulatorswillitselffacilitatethemovetowardsamutualrecognitionframework.
Intheprivatesector,therehasbeenongoing,albeitinformal,collaborationoneconomicandfinancialreform.GiventheopportunitiesforincreasingthefinancialconnectionsbetweenAustraliaandChina—andthevitalroleoftheprivatesectorinmakingthishappen—amoreformalapproachtoprivatesectorengagementisnecessary.Furtheringthiscollaborationthroughtheformalengagementprogramonfinancialservicesshouldthereforebeakeypriority.AustralianfinancialfirmshavehosteddozensofdelegationsfromChinaovertheyears—frompolicymakingandregulatorybodiesaswellasfromfinancialservicesfirms—toshareknowledgeaboutAustralia’sfinancialsystemandreformhistory.WithinChina,severalofAustralia’slargestfinancialinstitutionshavesignificantjointventurepartnershipsthroughwhichthetransferoftechnicalandmanagerialknowledgeandexpertisehasbeentakingplace.ChinesefinancialservicesfirmsthathaveestablishedoperationswithinAustraliahaveengagedproactivelywiththeAustralianfinancialservicessector,includingthroughgroupssuchastheAustralia–ChinaBusinessCouncil.
AmoreformalmodeofengagementbytheprivatesectorinChina’sfinancialsectorreformhasrecentlydeveloped—theSydneyforRMBCommittee.Formedin2013,theCommitteenowcomprises30seniorfinancialsectorprofessionalsrepresentingorganisationsthathaveadeepinterestindevelopinggreaterfinancialconnectednessbetweenAustraliaandChina.ItisledbytheprivatesectorbuthasthesupportoftheNSWandfederalgovernments.TheCommitteehaswrittenseveralwhitepapersandsupportedRMBoffshoredevelopmentbyidentifyingthekeyblockagestoincreasedtake-upofRMBamongAustralianfirmsandbypromotingSydneyasanimportanthubforRMBtrade,financeandinvestmenttransactionsintheAsiaPacificregion.
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mutual regulatory reforms to increase engagement
Alongwiththemutualrecognitionframeworkdiscussedabove,thereisscopeforotherreformsinregardstoprofessionalservices,regulatoryrestrictionsaroundtaxationandmacroprudentialregulations,whichshouldalsobeexploredtoincreasefinancialintegrationbetweenAustraliaandChina.
AccordingtotheAustralianChamberofCommerceinBeijing,thetrainedtalentpoolinChina’sfinancialservicessectorislimited,particularlywhentakingaccountofforeignlanguageskillsanddepthofexperience.Forsomespecialistroles,itisincreasinglydifficulttorecruitandretainstaff(AustCham2016).
AustralianandChineseacademicinstitutionshaveanimportantroletoplayinsupplyingthenextgenerationoffinancialservicesadvisors.ThereisscopeforjointventuresbetweenChineseuniversitiesandAustralianfinancialinstitutions,whichwouldresultinaspecialisttalentpoolthatistrainedoncurrentinternationalindustrypractices.Alonger-termtalentmanagementplanneedstoincludeaneducationpushtoenhanceprofessionalskillswithinthefinancialservicessector.
TheChineseandAustraliangovernmentscouldalsoimprovetheattractivenessoftheirfinancialservicessectorsascareerdestinationsforinternationaltalent.TheChinesegovernmentcouldgiveconsiderationtoprovidingtaxincentivescomparabletoHongKongorSingaporeforemployees,aswellasforemployerstoinvestinexperiencedforeigntrainerswhocaneducatelocaltalent.TheAustralianandChinesegovernmentscouldpartnerwithprivatefirmsfrombothcountriestoprovidetrainingandpolicysupportinthedevelopmentoftheChinesefinancialsystemthroughprogramsthatencouragecollaborationbetweenAustralianandChinesefinancialfirms.
WhilemuchofthischapterhasconsideredreformprocessesinChina,therearedomesticregulatorysettingsthattheindustrysuggestsinhibitAustralianfirmsfromexpandingintoChinaandtheAsiaPacific.Regulatorysettings,includingcapitalreserverequirementssetbytheAustralianPrudentialRegulationAuthority,needtobecarefullycalibratedtoensuretherearenounnecessarybarrierstoAustralianfirms’take-upofopportunitiesprovidedbyfreetradeagreementsthatraisethemaximumthresholdofforeignequityinajointventurefinancialservicesfirminAsia(AusterandFoo2015).
The2014FinancialSystemInquiryrecommendedreviewingthestateofcompetitioninthefinancialsector,includingidentifyingbarrierstothecross-borderprovisionoffinancialservices.TheAustraliangovernmentendorsedthisrecommendationandcommittedtotasktheProductivityCommissiontoundertakethisreviewbytheendof2017.Itnotedthat‘deepercross-borderlinkagespromiseenormousopportunities,ifproperlyharnessed’andthat‘ourpolicysettingsmustfacilitateentryofthesedisruptersratherthanactingasablockage’(GovernmentofAustralia2015c).ItisimportantthatthisreviewgoesbeyondAustralia’straditionalinvestmentpartnersandlooksspecificallyatthebarrierstoinvestinginChinaandothercountriesintheAsiaPacificregion.
TheAustralianFinancialCentreForum’s2010reporton‘Australiaasafinancialcentre’(JohnsonReport2010)alsoraisedanumberoftaxissueswhereAustralianregulationscurrentlyraisethecostsofoffshorecapitalborrowingandrestrictAustralianbanksfromaccessingoffshoreretailandwholesaledeposits(Finsia2014).TheseissuesshouldbeexaminedaspartoftheAustraliangovernment’sfocusontaxreform.
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Australia’sProductivityCommission(2015)notesthatstrongcompetitionandthegrowinglevelsofwealthinAsiameanthatbarrierstofinancialserviceexportsfromAustraliawillbeincreasinglycostly.ItnotesthereareregulatorybarriersconstrainingthegrowthofexportsfromthemanagedfundsectorinAustralia(inparticular,frommanagedinvestmentschemes)aswellasthroughtaxationarrangementsforinternationalinvestmentinmanagedfunds.
Bilateral and regional opportunities arising from Fintech
Financialtechnology—orFinTech—istransformingfinancialsystemsandpotentiallyentireeconomies.Globally,FinTechinvestmentreachedanestimatedUS$20billionin2015,ajumpofaroundseven-foldoverthelastthreeyears(AustralianTreasury2016).TheFinTechindustryhasgreatpotentialtonotonlyhelpdriveexpansionandgrowthinfinancialservicesandexports,butwillalsodeliverbenefitsthroughnewservicesthatcreatevalueorbringnewefficiencies.Forthesereasons,theengagementprogramonfinancialservicesshouldhaveaspecialfocusontheopportunitiesarisingfromthissector.
ChinahasaburgeoningFinTechsectorthatsupportsanumberoflargefirmssupplyingfinancialservicesandproducts.CompaniessuchasAliPayandWeChatdemonstratetherisingdemandforsophisticatedfinancialproductsandservicesinChina.Thishighlightsthecrucialimportanceofafreeandopeninternet.TheOECDrecentlywarnedthatworldwideeffortstoclampdownoncybercrimeandterrorism,inparticular,areputtingtheeconomicbenefitsofthefreeandopeninternetatrisk.TheOECDhighlightstheimportantlinkbetweeninnovationandinternetfreedom(OECD2016)AustraliaandChinamustensureafreeandopeninternetiftheyaretocapturethebenefitsofincreasingeconomicactivityinFinTechandotherinnovativesectorsthatarecrucialtofutureprosperity.ItisestimatedthattheuptakeofinformationandcommunicationstechnologiesinAustraliainthe1990saddedupwardsof0.2percentagepointsofmultifactorproductivitygrowthtoAustralia’sannualeconomicgrowth(Gretton2003).Theabsenceofdomesticandinternationalimpedimentstointernetaccessisessentialtocapturingtheproductivity-enhancingbenefitsofthesetechnologies.Thepositiveproductivity-enhancingeffectsofopennesstoFinTechinnovationarelikelytobeincreasinglyimportantastheindustrymatures.
DuringaFinTechroundtableorganisedbytheChinesegovernmentinShanghaiinFebruary2016,Lufax,thesecond-largestpeer-to-peerlenderinChina,spokeaboutreal-timepersonalisedinsuranceoptionssuchascarinsurancethatcouldaccountfortheplacesyoumightbedrivingthroughortoonaparticularday,includingweatherandtrafficconditions.DuringanotherFinTechroundtableinShanghai,ChineseinternetservicesgiantBaidu,explainedtheir‘InternetPlus’strategywasnotaboutbecomingaFinTechoperator,buttoenablethemtoactasanaggregator.Theyarefocusedonbringingtogetherthepartnersneededtorealiseanewproductorservicetofillthegapsandtosatisfyconsumerdemandsbyleveragingtheirdigitaldistributionnetworks,dataandinsights(AustralianTreasury2016).
FinTechisaboutstimulatingtechnologicalinnovationsothatfinancialmarketsandsystemscanbecomemoreefficientandconsumer-focused.Thiscanhelpdriveimprovementsintraditionalfinancialservicesand,perhapsmoreimportantly,promotedisruptionthroughinnovativenewproductsandservices,whichcanofferbenefitstoconsumersandothersectorsoftheeconomy.FinTechisalsoreducinginformationasymmetryinthemarketplaceandtherebyhelpingtomitigateriskandpromotetheefficientallocationofscarceresources(AustralianTreasury2016).
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FinTechsolutionsholdenormouspotentialbenefitstoallbusiness,especiallynewandexistingsmallbusinesses.Small-andmedium-sizedenterprises(SMEs)arecrucialforeconomicgrowthandjobsbutsomecanfacedifficultyinsecuringthefinancingtheyneedtosurviveandprosper.FinTechcanoffersolutionsthatareefficientandeffectiveatlowerscale,whichwillbenefitsmallbusinessesandprovidethemwithincreasedaccesstomorediversefundingoptions.InnovativeFinTechproductscanbebettertailoredtotheneedsofsmallbusinesses.Theseincludemarketplace(peer-to-peer)lending,merchantande-commercefinance,invoicefinance,onlinesupplychainfinanceandonlinetradefinance(AustralianTreasury2016).
Inadditiontofinancingandaccesstocapital,FinTechcanhelpallbusinessesthroughimprovedpaymentsystems,customerrelationshipmanagementandinvoicingandcollections.FinTechsolutionsincludee-invoicemanagementportalsandsupplychainfinancesolutions.
TheAustraliangovernmentoutlinedinarecentreport(AustralianTreasury2016)thatitiscommittedtoworkingwiththeFinTechindustry,regulatorsandotherstakeholders,onthekeyissuesthatunderpinthiscontinuedinnovationinfinancialservices.Thegovernmenthaspubliclysupportedtheindustry’sobjectiveofmakingAustraliatheleadingmarketforFinTechinnovationandinvestmentinAsiaby2017.Australia’sfledglingbutflourishingFinTechindustryisattractingtalent,promotinginnovationinAustralia’sfinancialservicesindustryandexportingtalentabroad,suchas:
• incubators(StoneandChalk,andTyro);
• venturecapitalfundswithafocusonFinTech(H2andReinventure);
• personalandbusinessfinance(SocietyOne,Prospa,Ratesetter,SpotcapandMoula);
• capitalmarkettechnology(OzForexandPepperstone);
• paymentsproviders(TyroPaymentsandPromisePay);
• wealthmanagementproviders(Stockspot,SimplyWallStreetandPocketBook);
• business-enablingtechnologiesanddataanalytics(Avoka,Metamako,andQuantium);and
• crowdfundingplatforms(Equitise,TMeffectandCrowdFundUp).
Research on financial services trade and cross-border investment
TheAustralianCentreforFinancialStudies(AusterandFoo2015)identifiesalackofresearchanddataasanimpedimenttofinancialservicesintegrationintheAsiaPacificregion.Itarguesthatmanyoftheenablersandimpedimentstogreaterintegration,ortheirpotentialimpact,arenotwellresearchedorunderstoodandthatpolicymakers,regulatorsandpractitionerslackastrongevidentiarybasefromwhichtomakewell-informeddecisionsonmattersofsignificancetotheAustralianandChineseeconomies.
AustralianandChineseorganisationsshouldcommissionandencouragecollaborativeresearchprogramstobecarriedoutbyAustralianandChineseinstitutions,tobetterunderstandandassesstheimpactoffinancialintegrationintheAsiaPacific.Theresearchshouldlookspecificallyatthedriversandmechanismsoffinancialintegration,theimpactofglobalregulatoryreformssuchasthoseresultingfromBaselIIIandtheFinancialStabilityBoard,theinstitutionalmechanismsthatdrivereforms,andAsia’svoiceinthesemechanisms.
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Thisresearchcouldhaveaspecificfocuson‘behindtheborder’barriersandthebroaderimpactsofChina’sreformprocessesforAustraliaandtheregion.ThereislittlesubstantiveresearchthatanalysestheimpactsoftheopeningofChina’scapitalaccountontheAustralianeconomyfromawhole-of-economyperspective.Someindustrystudiespredictincreasedinvestmentorcommercialflowsinparticularsectors,butnostudieshavelookedattheAustralianeconomyasawhole,ortheimpactonrelevantsectorswithinfinancialservices.Further,thereissignificantdatadevelopmentstilltodoonmeasuringandreportingChina’sfinancialdata,includingcross-bordercapitalandinvestmentflows.
Regional collaboration on financial services and flows
AstheChinesefinancialsystemopenstotheregion,thereisasignificantopportunityfortheseflowstofinanceproductiveinvestment,buildcapitalstocksandincreaseeconomicgrowthintheregion.ForAustralia,asacapitalimportingcountry,thereisagreatopportunitytoimportChinesecapitaltofinanceinvestmentandreducethecostofcapitaltoAustralianfirmsandhouseholds.ForChina,thesereformsoffertheopportunitytoincreasethereturnsonthecapitaloffirmsandhouseholds,whichiskeytoimprovinglivingstandardsandaddressingchallengesrelatedtotheageingpopulation.Thissectionidentifiesanumberofinitiativestohelpfacilitateregionalintegrationinfinancialservicesandflows.
One Belt, One Road
Asthe‘topandtail’oftheregionidentifiedbytheOBORvision,collaborationbetweenAustraliaandChinaonfinancialsectorreformanddevelopingfinancialinfrastructureacrosstheregionwillbeanimportantsourceofstabilitytohelpensureeconomicprosperityforfuturegenerations.AsdiscussedindetailinChapter4,thepartnershipbetweenAustraliaandChinamustbeenabledonbothsidesbytheprovisionofsupportingfinancialinfrastructure(includingaccesstoeachother’sfinancialservicesmarkets),theabilitytomakeinvestmentsthatsupportfurthertradeandservicedelivery,andcontinuedandeasierflowsofpeoplebetweenthetwocountries.
TheOBORinitiativeinvolvesbuildingahostofnewinfrastructureconnectionsbetweenChina,Asia,Africa,theMiddleEastandEurope.AcomplementaryseriesofportsandotherinfrastructureprojectsacrosstheIndianOceanandsurroundingseascalledtheMaritimeSilkRouteaddsamaritimelegtoland-basedconnectionsincludingtheChina–PakistanEconomicCorridor(CPEC)andtheproposedBangladesh–China–India–MyanmarEconomicCorridor(BCIM).
Chinahasalreadyestablishedmajorfinancingbodies,includingtheAIIBandtheSilkRoadFund,tohelpfundanestimatedUS$250billionworthofOBORprojects(Australia–ChinaOBORInitiative2016;Brewster2015).OBORrepresentsanopportunitytofurtherstrengthenfinancialintegrationbycomplementingitstradenetworksandphysicalinfrastructureinvestmentswithgreaterinvestmentinfinancialinfrastructure.
AlongwithinfrastructureinvestmentinNorthernAustralia,thisrepresentsanotherkeywayinwhichAustraliaandChinacancollaborateonOBOR.Investmentinfinancialinfrastructuresuchasfinancialinstitutions,financialintermediaries,paymentsystems,creditinformationbureausandcollateralregistriesshouldbeseenascriticalcomplementstothebroaderOBORobjectivesofdeepeningtradeandcommerciallinks,andthusshouldreceivethesamelevelofattentionandfinancialsupport.
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APEc’s Asia Region Funds Passport
UndertheauspicesofAPEC,theAsiaRegionFundsPassport(ARFP)will,onceimplemented,provideamultilaterallyagreeduponframeworktofacilitatethecross-bordermarketingofmanagedfundsacrossparticipatingeconomiesintheAsiaPacific.Theviewisthatamutualrecognitionapproachmaybemorerealisticthanpursuingregulatoryharmonisation;infundsmanagement,theARFPisthepreferredregionalvehicleforcross-bordermarketingofmanagedfunds.Inthelongerterm,theARFPcouldalsofacilitatefundsfromtheAsiaPacificregionbeingmarketedinEuropethroughanAsian/Europeanmutualrecognitionagreement.
TheAustralianFinancialMarketsAssociationstatesthatthePassportprovidesa‘practicaltemplateforcooperationintheAsianregion’.TheFinancialServicesCouncil(FSC)saysthattheARFPisits‘preferredmechanismforcrossbordertradeinfundsmanagement,alongsidebilateralandmultilateralfreetradeagreements’.TheFSCalsonotesthattaxationregimes,bothinAustraliaandoverseas,arecomplexandthat‘Australiawillnotbeasuccessfulparticipantin[theARFP]unlessaccompanyingdomesticreformsareundertaken’(ProductivityCommission2015).
TheARFPisaregion-wideinitiativethatwasinitiatedbyAustralia,NewZealand,SouthKoreaandSingapore.InSeptember2013,thesefourcountriessignedaStatementofIntenttojointlydeveloptheARFPtofacilitatecross-borderoffersoffundsintheAPECregion.InApril2014,thesignatories,togetherwiththePhilippinesandThailand,issuedajointconsultationpaperontheproposedrulesandarrangementsfortheARFP.Japansignalleditsinterestinparticipatingin2015.Theseseven‘pilot’economieshavebeenworkingtowardsthelaunchoftheARFP.FiveotherAPECmembersnotcurrentlysigneduptotheARFP—China,HongKong,Indonesia,MalaysiaandVietnam—haveneverthelessjoinedparalleldiscussionsontheARFPrules(APEC2015).
On28April2016,aMemorandumofCooperation(MoC)wassignedbyAustralia,Japan,SouthKoreaandNewZealand.TheMoCcomesintoeffecton30June2016.TheARFPinitiativeisopentoanyAPECeconomythatsignson,andparticipatingeconomieshaveupto18monthsfrom30June2016toimplementdomesticarrangements.ActivationoftheARFPwilloccurassoonasanytwoparticipatingeconomiesimplementthearrangementsundertheMoC.
TheAustraliangovernmentintendstolegislatetogiveeffecttotheARFPinthesecondhalfof2016(ProductivityCommission2015).ThegovernmentshouldcontinuetoprogresstheARFPand,throughworkininternationalforums,encourageotherjurisdictionstoparticipate.ChinahasbeeninvolvedindiscussionsaroundtherulesoftheARFPandcouldconsidersigningupformallytotheinitiativeasakeywayofattractingtalentandexpertiseintoitsfinancesector(APEC2014b).
RcEP negotiations
ThereissignificantscopetouseRCEPnegotiationstostrengthenthesupplyoffinancialservicesthroughouttheAsianregion.Inthefinancialservicessector,manytypesofservicescanbeperformedacrossborders,withoutsacrificingappropriateprudentialsupervision.Theseservicesincludebuyingandsellingfinancialproducts,participatinginandstructuringtransactions,andprovidinginvestmentadvice.RCEPshouldconsiderpermittingfirmstoprovidecross-borderservicestoclientsandqualifiedinvestorswithoutestablishingan
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in-countrycommercialpresenceorbeingsubjecttotheseparatelicensingandapprovalrequirementsthatgenerallyapplytofirmscommerciallypresentinamarket(seeChapter7;andseediscussioninAustralianServicesRoundtable2013).
managing risks
TheliberalisationandopeningoftheChinesefinancialsystembringswithitgreatopportunitiesforbothChinaandAustralia,but,aswithAustralia’sreformexperience,carrieswithitanumberofrisks(seeChapter6).Theseincludegreaterexposuretonegativeexternalshocksandcontagion,challengesinrelationtocross-bordersupervisionandenforcement,andadverseeffectsfrompotentiallyhighervolatilityincapitalflows—whichcancauserapidchangesindomesticassetpricesforequities,bonds,commodities,foreignexchangeandderivatives.
Increasinglycorrelatedpricesbetweendifferentcountriesandassetclassesreducethebenefitsofportfoliodiversification,whilealsopotentiallycreatingchannelsforcontagion.Theglobalfinancialcrisishighlightedthefactthatlargecapitalflowscanincreasevulnerabilitiesatthemacroeconomiclevelandexacerbatesystemicrisksinfinancialsystems.TheliberalisationandopeningofChina’sfinancialsystemwillfundamentallychangethenatureoffinanciallinkagesintheAsiaPacificregion,withimplicationsnotjustforfinancebutalsoforflowsoftrade,capitalandpeople.
TheflexibilityofAustralia’seconomy,particularlyitsfloatingexchangerateandinflation-targetingmonetarypolicy,helpsitweathervolatilityfrominternationalmarkets.Asithasdoneinthepast,thiswillplayafundamentalroleinAustraliamanaginganyfuturevolatilityresultingfromChina’sreformsandregionalintegrationmorebroadly.FinancialreformsofpastdecadesandtheintegrationofAustralia’scapitalmarketsintotheglobalsystemhavedeliveredthebasisforsoundermacroeconomicpolicy,morediversifiedportfoliosforAustralianinvestorsandthedevelopmentoftoolsforhedgingrisk.TheAustralianfinancialsystemprovedresilientthroughouttheglobalfinancialcrisiswhileothersdidnot.
ForChina,riskmanagementshouldbebasedonensuringthatreformsareproperlysequencedintheirimplementationandundertakenattheappropriatepace.TheAustralianexperiencesupportsthenotionthatstronginstitutionsandregulatorypracticescangoalongwaytowardmitigatingtherisksofdeepfinancialreform.
BothAustraliaandChinahaveastrongincentivetoensurethatthereisawell-resourcedandflexiblefinancialsafetynetintheregion.On4February2016,IMFManagingDirectorChristineLagardewarnedthattheglobalfinancialsafetynethasbecometoofragmented,particularlyinAsia,andneedstobereformedandstrengthened.ReformingthesafetynetwouldbenefitChina,AustraliaandtheAsiaPacificregion(Lagarde2016).ThiscrucialtaskisdiscussedinmoredetailinChapter8.
AustraliaandChinamustfocustheireffortsintheG20andintheIMFonensuringthatthereisaholisticapproachtoaddressingtherootcausesofsafetynetfragmentationintheAsiaPacific.ThisrequiresafocusonincreasedandmorepermanentfundingfortheIMF(althoughtherearerealconstraintsonthis),better-tailoredfinancingfacilitiestomeettheneedsofAsianeconomies,anewphaseofIMFreformsthatgiveAsianeconomiesagreatervoice,andbettercooperationbetweentheIMFandregionalfinancingarrangements.TheseareperspectivesthatAustraliaandChinashouldadvocateforintheIMFandintheG20(seeChapter8).
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Regionalandbilateralarrangements,suchastheuseofcurrencyswaplinesandarrangementsliketheChiangMaiInitiativeMultilateralization,shouldnotbediscounted.TheyplayanimportantandcomplementaryroletotheIMF.TheIMFneedstolookathowitcanbettercooperatewiththesearrangementsbysettingupguidelinesbeforeacrisiseruptsinordertohelpguidehowthatcooperationwouldtakeplaceduringacrisis.Thisiscriticaltothesafetynet’sabilitytorespondquickly,flexiblyandconsistentlytocrisesandiskeytopromotingmarketconfidenceinthesafetynet.
Whilemanyofthesemeasuresarepoliticallydifficult,China’sG20hostyearhasseenincrementalandpragmaticfirststeps,throughtheIMF’sreporttoG20financeministersinApril2016,tobolstertheadequacyofthesafetynet.TheG20mustseizethisopportunitytobeginaconversationontheseissues(seeChapter8).
Finally,thereisanincreasingriskthatslowinggrowthinChina,aswellasslowinggrowthregionallyandglobally,coulddampenthemotivationanddriveforundertakingthereformsoutlinedinthischapter.Losingthemomentumforreformwouldhavesignificantconsequences.Itwouldnotonlyriskthegainsachievedthusfarbutcouldleadtoincreasedvolatilityfromanegativemarketresponse.TheAustralianandChinesegovernmentsshouldemphasisetheimportanceofthesesupply-sidereformsincreatinggrowthandboostingjobcreationinasustainableandbalancedwayintothefuture.Aweakglobaleconomy,combinedwiththedecreasingeffectivenessofmacroeconomicpoliciesinmanycountries,meansachievingstructuralreformsandreducingbarrierstointernationaltradearenowmoreimportantthanever.
The future of bilateral financial cooperation
Chinahasachievedsignificantprogressregardingtheliberalisationofitsdomesticfinancialsystem,retaillendinganddepositrates,usageofitscurrencyinglobaltradesettlementsandoffshoreRMBmarkets,flexibilityinitsexchangerateregime,andopennessofcapitalflowsintoandoutofChina.ThesedevelopmentshaveimportantimplicationsforChina’sinstitutionalandeconomicstructurethroughreducingdistortionsinfactorandfinancialmarketsandallowingalargerroleforthemarketintheeconomy,whilestillmaintaininganactivestatecontroloftheprocessandincreasingChina’spositionintheglobalfinancialsystem.
Howevertheyturnout,thereformprocessesunderwayinChinawillprofoundlyshapethefutureoftheAustralia–Chinaeconomicrelationship.Theywillhaveimplicationsacrosseconomic,politicalandsocialdimensions.Thecentralargumentofthischapteristhat,ifthegovernmentsandprivatesectorsofAustraliaandChinapositionthemselvesstrategically,thesereformprocessesofferaonce-in-a-generationopportunitytodeepentherelationshipinfinancialservicesandfinancialflowswhich,atpresent,isnascentcomparedtotherelationshipinmerchandisetrade.Thiswillbealongprocess,butthischapterhasoutlinedanumberofstepsthroughwhichitcanbeachieved.
Mostimportantly,thischapterproposesthattheAustralianandChinesegovernmentsdevelopaprogramofformalengagementonfinancialservicesandreform.TheprogramwouldcomplementtheStrategicEconomicDialogueandengageministers,officials,regulatorsandfirmsinaworkprogramtodeepenbilateralfinancialintegration.ItisrecommendedthatakeyfocusofthisprogrambeonpilotingtheselectreleaseofregulatoryandlicensingrestrictionsonAustralianfirmsinChinaasaphase-inor‘testingground’forregionalliberalisation.
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Thechapteralsorecommendsmeasures,whichshouldbedrivenbybilateralcommercialneed,toimprovethedialoguebetweenAustralianandChinesecentralbanksandregulators.Theaimshouldbetodevelopamutualrecognitionframeworktoimprovetheeaseofdoingbusiness,progressthedevelopmentofRMB-denominatedassetsandsecuritieslistingsinAustralia,reviewregulatoryrestrictionsincludinginregardtotaxationandmacroprudentialregulations,promotethebilateralandregionalopportunitiesarisingfromFinTechanddigitalfinance,andcommissionresearchbetweenAustralianandChineseinstitutionsonfinancialservicestradeandcross-borderinvestment.
Thechapteralsorecommendsthatthesebilateralinitiativesbecomplementedbyafocusonregionalfinancialcooperation.ThisincludesbuildingabilateralfinancialinfrastructurefocusinregionalinitiativessuchasOBORandtheAIIBtoimprovepaymentsystems,creditinformationbureaus,collateralregistriesandfinancialintermediariesandinstitutionsthroughouttheAsiaPacific.Chinashouldalsosignonto,andAustraliaimplement,APEC’sAsiaRegionFundsPassportandbothcountriesshouldadvocateitsgreateruseintheregion.
Thiscombinationofastrengthenedbilateralarchitectureandregionalinitiativesaimedspecificallyatfinancialservicesandfinancialintegrationwillbekeytocatalysinggreaterfinancialintegration.ThisisthevitalnextstepinstrengtheningtherelationshipbetweenAustraliaandChina.
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CHAPTER6Framework for capturing opportunities and managing risks
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Key messAges
AustraliaandChinashouldaspiretoabilateralrelationshipofthehighlevelandscopethattheyestablishedduringthefoundationalperiodofeconomictiesinthe1980s,whentheyagreedona‘modelrelationship’forcooperationbetweencountrieswithdifferentpoliticalandsocialsystemsandatdifferentstagesofeconomicdevelopment.TheenormoustransformationtoneweconomicmodelsthatAustraliaandChinaarecurrentlyundergoingcallsfortheelevationanddirectionoftheirpartnershipinasimilarway.
Therearesignificantuntappedopportunitiestoincreasetwo-waybilateraltrade,investment,financeandcooperationonregionalandglobalissues.Realisingtheseopportunitieswillbeimportantforthelong-termeconomicperformanceandsecurityofbothcountries.
Therearethreemajortypesofriskinthebilateralrelationship:commercialrisks;macroeconomicrisks;andsystemdifferencerisks.Commercialandmacroeconomicrisksrequiretheadoptionofnormalbusinessstrategiesandpolicycapabilitiestoavoidoramelioratetheircost.Systemdifferencerisksarestructuralandsubjecttochangeovertime.Theyaremorecomplextomitigate,requiringpoliticalaswellasbusinessleadershipinordertoframestrategicarrangementsfortheconductoftherelationship.
Theopportunitiesarebestrealisedandtherisksbestmitigatedthroughpoliticalleadershiponbothsidesthatmobilisesbi-nationalworkprogramstoadvancepriorityinterestsandworkthroughissuesintherelationship.Thisprovidesimpetusandaunitingvisionthatiskeytocommandingtheattentionandfocusingtheresourcesofofficialandprivateactors.
• AustraliaandChinashouldupgradetheirbilateralrelationshipfroma‘ComprehensiveStrategicPartnership’toa‘ComprehensiveStrategicPartnershipforChange’.ThisuniquecategorisationoftheAustralia–Chinarelationshipwouldsignalbilateralcommitmenttostayingaheadofthereformcurveinimplementingneededeconomicpolicyinitiativesandstrategies,andprovideanexceptionalopportunityforChinatoworkwiththesmaller-scaleyetmoredevelopedAustralianeconomyasatestinggroundforchange.
• AustraliaandChinashouldworkoverthecomingyearstodeveloptheirnewpartnershipintoacomprehensivebilateralBasicTreatyofCooperationthatembedsfrequenthigh-levelpoliticaldialogue;institutionalisesofficialbilateralexchangesandtechnicalcooperationprogramsbetweenministriesandbranchesofthemilitary;poolsapproachesbetweenfederal–stategovernmentsinAustraliaandcentral–provincialgovernmentsinChina;andprovidesforthecomprehensivesettingofstrategicbilateralobjectivesandforwardworkagendaseveryfiveyears.
• TheComprehensiveStrategicPartnershipforChangeshouldencourageinvestmentinnationalcentresofresearchexcellencetosupportunderstandingoftheforcesthatwillshapethedevelopmentoftheeconomicrelationshipbetweenAustraliaandChinainitsregionalandglobalsettings.Thatwillensuretherelationshiphasthenecessaryintellectualunderpinningstothrive.
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• AustraliaandChinashouldestablishabi-nationalAustralia–China(Ao–Zhong)Commissiontodramaticallyboostthelevelandrangeofscientific,official,businessandcommunityexchangesbetweenthetwocountriesanddrivetheaccumulationofhumancapitalandnetworksneededtotakeAustralia–Chinaeconomicrelationstothenextlevel.Itwillpromoteanambitiousbilateralprogramof‘literacy’capacitybuilding,multi-levelscholarlyexchange,bureaucraticnetworkbuilding,politicalinteractionsandsustainedhigh-levelbusinessdialogue,anddevelopaforwardworkagendaforimprovingeconomicpolicymakingcoordination.
ThisisatimeofgreatchangeinChina,Australia,theregionandtheworld.Thereareenormousopportunitiesstilltobegraspedonbothsides.Thischapterwillreviewkeyopportunitiesintherelationship,identifythemajorrisksinrealisingthoseopportunitiesandproposeaframeworkformanagingtheserisksandgettingthemostoutoftherelationship.
AsbothcountriesadapttoChina’stransitiontoaneweconomicmodel,thisReportproposesthattheyupgradetheirrelationshipfromaComprehensiveStrategicPartnershiptoanewanduniquelevelasa‘ComprehensiveStrategicPartnershipforChange’.Thiswouldsignalthedeterminationofbothcountriestofocustherelationshiponachievingtheirgoalsforeconomicandsocialchange.Thetaskofsuchapartnershipwouldbetoenergiseanddeepenthecurrentbilateralinstitutionalarrangements,buildtrustaroundcommoneconomicandpoliticalinterests,managetheuncertaintiesofchange,anddeveloptheclosecommercialandbusinessengagementneededasthestructureoftheeconomicrelationshipshiftstowardsservicesandconsumers(seeChapter1).
Opportunities
TheopportunitiesintheAustralia–ChinarelationshipderivefromthegrowthofChina’swealthanditsimportanceintheworldeconomy,thestronglycomplementaryrelationshipofAustraliatoChina’stradeandindustrialtransformationbecauseofAustralia’scompetitivenessininternationalresourceandenergymarkets,Australia’sabilitytomeetmanyofChina’snewdemands,theirrelativegeographicproximityandtheirclosepoliticalengagementsinceChina’sreformandopeningbeganinthelate1970s.
Foundations
ThefoundationoftheinteractionbetweenAustraliaandChinaistheirdeeplycomplementaryeconomicpartnership,whichcontinuesasthebridgeheadofbilateralengagement.ThenaturalcomplementaritybetweentheireconomieshasdeepenedtherelationshipsinceAustraliacommittedtoengagementinChina’sreformandopeningprocess.Australia’sabundant,stableandlow-costsuppliesofresourcesarecriticaltoChina’scontinuinggrowth,investmentandurbanisation.China’sdemandfortheseresourceshassustainedstrongtradeandeconomicgrowthinAustralia—directtradewithChinaiscalculatedbytheAustralia–ChinaBusinessCouncil(ACBC2015)tohavecontributedover5.5percentofAustralianGDPbetween1995and2011.Thisisthebiggestcontributionofanycountryandtwiceaslargeasthatofagriculture,forestryandfishing.
Thefoundationsofthebilateralrelationshipalsoencompasstheassetsthathavebeenbuiltthroughthesuccessoftherelationship,symbolisedinthepresentComprehensiveStrategicPartnership.
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new economic model
Whiletheresourcetraderemainsacentralelementinthebilateraltraderelationship,theendofthecommoditiesboomandtheemergingtransformationofChina’seconomyfromaninvestment-exportmodeltoconsumptionandservices-ledgrowthopensnewopportunitiesinthetraderelationship.Theopportunitiesforgrowthintherelationshipnowlieinenergy,agriculture,high-valuemanufacturesandespeciallyinservices.ChinawillcontinuetoexportmanufacturesandbeastrongnetsourceofmigrationtoAustraliawhilecapitalexportswillgrowanddiversify.TheupgradingofChina’sindustrialeconomywillpushgrowthinitstradewithAustraliaintonewmarketsformachinery,highvalue-addedmanufacturesandequipment,andcapitalintoallsectorsoftheAustralianeconomy.
MajorflowsofChinesetourists,students,investorsandmigrantsintoAustraliaandmoreAustraliansstudents,touristsandinvestorsspendingtimeinChinawillequipmoreAustraliansandChinesewithinterestsandcapabilitiesinimprovingbusiness,culturalandpoliticalrelations.
investment and financial opening
Two-wayflowsoninvestment,particularlyFDI,willbecriticaltonewtradeandcommercialgrowthbetweenthetwocountries.ChineseinvestmentcanhelpAustraliatoaddressitssignificantinfrastructuregap,whileAustralianinvestmentisinjectingdeveloped-marketexpertiseintoemergingsectorsoftheChineseeconomy.FDIineachother’seconomieswillendowbusinesspeopleinbothAustraliaandChinawithalong-termcommitmenttomanagingnotonlycommercialbutalsopublicissuesthathavetobenavigatedintherelationshipasitchangestoonethatinvolvescloserengagementinbusinessineachcountry.
ThefinancialintegrationthatwillflowfromChina’songoingprocessoffinancialmarketandcapitalaccountliberalisationisanareaofparticularopportunityandimportance.LiberalisationwillreleasemassivevolumesofChinesesavingssearchingforhigherreturns,creatingamajorinvestmentpoolasAustraliaseekstoupgradeitsinfrastructure,internationaliseitssupplychainsandinvestininnovation.Reducingbarrierstotradeinfinancialservicesispartofthestep-by-stepprocessinvolvedinthesereformsandAustraliacanworkwithChinainpioneeringchangeinthesemarkets.Liberalfinancialmarkets,fullyconvertiblecurrencies,andopencurrentandcapitalaccountswilldiversifyandstabilisetheinteractionbetweenChineseandinternationalcapitalmarkets,butthisgoalwilltaketimetoachieve.Meanwhile,steadyexperimentationandsharingofpolicyexperiencecanhelpalongtheway.
TheComprehensiveStrategicPartnershipforChangewouldencourageandsupportnewcommercialpartnershipsbetweenAustraliaandChinathatmakeuseofbothcountries’innovationagendastoharnesstechnologytoimprovebilateraltradeandcommercialties.
Partnershipsmakecommercialsenseinbuildingbusinessonlywherelocal,up-closeengagementdeliversreturns.Gettingclosetothecustomerrequiresknowingthecustomerwell.PartnershipsareaneffectivevehicleforbringingsuppliersandcustomersinChinaorAustraliaclosertogether,expandingmarkets,improvingefficiencyanddeliveringcompetitiveproductsandservice.
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common regional and global assets
AustraliaandChinahaveastronginterestinapeacefulandprosperousregionalandinternationalsystem.Crucialpartsofthisorderarewellestablishedinthepost-BrettonWoodsinstitutionsandtheUnitedNationsframework,buttherearegapsandtheorderneedstoevolvetomeetnewchallenges.SomeoftheprioritiesaredealtwithinChapters7and8.Herethefocusisontheprinciplesandapproachesthatwillhelpcreatetheconsensusthatisneededtomakeprogresswheresignificantdeficienciesremain.
AustraliaandChinahavethechancetobuildbilateralpartnershipsthatareaheadoftheeconomicreformcurveinbothcountriesandthatsetthebenchmarksforbroaderregionalandglobaleconomiccollaboration(Box6.1).Chinaisfacingadecadeofchallengingyetcrucialdomesticandinternationaleconomicpolicyreforms,andAustraliaprovidesaprovinggroundforChinatotestthepathwaysthroughmanyofthesereformsonthewaytohigher-incomeadvancedeconomystatus.AustralianandChinesepolicymakerscanusetheirpartnershiptohelppushthroughdomesticeconomicreformsandtostrengthenthestructureofregionaleconomicarchitecture.
China’sstandingintheAustralianandAsiaPacificeconomiesisboundtoriseifitsucceedswithitscontinuedprogramofeconomicandsocialreform.Intheinternationalarena,Chinaisbecominganincreasinglyglobalpowerandnaturallyseekstosecurecommensuraterepresentationinglobalgovernanceandtoplayamoreimportantroleininternationalaffairs.Australiacanplayaconstructiveroleinsupportingthesedevelopments.
Theeconomicchangesunderwaywillalsoimpactonpoliticalrelations.Bothcountriesshareinterestsindevelopingarrangementsthatstrengthenregionalandglobalpoliticalsecurity.
BOx 6.1: AusTRALiA, CHinA AnD RegiOnAL inFRAsTRuCTuRe invesTmenT
TheNorthernAustralianeconomyisheavilydependentontheminingsectorandisnowseekingeconomicdiversification.Whileresources,includingenergy,willcontinuetodominateNorthernAustralianindustry,theAustraliangovernmentisanticipatingthatgrowthsectorsforitsfutureinclude:foodandagribusiness;tourismandhospitality;internationaleducation;andhealthcare,medicalresearchandagedcare.NorthernAustraliahasasizeabledeficitintheinfrastructurethatisneededtorealisethisgrowthpotential.TheAustraliangovernmenthassetupanA$5billionconcessionalloanmechanism,theNorthernAustraliaInfrastructureFacility(NAIF).Businessesfromanycountryarepotentiallyabletoaccesstheseloans,butitisclearthatstillmuchmorecapitalwillbeneededtodeveloptheregion(GovernmentofAustralia2015b).
TheNorthisalreadyveryopentoforeigninvestment.Muchofthecapitalusedtofinancetheresourcesectorisalreadyforeign-owned.Thereisastronglinkbetweenforeigninvestmentandlocalwagesandcommunitydevelopment.TheNorth’ssparsepopulationalsomakesfindingthespaceforlargedevelopmentseasierthaninmanyotherareasofAustralia.Mostimportantly,Australiasimplydoesnothavethedomesticsavingsnecessarytobuildandupgradeports,pipelines,logisticsnetworksandtransportationfacilities.Australiahaspersistentlyrunlargecurrentaccountdeficits,averagingabove3percentofGDPbetween1960and2015.Anyoverallexpansionininvestment—whetherintheNorthoranywhereelseinthecountry—willlikelycomefromforeignsavings.
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ThereareotherreasonswhyChineseinvestmentintheNorthmaybefavourabletobothChinaandAustralia.Chinahasdevelopedaworld-classinfrastructureindustry,whiletheNorthneedslarge-scaleinfrastructuredevelopment.Northerninfrastructurecanserviceandintegratewithtransportandcommunicationnetworkselsewhereintheregion,potentiallyachievingeconomiesofscaleandscope.Australia’sdemandforinfrastructureinvestmentintheNorthandacrossthecountrymatchesChina’sappetiteforbothinfrastructureinvestmentandforitsfirmstobeinvolvedinlarge-scaleinfrastructureprojects.InvestmentinNorthernAustraliawillfacilitateregionaltrade,increasingAustralia’sregionalintegrationwithSoutheastAsiaandprovidingtheregionwithbetteraccesstoitsland,resourcesandknowledge.Withcapacitytodeliverabroad,China’sstrategyistoinvestoutwardstoaddresstheUS$8trillionregionalinfrastructuregapviainitiativessuchasOBOR.
OBORconsistsoftheNewSilkRoadEconomicBeltandthe21stCenturyMaritimeSilkRoad.TheBeltandRoadareenvisionedasextensivenetworksofChinesecommerce,investmentandinfrastructureprojectsextendingalongthecountry’skeystrategictraderouteswestandsouth.ChinahascommittedUS$40billiontoaSilkRoadFundandcreatedthemultinationalUS$100billionAIIB,whichcouldhelpfinanceOBORprojects.InhisspeechtoajointsittingoftheAustralianparliamenton17November2014,ChinesePresidentXiJinpingdeclaredthatOceaniawasa‘naturalextension’oftheMaritimeSilkRoad,andheinvitedAustraliatoparticipateinOBOR(Thomas2015).
Thewheelsarealreadyinmotion.The2015roundoftheAustralia–ChinaStrategicEconomicDialoguefocusedonregionalinfrastructureinvestment,andformedworkinggroupstoexploreopportunitiesinNorthernAustraliaandtheregion,includingthepotentialroleoftheNAIFandAIIB(TreasurerofAustralia2015c).RepresentativesfrommajorChineseinvestorsparticipatedintheNorthernAustraliaInvestmentForumthatwashostedbythethenMinisterforTradeandInvestmentAndrewRobbinDarwininNovember2015.AustraliashouldseektosupporttheAIIBfundingprojectsthatareapartofOBOR,suchasbyusingtheAIIBtosourcecapitalforworldclassinfrastructure.
OBORandtheAIIBalsohavethepotentialtofacilitatepartnershipsbetweenAustraliaandChinaoninfrastructureprojectsinthirdcountries.Forexample,aChinesestate-ownedassetmanagementcompanycouldprovidethecapital,aChineseconstructioncompanycouldprovidethematerialsandlabour,andanAustralianconsultancycouldprovidetheprojectplanning,financialforecasting,riskandtalentmanagement,andcontractingoutspecialisedtechnicalinputsforamajorinfrastructurefacilityprojectinacountrylikeMyanmarorIndonesia(Lumsdenetal2015).AjointapproachtoregionalinfrastructurecanbefurtherenhancedthroughtheGlobalInfrastructureHubinSydney.
UndertheComprehensiveStrategicPartnershipforChange,theAustralianandChinesegovernmentsshouldupgradetheircooperationonOBORthroughappointingadedicatedhigh-leveljointworkinggrouptodeepenandextendtheworkalreadybeingundertakenbytheSECInvestmentWorkingGrouptoexplorethepracticalitiesofhowthetwocountriescanbetterworktogethertoenhancedomesticandregionalinfrastructure.
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Risks
Inallbigeconomicandpoliticalrelationships,suchasthatbetweenAustraliaandChina,thereareuncertaintiesandunpredictableoccurrencesthatcreaterisksthathavetobemanaged.Inpartnershipsthatarerelativelynewandgrowingrapidly,especiallywherethescaleandactivitiesofonepartnerchangesrapidly,ashasbeenthecasewithChina,associateduncertaintiesandheightenedchancesofunpredictableeventsexaggerateperceptionsofrisk.Betweencountriesthathavedifferenthistoriesandpoliticalcultures,systemdifferencesaddanotherdimensiontoriskinmanagingrelationships.Learningandexperiencewillreducetheserisks.Butprivateandpubliceffortisimportanttotheunderstandingoftherisksbornofchangeandthedifferencesthatwillremain—andfindingwaystoworkaroundthemtoachieveeconomicallyandsociallyproductiveoutcomesfromexchange.ThisReportsetsoutataxonomyofrisksthatconfronttheAustralia–Chinarelationship:commercialrisks,macroeconomicrisks,andsystemdifferencerisks.ThegoaloftheComprehensiveStrategicPartnershipforChangeshouldbetoforgeabilateralrelationshipthatgoesbeyondthatwhichisbasicbetweentwocountriesandthatcanwithstandandthrivearoundunexpectedchangesineithercountry.
commercial risks
Therearefirm-andindustry-levelcommercialrisksacrossallmarkets.Theseincludeissuesofduediligence,marketaccess,regulatoryenforcementandlocaloperationsinothercountriesthatimpactuponspecificactorsinthebilateraleconomicrelationship.
Commercialrisksareanormalpartofthedecisioncalculusofacompanyseekingtoexpanditstrade,investmentoroperationsinanothercountry.Companiesthatassumetheserisksinsearchofhigherreturnsneedtohaveastronggraspoflocalmarkets,regulationsandbusinesspractices.Still,suchrisksareamplifiedinnewmarketswherecompanieshavenopriorexperienceandlittlebackground.ThishasbeenthecaseforsomefirmsinAustraliaandChinawho,attractedbytheexcitementofnewpossibilitiesforprofitableinvestmentintheothercountry,weredrawnintoventuresthatunderestimatedorotherwisemiscalculatedcommercialrisks.Whilethefirst-moveradvantageisreal,itneedstobeadequatelybalancedbynormalbusinessconsiderations.
ItisnottheroleoftheAustralianorChinesegovernmentstoconductduediligenceonbehalfofcompaniesandcovertheirfailures.Butbothleadershipshaveanimportantmessagingroletoplay:infosteringbilateralbusinesssentimentthatisrealisticaboutopportunities,whileencouraginginvestmentprojectswheretherearethecapabilitiesandrelationshipstoforgesustainablecommercialpartnerships;inupgradingmarketawareness(throughAustradeinAustraliaandMOFCOMinChina);andinbuildingcompetenciesforbothAustralianandChinesefirms(Box6.2).
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BOx 6.2: exPeRienCe WiTH COmmeRCiAL RisKs
TwoearlyAustralianmoversintotheenormousandpotentiallylucrativeChinesemarketwereitsmajorbrewingcompanies,LionNathan(nowLion)andFoster’s(Gettler2004;Slocumetal2006;Chung2011).LionNathanspentoverA$350millionbuildingbreweriesandbuyingintojointventuresintheChinesemarketfromthemid-1990s,buteventuallysoldoffitsbusinessesforonlyA$220millionin2004.Lion’sstrategyinChinawassimilartoitsapproachinAustralia,whichwastoinvestheavilyinvolume-buildingandcompetitivepricing.However,confrontedbyhighdistributioncostsandintensecompetitionfromlocalbrandsinthelow-endofthemarket,ithadtowithdraw.ForaforeigncompanyinChina’sfragmentedandstillmaturingbeermarket,otherareassuchasbranding,marketingandthelogisticsofdistributionshouldhavebeenmoreimportantconsiderations.Theseareasrequiredsophisticatedmarketengagementandhigh-levelknowledgeoflocaloperationsthatcomprehendedChinesemarketrealitiesandemployedbiculturalhumanresources.Foster’sGrouplimpedoutofChinain2006afterexperiencingsimilarchallenges.ThechallengesfacedbyLionNathanandFoster’sshowthenecessityofadvancedmarketandregulatoryknowledge,sustainedon-the-groundengagementandtheprudentassessmentoflogisticalrisks.
TheSinoIronprojectinWesternAustraliais‘famousinChinaasthesinglemostdisastrousoutboundinvestmentdealinChinesehistory’(Garnaut2014;AustralianCentreonChinaintheWorld2015).In2006,Chinesestate-ownedholdingcompanyCITICPacificsignedaA$5billion25-yeardealwithAustralianminerMineralogytominemagnetiteironoreinWesternAustralia’sPilbararegion—thelargest-everChineseinvestmentinAustralia.WhenCITICboughtintotheSinoIronprojectitlackedexperienceinboththeironoreindustryandintheAustralianmarket,butwasattractedbygettingasliceofthelucrativeAustralianironoretrade.TheSinoIronprojectsufferedmassivecostblowoutsfromarangeofpredictablerisks—transportationbottlenecks,weatherevents,risinglabourandcapitalcosts,andastrengtheningAustraliandollar.AhighlypubliciseddisputebetweenMineralogy’sownerClivePalmerandCITICoverroyaltypayments,amongotherissues,exacerbatedtheproject’scommercialproblems.
ButattheheartofSinoIron’sproblemswasthelackofaclearassessmentoflocalconditionsandregulatoryprocesses(CITIC2012;Duffy2012).DifferencesinChineseandAustraliancommissioningrequirements,suchasthecertificationofsafetydocumentsbylicensedengineers,werenotadequatelyconsidered.CITIC’sbudgetandtimeframewerestretchedfurtherbyashortageofthequalifiedelectriciansrequiredbyAustralianregulationstocommissioncontrolsystems.Personnelmovementposedproblemsastheprocessingofhundredsofequipmentserviceproviders’visasfarexceededtheexpectedtimeframe.AplannedinvestmentofA$3.46billionballoonedtoexpendituresofoverA$10billion.WhenmagnetiteexportscommencedinDecember2013,theprojectwasfouryearsbehindschedule.ThisdelaycostCITICdearly,asironorepriceshadstartedplummetingin2013,leadingCITICtowrite-downSinoIronbybillionsofdollars.
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macroeconomic risks
Therearecountry-levelmacroeconomicrisksarounduncertaintiesabouttheeconomicandpoliticalstabilityandgrowthpotentialofanothercountry’seconomyaswellastheprospectsforexpandingbilateraltrade,investmentandflowsofpeopleandideas.
China’seconomyfacesanumberofdifficult,butinevitable,transitions.ThesetransitionswillbenefitChinaandAustraliasignificantlyinthemediumtolongrun(seeChapter5).Butintheshortterm,theyhavebrought,andwilllikelycontinuetobring,adjustmentcostsaswellascommercialopportunitiesforpartnerslikeAustralia,andbethesourceofinternationaleconomicshocks.
WhatarethepotentialimpactsofshocksintheChineseeconomyonAustralia?TherearetwobroadmechanismsbetweentheAustralianandChineseeconomiesthroughwhichshockscanbetransmitted:tradeandfinance.Movementofpeoplecouldbeathird.
Fortrade,AustraliawillbenegativelyimpactedbyshocksinChinathatseeasignificantreductionindemandforAustralia’smajorexports.ItisinstructivehowrelativelycomfortablyAustraliahasweathereda60percentdropinthepriceofironoresincethecommodityboomburst.
YetanalysisfromtheIMFfindsthatAustraliawouldbeoneoftheworsthitadvancedeconomyfromslowingChineseinvestmentgrowth—onlyIran,Kazakhstan,SaudiArabia,ZambiaandChilecouldsufferbiggereffectsontheireconomies(Box6.3).
Reducingrelianceoninvestmentandexport-ledgrowthisakeyaspectofChina’seconomicrebalancinganddirectlyaffectsAustralia.TheIMFanalysissuggeststhatforeachpercentagepointdeclineinChineseinvestmentgrowth,Australia’spotentialGDPfallsby0.2percentagepoints(Greber2015).TheseestimatesarebuiltontheChinesegovernment’sexpectationthatinvestmentwillfallsteadilyacrosstheworld’ssecond-largesteconomyfrom46percentofGDPtoaround35percentoverthenextfiveto10years.ThisimpliesAustralia’sGDPcouldbe2percentbelowthelevelsthatwouldoccurifChina’sinvestment-ledgrowthweretocontinue.
TheprojectionisconditionalondecliningdemandforAustralia’sminingandresourcesexports—othercommodityexportingcountriesarealsohitbythischangeintheChineseeconomy.TheanalysisdoesnottakeintoaccountthepotentialincreaseinAustralianexportsinothersectors,includingservicessectoradjustmentsinthenon-tradeandimport-competingsectors,norassociatedresponsesintheAustralianeconomythatcanbeachievedfromimprovedengagementwithChina.Itisanexercisethatsimplymeasurestheimmediateimpactofamajorshocktoexistingtrade.Australianengagementandpolicysettingsarethereforecrucialtothefinaleffectontheeconomy.Iftheexchangeratefallswithreduceddemandforestablishedexports,therewillbeafilliptoexpansionofothersectors.Cruciallythiswillbeassistedbymoreproactivere-positioningbyAustraliabilaterally,regionallyandmultilaterallytotakefulladvantageoftheseopportunities.AsshowninChapter5,Australia’seconomicflexibilityallowstheseshockstobeabsorbedwithoutlossofthegainsfromtrade.
Forfinance,directinvestmentandfinanciallinkagesthroughequity,bond,currencyandpropertymarketsrepresentthekeytransmissionmechanismsforshocksfromtheChineseeconomies.Financialreform,capitalaccountliberalisationandinternationalisationoftherenminbiwillhavearangeofimplicationsforAustralia.Theywillbringdeeperfinancialmarketstotheregion,increasedcapitalflows,areductioninthecostofcapital,andgreateropportunitiestosupplyfinancialservicesintothesemarkets.However,theywillalsobeasourceofshockstoinvestmentinAustralia,AustralianfinancialmarketsandAustralia’smacroeconomicsituation.
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BOx 6.3: AusTRALiA’s ReACTiOn TO sHOCKs FROm sHiFTs in CHinese mARKeT senTimenT
RecentvolatilityinChinesestockmarketsillustratesthewayinwhichshockscanbetransmittedthroughfinancialmarkets.China’sstockmarketisstillveryunderdevelopedanditplaysaverysmallroleintheeconomy.ThestockmarketisaboutathirdofGDP,comparedwithmorethan100percentindevelopedeconomies.Lessthan15percentofhouseholdfinancialassetsareinvestedinthestockmarket.Theseshocksare,however,transmittedtoAustralia,causingvolatilityinAustralianequityandcurrencymarketsandpotentiallyhurtinggrowththroughwealtheffects.
TheASX200,alongwithotherindicesgloballyandintheregion,followedthedownwardtrendintheShanghaiCompositethrough2015.CommonwealthBankChinaandAsiaeconomistWeiLiasserts‘thatChina’sfinancialmarketisbecomingmoreintegratedinglobalinvestorsentiment’(quotedinDesloiresandCauchi2016).AnalysisbyRodriguezandRen(2015)findsthattheAustraliandollarisespeciallysusceptibletovolatilityinChinesefinancialmarkets.Theyfinda20-daycorrelationof0.38betweentheAustraliandollarandtheShanghaiShenzhen300,thelargestcorrelationforanycurrency,includingtheJapaneseyen.
AmoresignificantfinancialriskisifthereisagenerallossofconfidencebyinvestorsinChina,potentiallytriggeredbyabroaderlossofconfidenceintheemergingmarketeconomiesgiventhechallengesfacingBrazilandRussia,inparticular.Usinganinter-temporalmulti-sectoralDSGE(DynamicStochasticGeneralEquilibrium)modelcalledG-Cubed—thetheoreticalstructureisoutlinedbyMcKibbinandWilcoxen(1999)—theconsequencesofa200basispointincreaseintheriskpremiumofholdingassetsinemergingmarketeconomiescouldbesignificantforAustralia.
TheAustralianeconomyisalsoinaperiodoftransition.Capital,labourandothereconomicresourcesaremovingfromtheminingandresourcessectorstowardsothersectorsoftheeconomy.ItisinAustralia’sinteresttoensurethatthisreallocationofresourcesiscarefullymanaged.Theimpactofa200basispointriskpremiumshockthroughalossofinvestorconfidenceinChinawouldbetospeedupthischangesignificantly.TheearningsfromAustralia’sminingandresourcesexportsarealreadylowcomparedtotheminingboomperiod,andmuchofthisdemandcomesfromtheemergingmarketeconomies.ReducedgrowthintheseeconomieswouldseefurthercontractionsindemandforAustralia’sexports.Investmentfallsby10percentinAustralia’sminingsectorand5percentinitsenergysector(Greber2015).
Butonthefinancialside,capitalflowingoutoftheemergingmarketeconomiesflowsintotheadvancedeconomies,includingAustralia.Thisappreciatestheexchangerateby3percent,whichfurtherexacerbatesdecliningdemandforAustralianexportsandweakensthetradebalance.ThecapitalflowingintotheAustralianeconomyfavoursthenon-tradeexposedsectors,whichactuallyboostsinvestmentinthosesectors.OveralltheshockhastheeffectofspeedinguptheeconomictransitioninAustraliathroughsubstantialreductionininvestmentandeconomicactivityinAustralia’strade-exposedsectorsandincreasedinvestmentelsewhere.Although,counter-intuitively,theneteffectismarginallypositiveforAustralianGDP(around0.6percent),thisshockteststheflexibilityoftheAustralianeconomyanditsabilitytorelocatecapitalandlabouratarapidpace.
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ThekeypolicymessageforAustraliainconsideringhowtodealwithChineseeconomicshocksistounderlinetheimportanceofhavinganopenandflexibleeconomysoastomanagetheseshocksandfacilitatethesmoothtransitionoftheAustralianeconomy.Australia’sfloatingexchangerate,stronginstitutionsandrobustmacroeconomicframeworksarecritical.Theseneedtobecomplementedwithreformstostrengthentheflexibilityoflabourmarkets(particularlythroughimprovingworkplaceregulationandtheeducation,trainingandre-skillingofworkers)andproductmarketsthroughmicroeconomicreformstoboostcompetitionandreducebarrierstoentryandexit.
system difference risks
Therearesystemdifferencerisksthatcreate,amongotherthings,uncertaintiesinsovereignbehaviourtowardsprivateentitiesinothercountriesthatareconnectedtopolicyframeworksandtheirstability(seeChapter1).Theseuncertaintiesgiverisetorisksthatareimportanttomanagingrelationshipsinwhichthepartnersareundergoingrapideconomicandsocialchange.Withinthebilateralrelationship,theserisksresultfrominstitutionalandpoliticaldifferencesaswellasinterestdivergencesbetweengovernments,andareembeddedintheinstitutionsandpoliticalandsocialbehaviourofeachcountry.
Systemdifferencerisksanduncertaintiesderivefromdifferenthistories,andfromtheeconomicandinstitutionaltransformationsthatbothsystemsareundergoing.Evenastheprocessofeconomicreformisfurtheradvanced,fundamentaldifferenceswillremainbetweenAustraliaandChinainrelationtopoliticalandlegalinstitutions.TherightofChinaandofAustraliatodetermineandmaintaintheirownpoliticalinstitutions,anddefendtheirnationalsovereignty,isapremiseintheirbilateralrelationship.
TheAustralianandChinesegovernmentsrecognisethatthey‘havedifferenthistories,societiesandpoliticalsystems,aswellasdifferencesofviewonsomeimportantissues’,butbothcountries‘arecommittedtoconstructivelymanagingdifferencesifandwhentheyarise’(DFAT2016a).
Australiaisamulti-partyliberaldemocracy.Chinaisgovernedasaone-partystate.Australiahasafreewheelingmedia.Chinahasamorecontrolledmediaenvironment.TheAustralianpeopleprovideinputtotheirpoliticalsystemthroughregularrepresentativeelections.TheChinesepeopleprovideinputtotheirpoliticalsystemthroughconsultativemechanisms.TheChinesepoliticalandinstitutionalsystemcontinuestochange,withlong-termgoalsforpoliticalreform,butthereisuncertaintyaboutwhenandhowthesegoalswillbedelivered.
Australiaisafederation,underanationalConstitutionoftheCommonwealth.Thefederalgovernmentandstategovernmentsareseparatepoliticalentities,whoseparliamentsareelectedtoberepresentativeofthepeopleinasystemofmulti-partydemocracy.Around100,000Australiansaremembersofpoliticalparties.TheCommonwealthParliamenthasthepowertopasslawssubjecttotheConstitutioninareaswhereitiscompetent.Theprimeministerandotherministersofstatearedrawnfromtheparliamentandaresubjecttoitslaws.Thegovernmentappointsjudges,butthelawisinterpretedindependentlyaccordingtocommonlawtraditions.Stateshavetheirownareasofjurisdiction.Theeconomyislargelyprivate.Whetheradisputeiswithanotherprivatecompany,astateorthefederalgovernment,itissettledaccordingtothiswell-establishedlegalframework.
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ChinahasaunitarypoliticalsystemundertheleadershipoftheChineseCommunistParty.Morethan80millionChinesearemembersoftheChineseCommunistParty.Since2002,ithaswelcomedbusinesspeopleasmembers.ItguidestheworkofChineseleadinginstitutions,includingtheNationalPeople’sCongress,andconsultsthepeoplemorebroadlythroughtheChinesePeople’sPoliticalConsultativeConference(CPPCC).ThegeneralsecretaryofthePartyisalsothepresidentofthePeople’sRepublicofChina.ThestateandPartyoperatewithrespectiveformalconstitutions.Chinaisstrengtheningitssystemoflawsandregulationsatnationalandlocallevels.Whileaverylargeanddynamicprivate-sectoreconomyhasemerged(seeChapter2),publicownershipremainsthefoundationofkeysectorsofthestateeconomy.ChinesecompanylawrequirescompaniestoprovidenecessaryconditionsforPartyestablishments;however,onlyinSOEsdoesacompany’sPartycommitteeplayaformalleadershiproleincompanyaffairs.
BOx 6.4: LAnDBRiDge gROuP AnD THe PORT OF DARWin
UndertherelevantlegaldefinitionsgoverningAustralianforeigninvestment,theLandbridgeGroupisaprivatecompany.Nevertheless,afterthecompanywasawardedaleaseoverthePortofDarwinintheNorthernTerritory,somesecuritycommentatorsraisedalarmsinthemediaaboutLandbridge’ssupposedconnectionstotheChinesegovernment—inparticularthatthecompanyhasaPartyCommittee,andthatitschairmanisanadvisortoandmaybeamemberoftheChineseCommunistParty.
But1.63millionprivatecompaniesinChinahaveCommunistPartycommittees—morethanhalfofallChineseprivatebusinesses—andmillionsofPartymembersworkinChina’sprivatesector(Xinhua2014).ThisisanaturalresultofChina’spoliticalsystem,notevidencethatcompaniesareactingasagentsofthestate.
TheNorthernTerritorygovernmentreceivedA$390millionfromtheproceedsoftheA$506millionleaseawardedtoLandbridge,andLandbridgehascommittedtospendafurtherA$35millionontheportwithinfiveyearsandtoinvestA$200millionovera25-yearperiod.
ThestructureofthesaleofthePortofDarwinmeantthatonlyforeigngovernmentinvestorsrequiredFIRBapproval.ThiswasduetoanexemptionundertheForeignAcquisitionsandTakeoversAct(Cth)1975forassetsalesbystateandterritorygovernments.Privateforeigninvestors,includingtheChineseprivateinvestorLandbridge,didnotrequireapproval.
ToaddressanynationalinterestconcernsregardingtheprivatisationofthePort,theDepartmentofDefencerenegotiatedaDeedofLicencewiththeNorthernTerritorygovernmentfordefenceaccesstothePortforthenext15yearswithanoptiontoextendto25years.ThemainnavaldefencebaseinDarwin,HMASCoonawarra,wasalsoexcludedfromthetransaction.
On18March2016,theTreasurerannouncedanamendmenttotheForeignAcquisitionsandTakeoversRegulation2015,removingtheexemptionforprivateforeigninvestorsacquiringaninterestincriticalinfrastructureassetspurchaseddirectlyfromstateandterritorygovernments.From31March2016,FIRBwillformallyreviewallcriticalinfrastructureassetssoldbystateandterritorygovernments.
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Thesesystemdifferencescansometimesgiverisetomisunderstandingsaswellasbeacauseoffundamentaldifference,buttheyneednotbeanobstacletodeepertradeoreconomicengagement.ChinesebusinessesinvestingoroperatinginAustralianeedtounderstandthepoliticalseparationbetweendifferentlayersofgovernment,andalsobeawarethatinthecontextofrepresentativegovernment,thesupportofpoliticalrepresentativesinteractswithcommunityattitudesandperceptionsratherthandominatingthem.Inaddition,thesupportofelectedrepresentativescannotbeexpectedtofacilitatetheresolutionofdisputesortheconductofbusiness—thatisdeterminedbyindependentregulatorsandthecourts.
InAustralia,wherefundamentalpoliticalquestionsareresolvedbylegalinterpretation,thereisatendencytocategoriseChinesecompaniesas‘state-owned’or‘private’basedonblack-letterprovisionsrelatingtoequity-ownership.TheboundarybetweenChinesepoliticalinstitutions,SOEsandprivatebusinesspeopleisnotalwayswelldefinedorunderstood.SomeChinesecompanies,whichareclearlyprivateaccordingtoAustralianlegaldefinitions,areportrayedasbeingstate-influencedbecauseoffamilyconnectionsorhistoricallinkstotheParty,thestateorthemilitary(Box6.4).
AustraliaandChinacouldfurtherdeveloptheirlegalframeworkstohelpclarifytheseissuesovertime.Thelegalframeworkofmodernmarketeconomies,suchasAustralia,couldprovideusefulassistancetoChina’sownreformcommitmenttoimprovingruleoflaw.ThiscouldhelpreduceuncertaintyforforeigninvestorscomingintoChina,seekingpartnershipswithlocalbusinessesandnegotiatingthelocalregulatoryenvironments(Box6.5).Itisimperativethatbusinessesoperatingineithercountryareabletomakecommercialdecisionsthatrelyonarobustruleoflawratherthanrequiringnon-legalrecoursetopoliticalconnectionsandotherirregularchannelsshouldanybusinessorregulatoryissuesarise.Itisalsoimportantthatbothcountriesallowforopenaccesstoresourcesthataresharedbyallnations,suchassea-lanes,theinternetandspace.
ThedevelopmentofcorporategovernanceandtransparencyintheoperationofChinesecompanies,includingSOEs,canalsohelpinformtheirdealingsinaforeignsetting.AustraliawouldmissanopportunityforpositiveengagementwithChinaifitsformalpolicysettingsdiscriminatedagainstSOEsasamatterofprinciple.AnditcouldmisinterpretChina’sprivatesectorwereittoendorseaviewthatanycompanywithlinkstothegovernmentwasinsomewaycommerciallycontrolledbythestate.Similarly,Chinawillmissanopportunityifitwidelyandunnecessarilydiscriminatesagainstforeigninvestment.
BOx 6.5: sinO gAs in CHinA
SinoGasandEnergyHoldings(SinoGas)isanAustralianstockexchangelistedcompanythatexploresforandproducesnaturalgasintotheChinesemarket.Itscompetitiveadvantageisitsskilledlabourforceandtechnologicalabilitytodrillandextractgasusingadvancedtechniquesatverylowcost.SinoGashasbeenoperatinginChinasince2006andisnowAustralia’slargestenergyinvestorinChinaandoneofonlyasmallnumberofforeignexplorationandproductioncompaniesproducinggascommerciallyintotheChinesemarket.GasproductioncommencedfromitsSanjiaobeiandLinxingProductionSharingContracts(PSCs)inChina’sShanxiprovincein2014.AtotalofapproximatelyUS$310millionhasbeeninvestedinthetwoprojectsbySinoGasanditspartnerssinceinception.ProductionfromitsLinxingcentralgatheringstationcommencedinSeptember
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2015,afterbeingslightlydelayedduetoacentralgovernmentdirectiverequiringsafetyreviewsofallgasoperationscountry-widefollowingthemediasensationoveradeadlyexplosioninTianjin.
AtotalofUS$10.1millionwasreceivedbySinoGas’49percentjointventureforgassoldfromtheLinxingPSCfromDecember2014throughtolateFebruary2016.ProceedsforpilotgassalesfromtheSanjiaobeiPSCofapproximatelyUS$2millionhavebeenmadetoitsPSCpartner,PetroChinaCBM.However,productionattheSanjiaobeiCentralGatheringstationremainssuspendedwhilenegotiationsareunderwayonthefinalallocationofpilotproductionproceedstoSinoGas’jointventure.Thisisexpectedtoberesolvedshortly.
Theanti-corruptioncampaigninChinahascreatedsomeuncertainty,andsloweddealingsbetweenChineseauthorities,SOEsandforeigncompanies.IntheChinesesystem,regulatorymilestonescansometimesrequireamatrixofapprovalsfromdifferentdepartmentsatthelocal,provincialandnationallevels.TheseareissuesthatwouldnaturallybetakenupinanewinvestmentagreementbetweenAustraliaandChinaandmightbuildconfidenceintheinvestmentenvironment.Inthecurrentenvironment,manyoftheseapprovalshavetakenslightlylongerthaninthepastduetotheincreasedscrutinyofdecisionsmadebyregulatoryauthoritiesandSOEs.DelaysonthereceiptofsalesproceedsandregulatoryapprovalshasimpactedSinoGas’shareprice,thoughongoingtechnologytransferaswellasthehigh-levelsupportoftheAustraliangovernmentarehopedtoinsulateSinoGasfromexcessiveprojectdelaysinChina.Notwithstanding,SinoGashasbeenoneofthebetterperformingASXlistedexplorationandproductionstocksoverthepasttwoyears.TheChinaenergysectorremainsanattractivevaluepropositionforforeignfirmsandoperatorsgiventhefavourablefiscalandregulatoryregime.
SinoGasisanAustraliansuccessstoryandthelonger-termprospectsforthecompanyareverybrightbecausetheChinesecentralgovernmentislookingtodoublethegascontributiontoitsenergymixbytheendofthenextFiveYearPlanin2020.Fullproductionfromthecompany’sassetsisexpectedtocommencein2017,andby2021SinoGas’assetswillproduceapproximately3percentofChina’stotaldomesticnaturalgasproduction,makingitasignificantcontributortotheenergyobjectivesofthecountry.
Across-the-boardpoliciesthatdiscriminateagainstforeigncompaniesingeneral,orstate-ownedcompaniesinparticular,runtheriskofconfoundingstrategicintentwithwhatistheunremarkableandunthreateningproductofbasicdifferencesineachcountry’spoliticalinstitutions.WhereeitherAustraliaorChinadoesadoptpoliciestoprotecttheircoresovereigninterests,whetherincriticalinfrastructure,telecommunicationsormedia(astheybothproperlydo),thesepoliciesshouldbetargetedtomitigatetheactualrisksidentified,regardlessofwhetherthethreatcomesfromforeignordomesticactors,andwhethertheyarelegallyprivateorstate-owned.Thisiswhyinstitutionsthatfostermutualunderstanding,transparencyandcommoninterestsarecriticaltoallowingthefullflourishingofthepotentialeconomicrelationshipbetweenAustraliaandChina.
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EnhancingmutualtrustandunderstandingisakeyobjectiveoftheproposedComprehensiveStrategicPartnershipforChange.ThePartnershipwillhelpachievetheseenhancementsandmitigatesystemdifferencerisksthrough:increasingpublicandcommercialcapacitiestounderstandhowthesystemsoftheothercountrywork;morefocusedandmoreusefulstrategicofficialdialogues,forinstanceonregulatorycooperation,riskmanagementandreform;andclosehigh-leveltiesbetweenpoliticalleaderswhocan‘pickupthephone’toreducemisunderstandings.
Reducing risks
MostoftherisksfacingactorswithintheAustralia–Chinaeconomicrelationshiparenormalcommercialrisks,andtheAustralianandChinesegovernmentsshouldproperlyentrustthemanagementoftheseriskstomarketmechanisms,giventhelegalframeworksoftheirrespectivesystems.Therisksofcommercialfailuresandmacroeconomicuncertaintyshouldbeacceptedandoccasionalbusinessfailuresaretobeexpectedandlearnedfrom.Someoftheserisksarebilateralsystemdifferencerisks,whicharestructuralinnatureandcanbemitigatedthroughpoliticaldialogue,publicinstitutionsandbilateralcooperation.Theyoccurbecauseof:differencesininterestsamongAustralianandChinesefirmsintheiroperationsintheothercountry;theentrenchedinterestsofregulatoryactorsanddomesticfirmsintheothercountry,whichmaybemotivatedtolimitforeigncompetitionandpreservemarketsshare;andthewayinstitutionalsystemsandsocialbehaviouraffectbusinessoutcomes.
High-levelpoliticalleadership,buildingonstructuredadvicefromkeyofficialandprivatestakeholders,canusebilateralandinternationalpressuretomakeprogressagainstthesevestedinterestsopposingdomesticreform(Box6.6).Asitisanadvancedeconomy,AustraliaisavaluablepartnerabletoworkatthefrontierofopeningChinesemarketstonewactorsandcreatingpartnershipstoshareexpertiseonmanagingchange.
Inaglobalisedworldeconomy,domesticreformcanbeincentivisedandreinforcedbyinternationalcommitmentstogrowth-promotingeconomicliberalisation.Thisstrategypreservesthesovereigntyofeconomicpolicy,whilehelpingtoovercomeresistancefromentrencheddomesticinterestswhomightotherwisestymiereform.
ThroughtheComprehensiveStrategicPartnershipforChange,bothAustraliaandChinacantakeadvantageofthisstrategytoadvancetheirrespectiveeconomictransformations.ThiscouldbeachievedthroughAustraliaservingasapossibletesting-groundforgradualliberalisationsofChineseservicestrade,investmentandcapitalaccountflows.AustraliaandChinaareasuitablematchbecauseAustraliaistoosmallaneconomytohaveasignificanteffectuponglobalactivitybutitislargeenoughandwelldevelopedenoughtoprovideareliablefeedbackmechanism.
AprimeexampleofsuccesswiththisstrategyisChina’saccessiontotheWTOandAustralia’sapproachtoit.Oneofthekeydriversofglobalgrowthsincethe1970shasbeentheintegrationoftheglobaltradingsystem.Conventionalnotionsofthreedistincteconomicsystems—thecapitalist‘firstworld’,thesocialist‘secondworld’andthedeveloping‘thirdworld’—gavewayinthe1990stotheideaofasingleglobaleconomicsystem,guidedwithinacommonsetofinstitutionsbasedaroundtheWTO,theIMF,themultilateralbanksandotherentitiesthatderivedfromthepostwarBrettonWoodssystem.Economiesthatopenedthemselvestotheglobaleconomygrewfaster—notonlybecausetheirproducersgainedaccesstooverseasmarkets,butalsobecauseinternationalcompetitionplacespressureongovernmentstoreformdomesticeconomies.
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Chinawasalatecomertothisglobaltradingsystem.WhileakeyplankofChina’seconomicreformsafter1978wasopeninguptotheoutsideworld,makingitanexemplarof‘export-ledgrowth’inthe1980s,therewasstillgreatprogressyettobemadeinthemid-1990s.ButChinahadbeeninterestedinjoiningtheglobaltradingregimesinceitfirstrequestedobserverstatusattheWTO’spredecessor—theGeneralAgreementonTariffsandTrade(GATT)secretariat—in1980.Chinajoinedthemulti-fibreagreementthatregulatedglobaltradeintextilesin1984,andinJuly1986ChinarequestedfullstatusasaGATTcontractingparty.
China’sGATTapplicationwasanearlyexampleofclosepracticalcooperationbetweenChinaandAustraliainsupportofbothcountries’economictransformations.AustraliahadbeenencouragingChinatojoinGATTfromlate1985,andprovidedanadvisortoChina’sMinistryofForeignEconomicRelationsandTradefrom1986to1987toassistinpreparingtheapplication.AGATTworkingpartyconsideredChina’sapplicationfrom1987to1996,andwasconcernedaboutmanyChinesepoliciesthatremainedasalegacyoftheplannedeconomy.Theseincludedthen-hightariffbarriers(averagingabove35percent),lackoftransparencyoruniformityincustomsrequirements,theabsenceofopeningupofChina’sfinancialsectortoforeigncompetition,subsidiesforSOEs,aswellasalackofcurrencyconvertibility,labourstandardsandintellectualpropertyrightsenforcement.
BOx 6.6: CHinA’s ACCessiOn TO THe WTO
AttheOsakaAPECSummitin1995,Chinacommittedunilaterallytooneofthelargestsingletradeliberalisations,asbonafidesofitsintentiononthewaytoWTOaccession.TheChinesepremiervisitedtheUnitedStatesfornegotiationsinApril1999,andthepresidentsofbothcountriesmetattheAucklandAPECsummitinSeptemberthatyear.FinalbilateralnegotiationsbetweenthepremierandtheAmericanambassadorinBeijingresultedina250-pageagreementthatpavedthewayforChina’sfullaccession.Allthewhile,AustralianadvisersworkedcloselywithChineseofficialsonthesubstanceandtacticsofachievingWTOmembership(Garnaut2005).
China’saccessiontofullmembershipoftheWTOin2001reducedthetariffbarriersfacingChineseexporters,fuellingaboominwhathadalreadybeenafastgrowingsector.In1980,China’sshareofglobalmanufacturingexportswasjust0.8percent.By2001itwasalready5.2percent.FollowingWTOaccession,China’sshareofglobalmanufacturingexportsgrewby1percentagepointperyear,makingChinathesourceof18percentofworldmanufacturingexportsby2014.Thiswasnotonlybeneficialforconsumersoflow-costChinesemanufacturingproductsworldwide,butalsoaboonforrawmaterialssupplierssuchasAustralia(Andersonetal2014).
JustassignificantasthegrowingmarketforChineseexportswastheexternalanchorthatChina’saccessionprotocolprovidedforChina’sowndomesticreforms.Commitmentstophaseoutgovernmentsubsidiesforloss-makingSOEshardenedthebudgetconstraintinthestatesector,improvingSOEefficiencyandthereforegeneratingsignificantwelfaregainsoverandabovethetradepolicyeffects.Commitmentsontransparency,intellectualproperty,financeandenvironmentalprotectionalsosupportedChina’sdevelopment(BajonaandChu2015).
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AcceptingWTOdisciplinesdidnotmeangoingagainstChina’snationalpolicyinterests.SOEreform,forexample,wasalreadywellunderway,withthousandsofsmallandinefficientSOEsbeingclosedwellbeforeWTOentry(ZhangandFreestone2013).Nevertheless,byworkingtowardsandcommittingtostandardsinaninternationalagreement,theWTOprovidedChina’sleaderswithanexternalanchorwithwhichtoconsolidateexistinggainsandtopushforfuturereforms.
Internationalcommitments,fromthisperspective,arenot‘concessions’thatacountrygivesupinordertosecurebenefitselsewhere,butratherservetosecurethebenefitsthataredeliveredathomefromwin–wincooperationwithinternationalpartnersandinstitutionsthroughwhichallcountriescanthrive(Sachsetal1995).ThisisthephilosophythatunderpinsajointAustralianandChineseeconomictransformation.
WhiledevelopingcountrieswereallowedsomeleewayinmeetingfullGATTobligationsbeforejoining,theUnitedStateswasreluctanttoallowChinatojoineithertheGATTortheWTOuntilalltheseconcernshadbeenaddressed.Indeed,theprotocolsofChina’saccessiontotheWTO(forexampleonexportcontrols)wereinsomerespectsstricterthanthoseapplyingtoexistingmembers(Box6.6).Ratherthanchangepoliciessuddenlyandriskimmensesocialdisruption,Chinacontinueditspolicyofgradualandpragmaticliberalisation.EconomicleadersinChinasawtheopportunitytoprosecuteChina’sdomesticreformagendabyusingWTOrequirementstoforcechangeinsectorsthatresistedopeningtocompetition,andsopledgedreformsintheseareasinexchangeforUSagreement.
managing risk
Alltherisksthatbusinessandcountriesfaceinothermarketsaresusceptibletoameliorationbyarangeofstrategies.Commercialrisk,associatedwithuncertaintyaboutfuturepricesorincomes,canbemanagedbycontractingandexchangehedgingstrategies,andimportantlybyinvestmentintheacquisitionofmarketknowledge(Box6.7).Throughinternationalagreementortreaty,governmentscanprovideprotectionagainstcapriciouspolicybehaviourthatincreaseseconomicrisks.
TheAustralia–Chinarelationshiphasbeenbuiltaroundenshriningmarketprinciplesinthetwocountries’bilateralandglobalapproachtotrade,investmentandfinance,andworkingtoremoveimpedimentstotheoperationofmarketforcessoastoimprovetheefficiencyofcommercialexchangeandthereforeenhancegrowthprospects.
Yetbusinessreliesonaccesstoinformationabout,andanalysisof,theeventsandtrendsthatinfluencetheformationofefficientmarketoutcomes,andnowhereisthismorethecasethaninthediscoveryanddevelopmentofnewandprospectivemarkets.Governmentsareonesourceofinformationandanalysis,butbuildingreliableandindependentcentresofanalysisinuniversitiesandthinktanks,whichcaninformfirmsoftrendsanddevelopmentslikelytoaffectmarketoutcomes,providesanotherimportantsource.TheComprehensiveStrategicPartnershipforChangeshouldencourageinvestmentinnationalcentresofexcellenceinanalysistosupportunderstandingoftheforcesthatwillshapethedevelopmentoftheeconomicrelationshipbetweenAustraliaandChinainitsregionalandglobalsettings.Thatwillensureithasthenecessaryintellectualunderpinningstothrive.
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InAustralia,theANUhousesoneofthestrongestconcentrationsofresearchexpertiseontheChineseeconomyoutsideofChina.EachyearitsChinaEconomyProgram(CEP)publishesapeer-reviewededitedvolumeofinternationalresearchontheChineseeconomy—theChinaUpdateseries—andhostsamajorconferencethatbringstogetherChinese,Australianandinternationalacademicsandpolicymakerstodiscussitsfindings.YeteventheCEPwouldneedtobesignificantlystrengthenedintoatrulynationalendeavour—throughcooperationandresearchcollaborationwithofficialagenciesinAustraliaandChinaaswellasthroughroutinelinkswithothercentresofresearchinAustraliaandinternationally—ifitweretoplayaleadroleinimplementingastrategicresearchagendathatconnectsitsbi-nationaleconomicscholarshipdirectlytothepracticaladvancementoftheeconomictransformationoccurringbetweenthetwocountries.
Theimportantrolethatindependentacademicinterlocutorscanplayinreinforcingthevalidityofmarketapproachesonbothsidesisrevealedinthecommunicationbreakdowns,institutionalconfusionandresultantmistrustthatcharacterisedtheexplosionofthepriceboominironoreexportsfromAustraliatoChinafromaround2007to2012.
TheCEPinAustraliacouldappropriatelyserveasafoundationforanetworkofresearchcapacity,duetoitsexistingworkanditsdeepconnectionstoequivalentChinesecentressuchastheNationalSchoolofDevelopmentatPekingUniversity,RenminUniversity’sNationalAcademyofDevelopmentandStrategy,theChineseAcademyofSocialSciencesandtheCenterforChinaandGlobalization.ProcessessuchasthosesetinmotionbythiscollaborationbetweenCCIEEandEABERcanaddmomentumanddirectiontotheseefforts.
BOx 6.7: DeLiveRing PROsPeRiTy AnD seCuRiTy THROugH THe mARKeT
Intheearly2000s,theglobalmarketforironorehadtoadjusttoalargepositivedemandshockfromChina,whichrequiredenormousamountsofironoretobuildthehousingandinfrastructureneededtosustainrapidlyexpandingurbanisationandindustrialisation.AsinternationalsupplystruggledtokeepupwithsoaringChinesedemand,andhigh-costmarginalproducersinChinaandothercountriesenteredthemarkettofillthesupplygap,thepriceofironorewaspusheduptorecord-highlevelsby2011.
Themagnitudeoftheincreaseinironoreprices,ledsometosuspectthatthe‘BigThree’majorintra-marginalironoresuppliers—RioTintoandBHPBillitoninAustraliaandValeinBrazil—weretakingadvantageofChina’sironoreshortagebyengaginginstrategicsupplieroligopolisticbehaviourtoextractsuper-normalprofits.Naturalconstraintsontheexpansionofironoreproductioncausedashort-runsupplygapfollowingthesurgeinChina’sironoredemand,combinedwithpre-existingmarketconditionsanddelayedpricesignalling.
Theironoremarketadjustedtothedemandshockinacompetitivewayinthelongerrun.Upuntil2009,theglobalironorepricewassetbyabenchmarkpricingsystem,whichinvolveddirectnegotiationsbetweencontractholders—forexampleAustraliansuppliersandChinesebuyers—anddeliveredinternationallycompetitivepricingoutcomes.In2009,thestateChinaIronandSteelAssociation(CISA)intervenedinannualironorepricenegotiationsbythreateningtoboycottBigThreeironoreimportsunlessabelow-marketpricewasagreed.ThisinterventionfailedbecauseChineseimportersweredependent
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onBigThreesupplies,theinterventionwasthereforenotsupportedbythecentralgovernmentorbythesteelbusiness,andthethreatcouldnotbeenforcedbecauseofthecompetitivenatureofthedomesticindustryandtheinternationalmarket.
Thisepisodecreatedunnecessarytensionsinthebilateraleconomicandpoliticalrelationships.Italsoledtothecollapseofthebenchmarkpricingsystem,whichwasreplacedbyaspotmarketpricingsystem.Thischangealteredhowbilateralquasi-rentsfromgeographicclosenessweredistributedbetweenChineseandAustralianironoretraders.Inthefirst21monthsaftertheswitchtothespotmarketpricemechanism,Australianexportersreceived,onaverage,againofaroundUS$288.3millionpermonth,ascomparedtowhattheywouldhavereceivedunderthe2008pricingsystem.Thedivisionofbilateralquasi-rentsisazero-sumscenario,meaningAustralia’sUS$288.3millionaveragegainpermonthmeantthatChina’sironoreimportersfromAustralialostUS$288.3millionpermonth.Forcontext,duringthisperiod,China’ssteelindustrymadeanaverageprofitofUS$1.1billionpermonth(Hurst2016).
TheAustralianandChinesesystemswouldhaveprofitedduringthisearlierphaseofeconomictransformationfromhavingdirectpolicyaccesstoanindependentcentreofeconomicresearchexcellencethatwasdedicatedtofurtheringbilateralrelationsbasedonmarketprinciples.
Policyuncertaintyanditsimpactonbusinessesandwholeeconomiesisneverabsent,evenbetweencountriesthathavethemostfamiliarandinstitutionallysimilarmarketstructures,andevenwhengovernmentshavearangeofmacroeconomicinstrumentsandpolicysettingstocushionagainstunexpectedshocksfromothereconomieswhilepreservingthegainsfromexchange.Thesemacroeconomicinstrumentsnotablyincludeflexibleexchangerates,soundmacroeconomicpolicystrategies,andaccesstoreservesandinternationalsupportfromtheIMFormajoreconomicpartners.
HighvolatilityontheChinesestockmarketandtheslowingheadlinegrowthfiguresaresourcesofuncertainty.Also,someofthepublicreactionstoeconomicnewsfromChinaisnoiseandcouldaffectshort-termdecision-making.Butreasonedcommentarythatisinformedbycloseworkingrelationshipsattheofficiallevelandseriousindependentanalysis—forexample,oftheroleofkeydevelopmentsineachcountrysuchasstockmarketvariabilityormarketdevelopments—areessentialtobalancedandmeasuredresponsestoeventsthatpreventmarketandpolicystakeholdersineachcountryfrombeingdivertedbynon-significantsignalsandmisreadingunderlyingtrends.
Anewandrapidlyexpandingpartnershiprequiresprivateandpublicinvestmentindevelopingknowledge,literacyandunderstandingbothtomaximiseopportunitiesandtoprotectagainstrisks.
An Australia–China Comprehensive strategic Partnership for Change
WhentheAustralianprimeministervisitedChinainApril2013,thetwocountriesannouncedthattheyhadestablisheda‘StrategicPartnership’.TheyagreedtohaveregularmeetingsbetweentheChinesepresidentandtheAustralianprimeministerandtoholdthreehigh-levelannualbilateraldialogues:aLeaders’MeetingbetweentheAustralianprimeministerand
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theChinesepremier;aStrategicEconomicDialoguebetweentheAustraliantreasurerandtradeministerandthechairmanoftheNDRC;andaForeignandStrategicDialoguebetweentheAustralianandChineseforeignministers.InNovember2014,whenChina’spresidentvisitedAustraliaandmetwiththeAustralianprimeminister,bilateraltieswereupgradedtoa‘ComprehensiveStrategicPartnership’.
ThisdiplomaticnomenclatureisnotuniquetoAustralia,butispartofthe‘partnershipdiplomacy’thatisthefoundationofChina’s‘non-alignmentpolicy’ininternationalaffairs.Tobea‘partner’ofChinarequiresalevelofmutualtrust,anabsenceoffundamentaldifferencesonthemajorissuesofterritorialsovereigntysuchasTibet,XinjiangandTaiwan,andanimportancetoChinainstrategic,securityoreconomicissues.Ofthemorethan170countriesthathavediplomaticrelationswithChina,lessthan60are‘partners’.Unlikealliancerelationships,China’spartnershiprelationsareannouncedinjointstatementsratherthanenshrinedintreaties.
China’spartnershipsmostlyfallintofourcategories,whichinorderofascendingimportanceare:cooperativepartnerships;comprehensivecooperativepartnerships;strategicpartnerships;andcomprehensivestrategicpartnerships.Theterm‘comprehensive’indicatesthatacountrycollaborateswithChinaacrossabroadrangeofspheres,includingpolitics,economics,cultureandmilitaryaffairs.Theterm‘strategic’signifiesthatacountryworkswithChinaatahighlevelonissuesofcommoninterestthathaveaglobaldimensionandwhichimpacttheoverallblueprintofeachcountry’sinternationalpolicymaking.Strategicpartnersareconsideredtobereliablecolleaguesandtosharesimilarstrategicobjectivesintransnationalarenas.Countriestendtostartatlowerlevelsandworktheirwayupoveraperiodofmanyyears.
Inthisranking,ChinaalreadyrecognisesthestrategicimportanceofrelationswithAustralia.YetChinahas‘comprehensivestrategicpartnerships’withover20othercountries,includingcountriesthatareseeminglyoffarlesseconomic,politicalandstrategicconsequencetoChina,suchasAlgeriaandPeru.Indeed,certaincountriesofspecialimportanceforChinahavetheirownuniqueclassificationwithinChina’spartnershipdiplomacy.Russiaisa‘comprehensivestrategiccoordinationpartner’.Pakistanisan‘all-weatherstrategiccooperativepartner’.TheIndo-ChinaPeninsulastatesofVietnam,Laos,Cambodia,MyanmarandThailandare‘comprehensivestrategiccooperativepartners’.Germanyisan‘all-aroundstrategicpartner’.TheUnitedKingdomandChinarecentlydeclaredaunique‘globalcomprehensivestrategicpartnershipforthe21stcentury’.Forvariousreasons,neithertheUnitedStatesnorJapanispartofChina’sformal‘partnership’system.
Giventhedevelopmentsintherelationshipanditsprospects,AustraliaandChinashouldnowcontemplateupgradingtheirpartnershiptoaunique‘ComprehensiveStrategicPartnershipforChange’.Thiswouldsendanimportanthigh-levelmessagethatAustraliaandChinaextendtrusttoeachotheraspartnersinaworkingrelationshipthataimsforsubstantialchangetowardssignificantmutuallyagreedgoalsandobjectives.Already,onlymuchlargercountriessuchastheUnitedStates,theUnitedKingdom,RussiaandGermanyhaveanequalorgreaterlevelofregularinteractionwiththeChinesepoliticalleadership.Australia’splacinginChina’spartnershipsystemshowsthatboththeAustralianandChinesepolitiesrecognisehowimportanttheothercountryistotheother.Nowisthetimetoconvertthisbilateralunderstandingandexistingbilateraldialoguesintoclosereconomicandpoliticalcooperation.
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Bilateralpoliticalmeetingsarepartofaprocessofdevelopingunderstandingandtrust,improvingpolicycoordinationandcreatingnormsofconsultationbetweenAustraliaandChina.ThesearecrucialbothtocapitalisingonbilateralpolicyarrangementssuchasChAFTA,andtoestablishingconfidenceinbeingabletocommunicateduringsituationswheretherearedifficultiesintherelationshiporcrisestobemanaged.Importantly,aspartnersforchange,bothAustraliaandChinawillworkacrossarangeofpriorityareasonacommonlanguageforframingandadvancingbilateralrelations,andentrenchedproceduresfornotifyingtheothersideaboutupcomingpolicyannouncementsanddevelopmentsthataffectmutualinterests.Thisensures,asfaraspossible,thatthereare‘nosurprises’.Frequenthigh-levelpoliticalleadershipmeetings,frequentseniorbureaucraticmeetings,anddeeplevelsofworkingrelationshipscharacterisedtherapiddevelopmentofbilateralrelationsinthe1980s,andtheyarethekeytosuccessintherelationshipinallitsdimensionsinthedecadeahead.
TherevitalisingvisitbytheChinesevice-premiertoAustraliainOctober2009setthetoneforthefuturerelationship.Thatvisitfollowedtwodifficultyearsinthebilateralrelationship(AustralianCentreonChinaintheWorld2015):Australia’sthenprimeministerreferencedhumanrightsproblemsinTibetduringaspeechatPekingUniversity;Australia’s2009DefenceWhitePaperignitedcontroversybyconcludingthatChina’smilitarymodernisationcouldbe‘causeforconcern’andwas‘beyondthescopeofwhatwouldberequiredforaconflictoverTaiwan’;Chinalco’sbidforanincreasedstakeinRioTintofellthrough;aRioemployeewasarrestedinChinaonbriberycharges;andaUighurleadervisitedAustralia.YetAustraliaandChinaagreedona‘blueprintforthefurtherdevelopmentofChina–Australiarelations’andthisvisitiswidelycreditedwithlayinganewfoundationforstablebilateraltiesandimprovedpoliticalrelations.Itledtoan‘Australia–ChinaJointStatement’,inwhichbothsidesagreedthat‘strongerpracticalcooperationformutuallybeneficialoutcomesservesthefundamentalinterestsofthetwocountries’,andcommittedto‘sustainandenhancetheirdialogue,engagementandcooperationatalllevels,includingtheseniorleadershiplevel’(AustralianEmbassyChina2009).Thisoutcomeisanexemplarforthefutureofthebilateralrelationship.
AnewpartnershipforchangebetweenAustraliaandChinathatsupportstheeconomictransformationinbothcountriescanonlyworkifinstitutionsandarrangementsarejointlyputinplacetosustainregularengagementandtargetedpolicyinitiativesthatareaheadofthecurveofreform.Theseinstitutionscanaimatentrenchingacultureofcooperationwithintherelationship,bothfromthetop-downthroughpoliticalleadershipandfromthebottom-upthroughofficialandprivateinitiatives,andthroughcombinationsofboth.
AstheAustralianprimeministersaidin2013,‘newarchitecturewillnotdotheworkforusormakehardproblemsinourrelationshipeasy’,but‘whatitwilldoiselevateourexistinghabitsofdialogueandcooperation’(Kenny2013).AustraliaandChinacangivesubstancetotheirComprehensiveStrategicPartnershipandsignalcommitmentbyraisingittoanewanduniquelevel.
ApurelytransactionalapproachtobilateralrelationsisinneitherAustralianorChina’sinterests.Thisisbecause,fromitsmodernbeginnings,theAustralia–Chinarelationshiphasbeenpremisedonbothcountries’ambitionsforreformandchange.Fromtheopeningofdiplomaticrelationstotheprospectswehavelaidoutforthedecadesahead,managingchangeonahugescalehasbeen,andwillcontinuetobe,thepremiseofthesuccessoftherelationship.AsthisReportmakesclear,thisrequireslong-termcommitmentsand
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institutionsthathelptoframecommonprinciplesandreferencepointsforprogressintherelationshipthathelpwiththeprojectofmanagingchange,aroundalltheuncertaintiesandrisksthatareitsinevitableby-product.ThischangewillbringprosperityandsecuritynotonlytoAustraliaandChinabutalsotoourregionandtheworld.
InbuildingnewdiplomaticarchitecturefortheAustralia–Chinarelationship,itisinstructivetoexaminethehistoryofAustralia–Chinacooperation,andparticularlyitshighwatermarkinthe1980s(Garnaut2005).Followingtheestablishmentofdiplomaticrelationsin1972,bilateraltiesflourished,andwiththelaunchofChina’sopeningandreformphasefrom1978thelevelofpoliticalengagementandeconomiccollaborationbetweenthetwocountriesreachedapeakduringthe1980s.
Duringthe1980s,EastAsiawascentraltotheinternationaldimensionofAustralia’sowneconomicreform;atthesametime,Chinawasopeninguptotheworldthroughitsfirstroundofmarketreform.AustralianpoliticalleadersandtheiradvisersdirectedeffortstolinkingAustralia’sdomesticreformprocesstothatoccurringinChina.Thefoundationslaidbyhigh-levelpoliticalvisits,governmentvisits,policydiscussions,exchangesandjointworkinggroupsencouragedgreaterengagementbyprivatebusiness,stateenterpriseandothereconomicactors.
Intheearly1980s,theAustraliangovernmentrecognisedtheenormouspotentialforbilateraleconomicbenefitsifChinacouldgrowitsdomesticeconomyrapidlyandcreatetransitionalinstitutionsthatsecuredforforeignactorsrules-basedaccesstotheChinesemarket.ThiswasseenasanimportantwaytoensurethatChinaexerciseditsgrowingfuturepowerthroughconstructivemultilateraldialogue.
Thebedrockoftherelationshipduringthe1980swasthepersonalinterestofandexceptionalaccessbetweentopleaders.ThisclosenesswasduetotheinitiativeofpreviousAustralianprimeministersandsustainedofficialcommitment.InBeijinginFebruary1984,theChinesepremiersuggested,andtheAustralianprimeministeraccepted,thatthetwocountriesshouldaimtocreatea‘modelrelationship’,onewhereAustralia–Chinarelationsbecameamodelforhowcountrieswithdifferentpoliticalandsocialsystemsandatdifferentlevelsofeconomicdevelopmentcouldinteract.
Duringthistime,Chinaneededtoopenuptotheworld,andAustraliawantedthecredibilitythatcouldcomefromshowingthatitwasactingconsistentlywithitsprescriptionsforChina.Sowhilethe‘modelrelationship’includedtheimportantqualifierthattherewouldbenospecialprivileges—justequalrights,treatmentandaccess—bothsidescommittedtoimplementingallpromisesandcommitmentsmadeunderthemodelrelationship.
Economicrelationswerecentraltothismodelrelationship.AstrategicChinaActionPlanwasdevelopedfollowingdiscussionsbetweentheAustralianprimeministerandtheChinesepremierin1983,andwasagreedinBeijinginFebruary1984.Itcommittedtoadvancingtradeandinvestmentinbothdirections.InAustralia,thePlansetanobjectiveofdoublingthevalueofAustralianexportstoChinawithinfiveyears,andtookintoaccountChina’sdesiretoexpandimportstoAustralia.ThePlan’stargetwasreachedinonlytwoyears.
UnderthePlan,AustraliadecidedtomaximiseitsimpactinChinabyfocusingengagementandgovernmentfollow-throughonasmallnumberofindustrysectorsandChineseprovinces.ThefourkeyexportsectorsforAustraliawere:ironandsteel,non-ferrousmineralsandmetals,woolandgrain.InFebruary1984,AustraliaandChinaestablishedaJointWorking
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GrouponIronandSteel.Similargroupswereformedfornon-ferrousmineralsandmetals,andforwool,andChinaagreedtosoftenitsgrainself-sufficiencytargets.ChinamadeitsfirsttwomajoroverseasinvestmentsinAustralia—abrownfieldinvestmentinthePortlandaluminiumsmelterinVictoriaandariskiergreenfieldinvestmentintheMtChannarironoremineinWesternAustralia.
ThePlansignificantlyreducedcommercialrisksforAustralianenterprisesdealingwithChinabyprovidinghigh-levelpoliticalsupportformajorprojects,establishingworkingrelationshipsandconductingregularvisitswithkeyofficialsintargetareas,obtaininginformationregardingtheprojectandreformprioritiesofprovincialandlocalgovernments,andmakingintroductionsbetweenfirmsandrelevantofficials.
Australiainvestedconsiderableeffortincreatingbusinessandpublicsectorcapacityforanalysingthetrade,investmentandotheropportunitiesintheChinarelationship.Australiandiplomaticofficialsstrivedtounderstandcomplexdecision-makingstructuresandbuilteffectiverelationshipswiththelargenumberofChinesepolicymakerswitheffectivevetopoweroverreforms.TheAustralianEmbassywasabletohelpobtainauthoritativeresponsestomajorAustralianbusinessproposals.AustraliaandChinaworkedtogethercloselyonculturalexchanges,immigrationnormalisationandregionalnuclearnon-proliferation.
Althoughitwasrecognisedtowardstheendofthedecadethat,asChinabecamemorepowerfulanditstieswiththemajorindustrialcountriesexpanded,itwouldbeincreasinglydifficultforAustraliatosustainthestructureofitsrelationshipwithChina,theAustralia–Chinarelationshipcontinuedtohaveaspecialifdiminishedplaceinbothcountries’diplomacy.CompetitionincreasedasothercountriessoughttoparticipateinChina’seconomy.Inflationaryboomsandgrowthcorrectionsinbothcountriesinthelate1980sshiftedattentionfrominternationaltodomesticmarkets,andseveralmajorplayersshelvedtheirbilateralinvestmentplans.ThereformpaceoftheChineseeconomyslowedforavarietyofreasons,creatinguncertaintyforbusiness.
Threedecadeslater,lookingbackatthefoundationsoftheAustralia–Chinaeconomicrelationshipgivesinsightintowhatisneededforfuturesuccessintherelationship.High-levelpoliticalcommitmentisessential,asishigh-levelbureaucraticsupport.Bi-nationalcollaborationonreformandchangeiscritical.Strategicframeworks,suchastheComprehensiveStrategicPartnershipforChange,willbevitaltosettingthepathwayforward.
BothAustraliaandChinaaspiretobeleadersineconomicreformandcansupporteachotherinthiscommonobjective.AnupgradedanduniquebilateralarchitecturealignsbothwiththeAustraliangovernment’scommitmenttoan‘IdeasBoom’underitsNationalInnovationandScienceAgendaandwiththeChinesegovernment’sprioritisationofinnovationinits13thFiveYearPlan.
Thenextphaseofthetwocountries’relationshipneedstobuildonestablishedtrustaroundsharedandcommoninterestsintheireconomicandpoliticalrelationships,managetheuncertaintiesandrisksfromchange,anddevelopdeeper,up-closecommercialandbusinessengagementasthestructureoftheeconomicrelationshipshiftstowardsservicesandconsumers.Itwillflourishallthemoreifbothcountriessucceedincontinuingtonurtureintheirsocietiesacultureofcosmopolitanhumancapitalthatisliterateinthebusiness,societyanddiscourseoftheothercountry.
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Dialogues
Top-levelpoliticalleadershipmeetingssignal,andideallyimprove,theoveralltenoroftheAustralia–Chinarelationship.Theynormallyoccuronlyonceeachyear,althoughthereisscopeforsignificantadditionalcontactonthemarginsofthemanyinternationalleadersandkeyministersmeetingsthatnowexist.
Since2014,AustraliaandChinahaveheldtwoiterationsofanannual1.5-trackdialogueknownastheAustralia–ChinaHigh-LevelDialogue(HLD),whichisarecastingofthe1.5-trackAustralia–ChinaForumheldannuallyfrom2011to2013.Representativesofgovernment,business,academia,thinktanksandnon-profitorganisationsattendfrombothsidesto‘considerthefutureshapeanddirectionoftherelationship’and‘howtodeepenourtiesacrossthebreadthofourcommoninterestandpriorities’(Bishop2015).Engagingadiversityofbilateralstakeholdersinsemi-officialdialoguemechanismsisuseful,buttheHLDisbroadanditsfocusdiffuse,soitdoesnotleadtoconcreteoutcomesorconceptualadvancementsinbilateralrelations.ThisisinkeepingwiththeaimoftheHLDtoenhancemutualunderstandingandprovideaplatformfordevelopingideasfortherelationship,butrealprogressrequiressustainedhigh-levelattentionmarriedtointensivejointworkingarrangementsbetweentherelevantagenciesassociatedwithspecificpolicyissues.
Thegovernmentassistsspecificindustriesinbilateralengagementthroughthecoordinationofsupportacrossrelatedgovernmentdepartments.Forexample,theDepartmentofAgricultureandWaterResourcesadministersanAustralia–ChinaAgriculturalCooperationAgreement(ACACA)fortargetgroupsintheagriculture,fisheriesandforestrysectorsthatarelookingtoenhancecooperationanddeveloplinkageswithChina.ThisagreementoffersopportunitiesforAustralianbusinesspeopletovisitlocationswithinChinaandtomakebusinesscontactsthatmightotherwisenotbepossible.ToenhancethevalueoftheprogramforAustralia,delegatesarerequiredtosharekeylessonsandcontactsfromtheirvisitwiththeirbroaderindustry.
TheAustralia–ChinaCouncil(ACC),establishedbytheAustraliangovernmentin1978withtheSecretariatlocatedwithinDFAT,playsanimportantroleinfosteringbilateralcooperationandpeople-to-peoplerelationsbyactivitiesincludingfundingAustralia–ChinainitiativesthatbroadenandstrengthenAustralia’sengagementwithChina,HongKong,MacauandTaiwanintheACC’spriorityareasofeconomicdiplomacy,education,andartsandculture.TheACChasbeenattheforefrontofestablishingprivatesectorlinkagestosupportAustralianstudiesthroughthecreationoftheFoundationforAustralianStudiesinChina(FASIC),whichsupportstheBHPBillitonChairinAustralianStudiesatPekingUniversity,alongwithanetworkofover30AustralianStudiesCentresinChina.
Theyouthsphereisanotherareainwhichbothsides,oftenwithofficialsupport,haveprogressedthedevelopmentofvaluablebilateraldialoguesandcommunityorganisationsthathelptoconnectyoungAustraliansandChineseacrossdisciplinesandacrosslinguisticdivides.TheAustralia–ChinaYouthAssociation(ACYA)isavolunteerorganisationwhichpromotesbilateralyouthengagementandprovidescommunity,careersandeducationopportunitiesforover5000AustraliaandChinesestudentsandyoungprofessionalsacrossmorethan20chaptersinbothAustraliaandGreaterChina.TheAustralia–ChinaYouthDialogue(ACYD)isamarqueeannualeventthatbringstogetheremergingAustraliaandChineseleadersfromdifferentfieldstoforgeongoingprofessionalnetworksandcollaborations.TheAustralia–ChinaYoungProfessionalsInitiative(ACYPI)isthepremier
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platformforyoungprofessionalsinAustraliaandChinatoengagewiththemostsignificantissuesofthebilateralrelationship.TheAustraliangovernmenthasinvestedinalloftheseinitiatives,andtheirlong-termbenefittothebilateralrelationshipswillbecomemoreapparentastheiralumnibecomethenextgenerationofleadersinAustraliaandChina.
TheAustralia–ChinabusinessdialogueisprimarilydriventhroughtheAustraliaChinaBusinessCouncilinChinaandtheAustralianChambersofCommerceinChina.TheseorganisationsarecommittedtoadvancingbusinessandtradebetweenAustraliaandChinaanddosothroughlobbyinggovernmentstoremovebarrierstobilateralcommerce,providingbusinessintroductionsandnetworksformembersinbothcountries,andmaintainingresearchprogramsthatfeedintoevents,advocacyandpublications.TheAustraliangovernmentalsorunsabiennialAustraliaWeekinChina(AWIC)thatcoincideswithstatevisitstoChinabytheAustralianprimeminister.TheAWICinvolvesafederal-andstate-leaderheadeddelegationofseveralhundredAustralianbusinessesthatparticipateinsector-specificprogramsofseminars,sitevisits,productshowcasesandnetworkingeventswithChinesefirmsandofficials.Theseinitiativesformagoodbasisforcooperation,buttheywouldbeimprovedthroughmorebilateralinvolvementthatcommitsseniorChinesebusinessleaderstoongoingstrategiccooperation.
BOx 6.8: mODeLs OF BiLATeRAL COLLABORATiOn
Somemodelsofproductivebilateralcollaborationinotherareasthatcouldbeemulatedinbusinessandcommercialaffairsinclude:
the Australian Open:In2015,theAustralianOpentennistournament,whichhaslongpositioneditselfstrategicallyasthe‘GrandSlamoftheAsiaPacific’,signeda‘friendshipagreement’withtheShanghaiRolexMasterstoshareresourcesandengageinjointpromotionalactivities.Chinaisagrowingmarketfortennisparticipation,spectatingandsponsorship,andthereisalreadysignificantChineseinterest,attendanceandmarketingattheAustralianOpen.ANZandRolexaremajorsponsorsofbothtournaments,andthefriendshipagreementwillenablestaffexchangeandcombinethetwoevents’platformstopromotebilateraltennistourism.The2016AustralianOpenwas‘launched’inShanghaiinOctober2015.Additionally,theAustralianOpenhaslaunchedaWeChataccount,openedanofficeinHongKong,signedagreementswith12AsiaPacificbroadcasters,andengagedChina’sonlyAustralianOpenchampion,2014women’ssingleswinnerLiNa,asabrandambassador.
the national Library of Australia (nLA):TheNLApartneredwiththeNationalLibraryofChina(NLC)tocompileandcuratethe‘CelestialEmpire:LifeinChina,1644–1911’exhibitionthatshowedexclusivelyattheNLAinCanberrafromJanuarytoMay2016.TheexhibitionfeaturedpreciousartefactsfromChina’slastimperialdynastythatweredisplayedoutsideofChinaforthefirsttime,aswellasrarelyseentreasuresfromtheNLA’sownChinesecollections.Tocomplementtheexhibition,theNLAalsohostedaseriesofacademiclecturesandcommunityeducationalactivitiestoincreasepublicinterestinandunderstandingofChina.TheexhibitionwasalsoexpectedtoboosttourismtotheAustralianCapitalTerritory(ACT).TheNLAreceivedpromotionalsupportfromtheACTgovernment,buildingonpreviouspartnershipsbetweenthetwoentities,onthe15-yearsister-cityrelationshipbetweenCanberraandBeijing,andonanNLA–NLCMoU
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agreedin2012.TheNLAalsoreceivedsupportfromtheAustralia-ChinaCouncilandfromanumberofcorporates,whichwereeitherbuildingrelationshipswithChinaorofChineseoriginandseekingtobuildtheirprofileinAustralia.
the sydney symphony Orchestra (ssO):Billingitselfas‘theleadingculturalambassadorforAustralia’,theSSOsignedaMoUwiththeShanghaiSymphonyOrchestraandtheShanghaiOrchestraAcademyinApril2015.TheMoUformalisesthecommitmentofeachpartytotheirongoingrelationshipsandwillseeregularperformancetoursbetweenthetwocities.TheSSOwillalsoprovidementoringandperformanceopportunitiestoChinesestudentsinSydneyinShanghai.TheSSOalreadyhasMoUswithChina’sNationalCentreforthePerformingArts,Guangzhou’sXinghaiConservatoryofMusicandtheGuangzhouOperaHouse.
Thebusinessrelationshipdoeshaveadedicatedhigh-leveldialoguemechanismintheAustralia–ChinaCEORoundtable,whichhelditsfirstmeetingin2010.TheRoundtablemeetsonthesideofleader-levelstatevisitsanddiscussespossibilitiesfordeepeningbilateraltradeandinvestment.Itisaworthyinitiativebutitmightbeofgreaterservicetobusinessengagementiftherewaseffectiveinter-sessionalpursuitoftargetedagendasforenhancingbusinessrelationshipsandiftherewereasecretariatthatcouldsustainacooperationagendaandprogramofforwardwork.TheAustralia-ChinaSeniorBusinessLeaders’Forum,whichisapurelybusiness-to-businessdialoguealsoprovidesanotherforumforcorporateleaderstoadvancediscussionandpolicyrecommendationsonbilateralchallengesandopportunitiesontheoccasionofAustralia-Chinastatevisits.
Theessenceofabilateralstrategyshouldbetoworktogethertoachievecommonobjectivesratherthanhavingmeetingsfortheirownsake,andsothepositivesentimentandresourcesbehindtheHLDmighthelpfullybedeployedinmoretargetedways.ThiscouldbeachievedbyholdingarangeofHLDs,eachfocusedaroundbringingtogetherbilateralcounterpartsinaparticularareatodeliverspecificoutcomes.AgoodmodelcouldbetheAustralia–JapanPublic–PrivatePolicyDialogue(AJPPPD),aninitiativeoftheAustralia–JapanBusinessCooperationCommittee(AJBCC),whichfocusesspecificallyonpromotingAustralia–JapaninfrastructurecooperationandhasledtosuccessfulinvestmentsbyJapanesefirmsinAustraliansinfrastructureprojects.TheAustralian–AmericanLeadershipDialogue(AALD)alsoorganisesseveraleventseachyearthatfocusondefinedthemes.
AnumberofsuccessfulofficialdialoguesexistbetweenAustraliaandChinathatcouldbeatemplateforthemanysub-componentsofanAustralia–ChinaComprehensiveStrategicPartnershipforChange.TheAustralia–ChinaHumanRightsDialogue,whichwasinitiatedin1997,institutionalisesofficialdiscussionofsensitivepoliticalissuesinastructured,systematicandproductivefashion.Itprovidesamechanismforraisingspecificanddifficultissuesinaquietlyproductiveatmosphere,andseekstoresolveratherthandrawattentiontoproblems.Inadditiontosupportingexistingcommitments,theDialoguecanbeusedtoinformpartiesaboutfuturereform.TheDialoguealsointeractswithandcomplementstheworkandresolutionsofmultilateralhumanrightsorganisations,suchastheUN,andworkswithNGOs.TheDialoguestrengthensmultilateralcommitmentswhileallowingAustraliaandChinatodiscusshumanrightsinacollaborativesettinganddisplayacommitmenttoactionindomesticmedias.Italsohousesotherrelationship-buildinginitiatives.TheHumanRights
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TechnicalCooperationProgram,whichoperatesundertheDialogue,facilitatescollaborationbetweentheAustralianHumanRightsCommissionandpartnerorganisationsinChina,suchastheAll-ChinaWomen’sAssociationandtheBeijingLegalAidOrganisation.
SuchAustralia–ChinacollaborationisanexampleoftargetedcooperationthatdeliversspecificobjectivesthathaveabroadappealacrosstheAustralianandChinesecommunities,andwillthereforecreateamultipliereffectonbroaderbilateralties.Morestrategicallyfocusedplanningofofficialdialogues,andsupportfornon-officialdialogues,willformwell-calibratedpartnershipsbetweenAustraliansandChineseattheforefrontofeconomictransformationsandsocialexchangethatcanbetteradvancebilateralgoalssetatthepoliticalpartnershiplevel.
Aswellasthedirectdifferencesincultural,institutionalandpoliticalsystems,thereareadditionalquestionsofhowgovernancesystemsimpactoncommercialexchangeandwhatprotocolsandarrangementscanbedevelopedtohelpbuildunderstandingandtrustbetweenbothcountries.
AustraliaandChinahaveawiderangeofbilateralmechanismsincludingregularministerialmeetings,politicalexchanges,taxationagreements,disasterreliefcooperationandculturalexchangeprograms.Increasinglytargeted,strategicbilateralengagementinpriorityareasofeconomictransformationwillincreasetrust,shareknowledgeofreformprocessesandimplementpracticalcollaborationsthatfacilitategreatertrade,investmentandfinanciallinkagesinlinewiththedirectionofeachcountry’stransformation.Bilateralbusinesscouncils,professionalassociationsandforumsbuildrelationshipsbetweenbusinessleaderswhileprovidingaplatformforsharingin-countryexpertise.High-levelmeetingsingovernmentandbusinessencourageflowsofpeopleandideas,andcollaborationonpolicyoutcomes.
BilateralpolicyinstitutionssuchastheAustralia–ChinaSEDbringtogethertopministerial-levelpolicymakerstoaddressastrategicagenda.TheinauguralSEDdialogue,heldin2014,focusedoncloserfinancialcooperation,advancingoffshorerenminbimarketdevelopment,andhighlightingareasofpotentialcollaborationduringthetwocountries’G20andAPEChostyears.Thefollowingyear,thedialoguespecificallyaddressedinvestmentopportunitiesinNorthernAustralia,includingdiscussionoftheprospectiveroleoftheAIIB.
Yetthemostproductivebilateralinteractionislikelytobemaintainedwithintreatyframeworksbecausetheseregularisedialogueandobjectives.Forinstance,therehasnotbeenameetingoftheAustralia–ChinaHumanRightsDialogue—whichisnotembeddedinatreaty—inovertwoyears,sincethe15thmeetinginFebruary2014.
ThemostimportantbilateraltreatycurrentlyineffectbetweenAustraliaandChinaisChAFTA.Itlocksinbilateralcommitmentstomarketopeningandsetsadefinitivetimetableforfutureconsultationstofurtherthesereformcommitments,therebycreatingincentivesforcontinuingdialogueandforfindingcooperativesolutionstoopeningupeachother’seconomies.
ThenextstepforAustraliaandChinaistoexpandthiscloserrelationshipbeyondjusttheeconomicrealmthroughembeddingtheComprehensiveStrategicPartnershipforChange.
Ironically,whenChinawasamoreclosedeconomyandsociety,politicalsystemdifferenceswereclearerandengagementthroughtradeandinvestment(involvingdirectlystate-ownedentities)mayseemtohavebeenconductedinamorecertainenvironment,albeitonethatvastlylimitedthepossibilitiesforexchangeandinvestment.AsChinahasbecomeamore
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openandcomplexsociety,thereappeartobemoreuncertaintiesandattendantrisks.Thisisa‘quality’problemassociatedwithgreatlyelevatedopennessandopportunitiesforbusinessaroundthesuccessfulaccretionofChina’seconomicpower.Thiscircumstancerequiresengagement,notretreat,inordertotakeadvantageofthenewopportunitiespresentedbyChina’sincreasedopeningonmanyfronts.
Bridging the distance
Politicalandinstitutionalsystemdifferencescanmakeitdifficultforcountriestodevelopthecertaintyandconfidencenecessarytocommittolong-termpolicyendeavoursandinvestmentprojects.InAustralia,differentsystemsofgovernance,perceptionsofhumanrights,culturalvaluesandregionalsecurityissuesincreasefeelingsofdistancefromChina.InChina,misreadingthehostileattitudesofsomeinAustraliatoinvestmentprojects,lackofknowledgeabouthowdemocraticsystemsworkanddoubtsaboutregionalsecuritystrategiessimilarlycreatesdistance.
AustraliaandChinahaveverydifferentsocialtraditions,systemsofgovernmentandbusinesscultures.Consequently,amostimportantaspectofimprovedbilateralrelationsandthesuccessfulrealisationofaComprehensiveStrategicPartnershipforChangeisdevelopingdeeperrelationshipsbetweenAustralianandChinesepeople—whethertheybepoliticalleaders,departmentalofficials,corporateemployees,orcommunitiesofmigrants,tourists,studentsandcitizens.Initiatingandconsolidatingtheserelationshipsrequiresmutualtrustandadeepunderstandingofhowtheothercountryworks.Improvingthisstockofhuman,socialandculturalcapitalshouldbethegoalof‘Chinaliteracy’fortheAustraliansystemandthegoalof‘Australialiteracy’fortheChinesesystem.Itiscriticaltobeabletounderstandanothercountryonitsownterms—‘seeingoutfromtheinside’aswellas‘lookinginfromtheoutside’(Loubere2016).
Itisonlythroughknowledgeofthepoliticalinstitutions,economicsystemandsocioculturalcircumstancesoftheothercountrythatabilateralstrategicpartnershipcanfulfilitspotential.Thismeansthatmorepeopleonbothsidesmustbeabletospeaktheothercountry’slanguage,understandtheothercountry’sthinkingandcontemporarydebates,andbeabletocontributetothenationallifeoftheothercountry.Thiswillrequiresignificantinvestmentineducation,realignmentofbureaucratic,corporateandnon-profitcareerpaths,andthedeepeningofinteractionsbetweenthepeoplesofAustraliaandChina.
Presently,Australia’sassetsforunderstandingChinaarelesswelldevelopedthantheywillneedtobe.WhileAustraliamayhavebeenhighlyadeptatexportingresourcestoChina,buildingacommensuraterelationshipinmanufacturesandserviceswilldependongreaterChinacapabilities.Whileresourcestradereliesonthe‘hardware’ofextractiontechnologyandtransportationinfrastructure,manufacturingandservicestradeisdependentonthe‘software’ofsales,marketinganddesign.Withoutknowledgeofthetastes,preferences,hopesandfearsofanothersociety,businessesareunabletoeffectivelypositionthemselvestotakeadvantageofthatmarketorefficientlyusemarketingandpromotionalresources.
ThishighlightsthecruxofthemajorproblemthatAustraliafaces:whileitcanprovidemoreChinesepeoplewithhigh-quality,English-languageeducation,itcannotsimplyassumealinearrateofprogressinotherareasofAustralia’sservicesindustrieswithoutaddressingAustralia’scapacitytodevelopservicesexpertise.Therehavebeenconstantcallsfrom
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withinthebusiness,policy,academicandeducationsectorsforAustraliatoincreaseits‘Chinaliteracy’—aconcepttypicallydescribedastheknowledgeandskillsnecessaryto‘understand’Chinaandnavigatecross-culturalsocialandprofessionalinteractions.
TheAustraliaintheAsianCenturyWhitePaper(2012)andbodiesasdiverseasAsialink,theAustralianIndustryGroup,theAustralianPublicServiceCommissionandtheBusinessCouncilofAustraliahavearguedthatthereisan‘absenceorunderdevelopmentofcriticalindividualandorganisationalcapabilities’onAsia.MoreAustralianstudentsarestudyingChinesetodaythaneverbefore,butmostareofChineseheritage.AuthoritativereportstellusthatChineseclassesare‘overwhelminglyamatterofChineseteachingChinesetoChinese’(AsiaEducationFoundation2008).Excludingfirstlanguageandheritagespeakers,moreYear12studentsstudyLatinthanChineseasasecondlanguage.Arecentreportestimatesthattherearelessthan150Australiansofnon-ChineseheritagewhocanspeakChinesefluently(Orton2016).ItwouldbesensibletoresurrectandproperlyfundtherecommendationoftheAsianCenturyWhitePapertoprovideAustralianschoolstudentswithcontinuousaccesstopriorityAsianlanguagesthroughouttheireducation.
ItisdifficulttoimaginehowAustraliacanfullygraspChinaopportunitiesintheservicessectorwithouteitherencouragingthetargetedimmigrationofskilledChinese,withoutspeakingChinese,withoutunderstandingChinesesocietyandwithoutknowingtheChineseregulatoryenvironment.AndtheneedofservicesfirmsforChina(andAsia)literacywillonlygrow(BCG2012).LogisticscompanyLinfoxnotesthatit‘facesthechallengesofrunningalarge,complexorganisationinmultiplegeographiesandcultures…12,000ofLinfox’s19,200employeesarenowinAsia(only13areexpatriates)and20differentlanguagesarespokenacrossthefirm’(BCG2012).AllAustralianfirmsneedtheservicescapacitytofacechallengessimilartothoseofLinfox.
One,oftenunderexploredpartofthisproblem,comesdowntobusiness.IfbusinesswantsaworkforcewithChinaskills(or‘Chinaliteracy’),businessneedstocreateamarketforthisworkforce.Itisestimatedthat,theresourcessectoraside,AustraliacouldliftitseconomicperformancewithAsiabyuptoA$275billionoverthenext10yearsbyimprovingAsiacapabilities(Asialink2012).TheAustralianDepartmentofIndustry,InnovationandSciencehasmandatedAsialinkBusinessasAustralia’sNationalCentreforAsiaCapability,tosupportAustralianorganisationstodeveloptheknowledgeandnetworksneededtoengagewithAsianmarkets,includingChina.IthasmadeprogresstowardscultivatingamoreChinacapableworkforcethroughinitiativessuchastheChinaCountryStarterPacktofillthegapinChinainformationavailabletoAustralianbusinessesandtrainingover5000professionalsacrossthecountryannually.
Eventoday,veryfewmanagersinAustraliahavedevelopedthetime-consumingspecialistlanguage,culturalandanalyticalskillsthatarenecessarytobeChina-literate.Anothershifthastocomeinhowgraduatesarerecruitedattheentry-levelofbusinessandpublicservice.VeryfewjobsaskforspecialistChina-literateskills,focusinginsteadon‘generalist’skills.ButthehighertheproportionofChina-literateseniorleaders,themorelikelybusinesses(orpolicyagencies)willperformaboveexpectations.Withthisinmind,AustralianeedstothinkabouthowtobestusetheChinaskillsthatitalreadypossesses.Forexample,astartingpointwouldbetoprovideyoungAustraliansinindustry,governmentandotherprofessionalcareerswithpathwaysthatallowthemtomaintainandimprovetheirChinaskills.
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Chinaliteracyisnotdeterminedeithersolelyorevennecessarilyatallbyone’slevelofChinese-languageproficiency.PerhapsevenmoreimportantlywithintheranksofcorporateleadershipisanunderstandingofhowtodobusinessinChina,wherepersonalnetworksandinfluenceiskeytobuildingtrustwithpotentialpartners.AformerAustralianambassadortoChinahasopinedthatthemostimportantaspectofChina-literacyforAustralianbusinessesisinvestinghigh-leveltimeandeffortinmaintainingrelationshipswithcommercialpartnersandgovernmentofficialsthroughvisitingChinaandthroughinvitingChinesepartnerstospendtimeinAustralia,aswellasputtingseriousresourcesintotrainingandretainingappropriatebiculturaltalent(Raby2011).
Itistrue,ofcourse,thatAustralianandChinesefirmsoperateamarketforChinaliteracy,andthiscanbeassumedtobeworking—thesebusinesseswillstructuretheirhiringandmanagementpracticesasneededtoattractthenecessarytalent.ButtheambitionsofAustralianandChinesecompaniesinthisareaareconstrainedbythesupplyofbiculturalandbilingualworkersthatemergefromeacheducationsystem.ItisinrelationtopublicinstitutionssuchasschoolsthatgovernmentshavearoletoplayininvestmentinChina-literacyandAustralia-literacyasapublicgood.
AnassetthatappearsunderutilisedisthelanguageandculturalskillsofmanypeopleofChinesedescentlivinginAustralia.Of22millionAustralianscountedinthe2011Census,closetoonemillionhadsomeformofChineseancestry.AustralianswithChineseheritagecomprise4percentofthetotalpopulationand44percentoftheAsianAustralianpopulation,withSydneyandMelbournethemajorcentresofconcentrationofChineseAustralians.Since2011,mainlandChinahasbeenthelargestsourceofpermanentmigrantstoAustralia,andtherearenow319,000AustralianresidentswhowereborninmainlandChina—thethird-largestforeign-bornethnicgroup—aswellas75,000borninHongKong,25,000borninTaiwanand2000borninMacau.MandarinChineseisthesecond-most-spokenlanguageinAustraliaafterEnglish.YetChineseandotherAsianAustraliansareunderrepresentedinprofessionalandleadershippositions—AustraliansofAsianancestrycompriseonly1.7percentofparliamentarians,3percentofcompanyexecutivesand3.8percentofpublicserviceleaders.Theanalysisatthispointsuggeststheremightbea‘bambooceiling’thatneedstobebrokenifAustraliaistocallitselfAsia-literate(Soutphommasane2014).
Thereisalsounderdeveloped‘Australia-literacy’inChina.Australiahasitsowninstitutional,legal,political,socialandculturalsystemthathastobeunderstoodinordertobenavigatedbyforeigncommercialentities.WhileChina’sforeignlinguisticcapabilitiesandinternationaltradeintegrationaremoreextensivethanAustralia’s,manyChineseentitiesareunfamiliarwithhowtodobusinessinrelationtoAustralia’sdemocraticpoliticalsystem,regulatory,labour,environmentalandeconomicpolicies,aswellasitssocialnormsandpractices.ThismeansthattherearegreatopportunitiesforAustralianfinancial,legalandbusinessservice-providerstoworkproductivelywithChineseenterprisestradingandinvestinginAustralia.ChinesebusinessandgovernmentalsoneedtorecognisethebenefitofinvestingatalllevelsinunderstandinguniqueAustraliancharacteristics.Forexample,Australians’discomfortwiththeideaofalargerChineseeconomicpresenceinAustraliawillbeamelioratedbytheeffortsofChineseinvestorsthatareAustralia-andcommunity-literate.
Whileindividualsandevengroupsmayinvestinseriousbiculturalliteracy,AustraliaandChinacannotbeexpectedtobecomeproductivelyliterateineachother’ssocietywithouthigh-levelpoliticaladvocacyandencouragement.TheComprehensiveStrategicPartnership
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forChangeshouldcreateaproperlyresourcedbi-nationalcommissionthatwould,amongitslargergoals,assistinpromotinginstitutionalexchangesacrossschooling,university,businessandgovernmentthatarelinkedtoastrategicagendaforincentivisingimprovementstobiculturalliteracyandbusinesscapabilities.
Theseperceptionsarerevealedinvariousmeasuresofdistancebetweenthecountriesandinpollingdatathatsuggesthowclosecountriesfeeltowardseachother.Thesedatarevealvariationsovertime,buttheyshowthatAustralianshaveahighdegreeofrespectforChina’sachievementsandstatus,andthatChinesehaveawarmregardforAustralia’sopennessandroleintheregion.Despitesystemdifferences,AustraliaandChinahaveahistoryofhigh-level,strategiccooperationandoutstandingachievementinpolicycooperation,fromtheearlyopeningoftheresourcetradethroughtoChina’saccessiontotheWTO,therecentnegotiationofChAFTAandtheirclosecooperationinG20affairs.
BOx 6.9: RegiOnAL seCuRiTy AnD THe AusTRALiA–CHinA ReLATiOnsHiP
Bothcountrieshaveacoreinterestinasecureregionthatprovidesastablefoundationforadvancinginternationalcommerceandincreasingprosperity.Bothcountriesrecognisetheneedfortheregionalordertocontinuetoadaptandevolvetoensurethis,inawaythatrespectsandupholdsthesecurityandinfluenceofallcountriesintheregion.
AustraliahasreliedontheUnitedStatesforitsdefencesincethewartimeagreementsof1942andhasmaintainedaformalmilitaryalliancewiththeUnitedStatessincetheAustralia,NewZealandandUnitedStatesSecurityTreaty(ANZUS)wassignedin1951.ThemilitaryalliancebetweenAustraliaandtheUnitedStatesincludesamutualsecuritycommitment.Italsoincludesintelligencesharingarrangements.Therehasbeenalongstanding,bipartisancommitmentinAustralianpoliticstothisarrangement,ithaswidepublicsupportanditisunlikelytochange.ThisalliancerelationshipdoesnotprecludecooperationwithChinainareasofsharedinterest.
Whilepoliticalandsecurityrelationscansometimescutacrosseconomicinterests,thefoundationofaComprehensiveStrategicPartnershipforChangeisthelong-termnationalinterestsofbothcountries.AcurrentsecurityissueofprominenceintheregionisconflictingterritorialclaimsmadeintheSouthChinaSeaandtheEastChinaSea.ThisReporthasnoroleinweighinguptheseclaimsortheirresolution,butitisinthesharedeconomicinterestsofallpartiestoseethesettlementofanydisputesamicablyandtoensurethattheregionremainsopentotrade.
IntandemwiththetechnicaladvancesanddevelopmentofChina’seconomy,itsPeople’sLiberationArmy(PLA)hasinvestedinaprogramofmilitarydevelopmentandmodernisation.Recentinvestmentsinaircraftcarriers,submarines,long-rangemissilesandanemerging‘bluewater’navyhaveincreasedChina’scapabilitiesandabilitytoinfluencetheregionandbeyond.Eveninthecontextofa‘peacefulrise’,itistobeexpectedthatChinawilltakestepstoprotectitsownaccesstoglobaltrade,andtocontributetothesecurityofitscitizensandinvestmentsabroad.
China’semergenceasaregionalmilitarypowercreatesapotentialstrategicrivalfortheUnitedStatesintheregion.Undercertaincontingenciesinvolvingmilitaryconflict,Australia’salliancecommitmentsmightbeinvoked.Australiahasalreadyincreasedthenumberof
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USforcesrotatingthroughAustraliaaspartoftheAmerican‘RebalancetoAsia’strategy.TheAustraliangovernmentbelievesthat‘anydisruptiontokeyregionalsea-lanesandtoAustralia’sabilitytotradewouldhaveafundamentalimpactonournation’(Hurley2014).
ButAustralia’salliancewiththeUnitedStatesdoesnotprecludesecuritycooperationwithChina.AustraliahastheclosestdefencerelationshipwithChinaofanyoftheUnitedStates’English-speakingallies.InDecember2015,Australiahostedthe18throundoftheofficialAustralia–ChinaDefenceStrategicDialogueinCanberra.Thisremarkablerecordofdialogueonmilitarymattersisakeyassetfornavigatingnotonlybilateraldefencerelationsbutalso,potentially,thefutureofregionalsecurity.
RegularbilateralexchangestakeplacebetweentheAustralianDefenceForceandthePLA,includinghigh-levelofficervisits,navalshipvisits,strategicpolicyforums,humanitarianreliefdrills,culturalexchangesandanoverarchingAustralia–ChinaDefenceEngagementPlan.InJuly2014,PLANavyvesselsoperatedunderAustraliancommandduringUS-led‘RimofthePacific’navaldrills,andAustraliahostsanannualUS–China–AustraliatrilateralmilitaryexerciseinNorthernAustraliacalledExerciseKowari.TheAustraliangovernmentiscommittedtocontinuingthedevelopmentofitsdefencerelationswithChina.AustraliaandChinacoulddemonstratetheirrespectivecommitmentstotransparentregionalsecuritycooperationbystrengtheningbilateralintegrationoftheirglobalpeacekeepinganddisasterreliefforces.
AustraliaandChinacanbuildonthisfoundationofcooperationbyworkingwithotherregionalcountriesinexistingforumsliketheASEANDefenceMinisters’MeetingPlusandtheEastAsianSummitaswellasinnewmultilateralpolicydialoguesonregionalsecurityissues.
TheComprehensiveStrategicPartnershipforChangerecognisesthatregionalpoliticsareundergoingenormouschange.Thischangeneedstooccurinapeacefulandprogressivemannerwherenoonecountrydominatesanother,andallstates,largeandsmall,areabletoexpresstheirviewsandcontributetocommonsecurityobjectives.AustraliaandChinacanplayvitalrolesinleadingregionaldialogueandbrokeringsecurity,withtheirpartnershipasavehicleforpromotingregionalsecurityinitiatives(AustralianCentreonChinaintheWorld2015).
managing uncertainties
LearninghowtomaketheAustralianandChinesesystemsworktogetherintheprocessofenormouschangeandreformiscrucialtothevitalityoftheAustralia–Chinarelationship.ThedifferentnaturesoftheAustralianandChinesesystemsimpactoneconomicuncertaintyandriskdirectly;theyplayintohowthetwocountriesconducttheirpoliticalanddiplomaticrelations,andtheseaffairsultimatelyaffectthedepthoftheireconomicrelations(Box6.9).Theprinciplesandunderstandingsthatbothcountriesarticulate,andareguidedby,inmanagingthesedifferenceshavebeen,andremain,centraltothesuccessoftheirrelationship.ThatiswhythedevelopmentoftheirComprehensiveStrategicPartnershipforChangeisimportantastheoverarchingframeworkfortherelationship.
Changeinthepoliticalandglobalorderhighlightsthespecialimportanceofclarityineachcountry’sapproachtoregionalsecurityaffairs.(ThisissueisdiscussedindetailinChapter7.)Australia’salliancerelationshipwiththeUnitedStatesandChina’sunderstandingofthat
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relationshipprovidesafoundationfortheirownpursuitofcloserbilateralsecurityandmilitaryexchanges.Givingprioritytothedevelopmentofthesetiesacrossawiderrangeoftraditionalandnon-traditionalareasofsecuritymustbeanactivepartoftheagendaoftheComprehensiveStrategicPartnershipforChangeandwillserveindirectlytoreduceeconomicrisk.
Moreimportantly,thefoundationsoftrust(Box6.10)thatAustraliaandChinaalreadybringtotheireconomicrelationship,providesabaseforthemtoworkwiththeirpartnersintheregion,suchasJapan,theASEANcountries,SouthKoreaandIndiatotakeinitiativestowardsaddressingissuesofcommonconcernthathavethepotentialtocontributesignificantlytoenhancingregionaleconomicandpoliticalsecurity(seeChapter7).
BOx 6.10: BuiLDing POLiCy TRusT
TheelevationoftheAustralia–ChinabilateralrelationshiptoaComprehensiveStrategicPartnershipforChangerequiresahighleveloftrustbetweenthetwogovernments.ThePartnershipprovidesabaseforexpandingcommongroundforcooperationatthesametimeasmanagingrisks,includingpolicyandsystemdifferencerisks.Thefoundationsofahighleveloftrustresidewithofficialsofbothcountries—intheirprofessionalcapabilities,theirin-depthknowledgeofeachother’ssystemsandtheirbeingculturallysavvy.Thesecapabilitiesandfamiliaritiesareessentialtogoodjudgmentaboutpolicyintention,confidenceinengagementandavoidinginadvertentlyharmfulactions.
AustraliaandChinahavealreadycomealongwayinlayingthefoundationforconfidenthigh-levelgovernment-to-governmentengagement,withmanystepsalreadytakenbybothgovernmentsandcentraleconomicagenciesinestablishingstronginstitutionalandofficial-to-officiallinks.OneexampleistherelationshipbetweentheAustralianTreasuryandChina’sNDRC.Australia’swasthefirstTreasuryofaWesterncountrytosetupanofficewithintheirBeijingEmbassy,in1993.TheAustralianTreasurerandtheNDRCChairmansignedaMoUin2008,whichprovidedtheinstitutionalframeworktoguidethedevelopmentoftheagency-to-agencyrelationshipinfollowingyears.TheNDRCChairmanandtheTreasurerhavesincemetannuallyatMacroeconomicDialoguestodiscussglobaldevelopmentsaswellasmacroeconomicpoliciesandreformchallengesineachcountry.OfficialsofthetwoagencieshavepaidfrequentvisitsandengagedonarangeofmacroeconomicandstructuralreformpolicyissuesofdirectrelevancetothepolicyagendasinChinaandAustralia.TheAustralianTreasuryhasorganisedanannualseminarseriesconductedbyTreasuryofficialsinChina,directedtodevelopinganunderstandingofAustralia’seconomyandofAustraliansocialandeconomicpolicythatisofrelevancetoChina’sreformpolicies.
RecognisingtheimportanceofChinatoAustralia’sprosperityaswellasthecomplexanddynamicchangetakingplaceintheAustralianeconomy,Australia’scentraleconomicagencies,includingtheAustralianTreasury,theRBA,PM&CandDFAT,haveinvestedindevelopingskillsandcapacityforbetterunderstandingtheChineseeconomyanddevelopingamoreeffectivepolicyengagementwithChina.AstrongmotivationforthisendeavouristhatimprovedChinaknowledge,skillsandcapacitywillenhanceChinapolicyandthebenefitsfromtherelationshipforbothcountries.
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Thesebeginningsprovidethefoundationfortheengagementthatwillbeneededtomanageanddevelopamoresophisticatedrelationshipoverthecomingdecade.TheproposedAustralia–China(Ao–Zhong)Commission,throughitspromotionofhigh-levelexchanges,canassistinthis.Existinginstitutionallinksdemonstrate,however,thatcentraleconomicagenciesinbothcountriescanprofitablyexpandtheirties.ThisReport,whichhasenjoyedtheblessingofboththeAustralianandChinesegovernments,isanexampleofeffectiveworkingcooperationatthehighestlevelbetweenthetwocountries.ThecommitmentbytheAustralianTreasurytosupportafollow-upproject,toenhanceAustralianunderstandingofChina’seconomicpolicyandengagementwithChinesepolicymakers,isafurtherusefulstepinthisdirection.
Policy and institutional innovation
Inalltheseareas,thereisneedforinnovationininstitutionalmechanismsthatwillfacilitatefamiliarityandunderstandingofmotivationsandintentionsatthehighestlevelsofpolicymaking,cooperationattheworkinglevelinpolicydevelopmentbetweengovernments,andinvestmentinthehumancapitalandcollaborativepolicyinfrastructureonbothsides.
ThereisabroadandvastarrayofexchangesthatoccurwithintheAustralia–Chinarelationship.Theyspanacademia,thearts,business,culture,defence,economics,politics,scienceandsecurity.Strengtheningandencouragingtheseexchangeswillbevitaltosuccesswiththerelationshipinthecomingdecades.
TheComprehensiveStrategicPartnershipforChangecanprovideanoverarchingframeworkforlong-term,high-levelengagementthatbringsthecountriescloserbyworkingtogethertoadvancearticulatedstrategicobjectivesacrossallaspectsoftherelationship.ItwouldenabletheAustralia–Chinarelationshiptobecomeamodelofhowcountrieswithdifferentpoliticalandsocialsystemsandatdifferentlevelsofdevelopmentcancollaboratetoenhancecollectivewelfare.ProgresswithdeepeningtheComprehensiveStrategicPartnershipforChangewouldbuildstrongerholisticnetworksbetweentheAustralianandChinesesystems,ratherthanonlydisparatesectors,andthiswillinturnforgebilateralpartnershipsdirectedatrealisingparticularopportunitiesandmanagingspecificrisks.
ThefutureoftheAustralia–Chinarelationshipisbestguaranteedthroughstronginstitutionalarrangementsandthroughanentrenchedcultureofcooperationbetweenthetwocountries.TheAustralianandChineseleadershipscanencourageandpromotearangeofofficial,political,businessandcommunityinitiativesinbothcountriestodefineandfulfilthepotentialofanenhancedComprehensiveStrategicPartnershipforChange.
TheAustralia–ChinaComprehensiveStrategicPartnershipforChangewould:
• underlinebothcountries’commitmenttomutualtrust;
• institutionalisetheirdialoguesonstrategicobjectivesandworkprogramsoneconomicreformsandpolicychange;
• buildbi-nationalcapacitytosupporttheneweconomicengagement;and
• laythebasisfordeeperpoliticalcooperation.
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ThePartnershipwillentrenchdeeperandbroaderdialoguesandcooperationacrosstherelevantministriesanddepartments.Itwillbeservedbyjointworkinggroupsonreformdrawnfromthenationalgovernment,stateandprovincialofficials,business,themilitary,researchleaders,academiaandthebroadercommunity.Itwillfosterjointtrainingandthedevelopmentoflong-termworkingassociationsinkeyareasbetweentheofficialsofbothcountries.Itwilldevelopjointprotocolsforworkingtogetheronbilateral,regionalandglobalconcerns.
Australia–china (Ao–Zhong) commission
Beyondhigh-levelofficialandsemi-officialexchanges,amajorbi-nationalefforttoupgradethebreadthanddepthofexchangesisneededtosupportthedevelopmentoftheComprehensiveStrategicPartnershipforChange.ThiseffortneedstomatchthecharacteranddepthofexchangesthatAustraliahaswithothermajorpartners,suchastheUnitedStates.Amodel,onwhichAustraliaandChinacouldbuildandextend,istheAustralian–AmericanFulbrightCommission,whichisanon-profitorganisationthatwasfoundedbyatreatybetweenAustraliaandtheUnitedStates.CorefundingofanewAustralia–China(Ao–Zhong)Commissionshouldcomefrombothnationalgovernmentsequally.ButtheCommissionshouldalsobeopentoapprovingandmanagingprogramssponsoredbystategovernmentagencies,business,academicinstitutionsandpersonalbequests,aswellasbybothnationalgovernments.TheCommissionwouldbeindependentlygovernedbypersonsofstandinginbothcommunitiesandprotectthedevelopmentofexchangesagainstparticularinfluenceorfavour(DrysdaleandZhang2016).
TheFulbrightCommissioncoordinateseducationalpartnershipsandfundsacademicscholarshipswithafocusondeveloping‘long-lasting,productivebilateralrelations,partnershipsandconnectionsbetweenAustraliaandtheUS’(Australian–AmericanFulbrightCommission2016).However,atrulycomprehensiveandstrategicAustralia–Chinacollaborationframeworkwouldextendbeyondeducationalcooperationbyalsoadvancingandfindingsynergiesbetweenpolitical,official,subnational,businessandculturalexchangesandpartnerships.
TheCommissionwouldfurthermutualunderstandingthrougheducationalandculturalexchangebetweenthetwocountries.AcrucialpartofthisprogramwillbethedevelopmentofdeepnetworksbetweenAustralianandChinesepeopleacrossallareasoftherelationshipthroughthepoolingofsignificantprivateresourcesintoapublicframework.Itsimportancecouldbesymbolisedbythetwoheadsofgovernmentservingasdualhonourarypatrons.Itwouldhavethreemainpurposes.
First,theCommissionwouldfosterhigh-qualityresearchandacademicexchange.Thegoalofthiscooperationwouldbetoincreasethebi-nationalhumancapitalacrossAustralianandChinesesociety,whichwillcreatedeeperpoolsoftalentfromwhichtodrivethebilateralrelationship.Apartfromscientificandresearchexchange,theCommissioncouldsupportleadershipincreatingcollaborativeexcellenceinlanguageandculturaleducationinprimary,secondaryandtertiaryeducationsystemsthroughimprovedfundingmodels,curriculumdesign,teachertrainingandattitudinalchange.ThiswouldbuildintoaversionoftheAustralian–AmericanFulbrightCommissions’modelofpublicandprivatelysponsoredpostgraduate,postdoctoral,early-careerresearcherandsenioracademicexchanges,withafocusonbuildinglong-termpartnershipsforresearch,mentorship,scientificinnovationandentrepreneurialcommercialisation.TheCommissionwouldalsoleverageexistingofficial
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initiativessuchasAustralia’sNewColomboPlanandtheChineseGovernmentScholarships,andprivateinitiativessuchastheBHPBillitonAustralia–ChinaScholarshipsandtheWestpacAsianExchangeScholarships.
Second,theCommissionwouldfosterpolicyexchanges.Thegoalofthiscooperationwouldbetoproduceacadreofpoliticalandgovernmentleadersinbothcountrieswhoarefamiliarwiththepolicymakingdynamicsoftheothercountryandhavedeeppersonalnetworkswiththeirbilateralcounterparts.ThereispositiveexperiencewiththisthroughtheprogramsthatcurrentlyfacilitateexchangeswithChina’sOrganisationDepartmentthroughtheAustraliaandNewZealandSchoolofGovernment,andthroughtheANU’sexchangeswiththeCentralPartySchool.Thedeeperpolicylinkagesthatwouldresultwillsustaingreaterdialogueandmoreproductivebilateralinitiatives.TheCommissioncanbuildonexistingprogramssuchastheNationalParliamentaryFellowshipsProgramandtheNationalGovernmentFellowshipstofacilitateanextensiveprogramofprofessionalsecondmentsandresearchfellowshipsforAustralianandChinesepublicservantsandpolicymakerstoeitherreceivetrainingintheregulatoryworkingsoftheothersystemortoworkontargetedbilateralpriorityissueswithintheelitepolicy-shapinginstitutionsandwiththepolicythoughtleadersoftheothercountry.Thiswouldformabilateralbridgeheadbetweenpolicymakinginstitutionsandintellectualcommunities.
Third,theCommissionwouldfosterbusinessandeconomicexchange.ThegoalofthiscooperationwouldbetopropelstrategiccollaborationoneconomicreformprioritiesthatwillhelpAustraliaandChinatomanagetheirrespectivetransformations.ThiswillbesupportedbytheforwardworkagendaofthisReporttoundertakeacomprehensiveanalysisofAustraliaandChina’seconomicpolicymakingstructuresacrossallsectorsandinvestigatehowAustraliaandChinashouldthereforebestrelatetoeachotheracrossbusiness,governmentandsociety.ThisprojectwillbecollaborativeandservetounderpinAustralianandChineseeconomicengagementforthenextdecade.ThisresearchwillbecometheplatformforestablishingtheCommissionandcollaborationonsimilarinstitutionsindifferentcountries.
Acrossallofthesesectors,theCommissionwouldserveasanoverarchingframeworkthatallowspublicandprivateactorsinAustraliaandChinatoinvesttheirresourcesincreatinglarge-scalenationalprogramsofexchangeforbuildingtalentinthepursuitofspecificorgeneralbi-nationaloutcomes.
TheCommissionandtheoverallComprehensiveStrategicPartnershipforChangeareinitiativesonwhichjointworkcanbeginimmediatelyfortimelyimplementationbybothsides.Theprocessofplanning,negotiating,launchingandadministeringthesearrangements,andtheproductivebilateralengagementsandchangesthattheyachieve,willlaythegroundworkforAustraliaandChinatoupgradetheir‘model’relationshipoverthelonger-termintoabilateraltreatyframework.Thisframeworkwillcementpoliticalcommitmenttotherelationship,institutionalisebilateralcooperationandperpetuateeconomicreformpartnerships.
Thecommonthemeofbilateralcollaborationacrossallsectorsshouldbeworkingtogetheronjointinitiativeswithspecificobjectivesandpurposestowardsoutcomesthatareaprioritytobothsides.Mobilisedthroughthejointcommitmentofbothgovernments,anexpandingnetworkofcollaborationwillconstituteatrulystrategicpartnershipforchange.Thispartnershipneedstobefoundedondeeperpolicycollaborationatalllevelsindevelopingthenewbilateralrelationship,definingjointinterestsintheregionaleconomy,andstrengtheningtheglobaleconomicsystemonthebasisofinclusionandconsensus.
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CHAPTER7Australia and china in regional economic diplomacy
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Key messAges
AustraliaandChinafacenewchallengesinAsiaandthePacificasaresultofthechangingstructureofregionalandglobaleconomicpower.TheeconomicandpoliticalriseofChinaischangingtheregionalaswellastheglobalorder.Regionaleconomicinterdependencenowincludesawidergroupofeconomies,includingIndia,andawiderrangeofissueareas.TheestablishedregionalinstitutionsandarrangementsinEastAsiaandacrossthePacificdonotencompassalleconomiesandwerenotsetuptodealwiththeinteractionbetweeneconomicandpolitical-securityaffairs,andtherearegapsincoveragewithinthearchitectureforeconomicandpolitical-securitycooperation.ThesechallengesrequireAustraliaandChinatoplayanactiveroleinforginganewconsensusaroundtheprinciplesthatwillguidefutureregionalcooperation.Overthepastthreedecades,Australia’sandChina’seconomicintegrationintotheregionalandglobaleconomyhasoccurredwithinaframeworkthathasbeeninclusive,hasavoidedarrangementsthatweakentheglobalsystemandhasledpoliticalcooperation.Thetwocountriescannowdirecttheirbilateralrelationshiptowardthesecommonregionalandglobalobjectives.
AustraliaandChinashouldworkwithotherpartnersinAsiaandthePacificto:
• Connectandextendexistingregionalarrangements,suchasAPECandtheEAS,sotheycanprovideaplatformtoaddressthenewprioritiesinregionalcooperation.
• Initiatehigh-levelpoliticaldialogueoncross-cuttingissuesthatrequireclosecooperation,includingtheenvironment,energytransformationandregionalinfrastructureinvestment.
• MobiliseacoalitiontodefinethepathforwardinforgingtheTPPandRCEPintoaFreeTradeAreaoftheAsiaPacific(FTAAP)thatstrengthenstheWTOandtheglobaleconomicsystem.ConsolidationoftheTPPandRCEPmaynotbeapracticalobjectiveinthemediumtermbutfindingwaystomakeboththeTPPandRCEPinclusiveandcomplementaryis.
• Seektoestablishacommonframeworkforinfrastructureinvestmentandfundingintheregion.Currentlymanyplayersareactingindependentlyandatcross-purposes.Ministersandseniorofficialscanmeettodiscusspriorities,strategiesandmutualinterestsininfrastructuredeliverytofurtherregionalconnectivity.SucharegionalforummightinvolvetheAIIB,ADB,WorldBank,country-specificinstitutionsandrecipientregionalgroupingssuchasASEAN.
• Useambitiousbilateralinitiativestoprogressregionalandglobalarrangements.ChinacouldusetheinvestmentchapterinChAFTAtopushforahigherqualityinvestmentchapterinRCEPandsetthebenchmarkforotherbilateralinvestmenttreaties.AustraliaandChinacanpioneerservicessectoropening,capitalisingonAustralia’spotentialroleasatestinggroundforwiderdomesticandregionalliberalisation.
• Initiateadialogueonthearticulationofacommon,plurilateralsetofprinciplestogovernforeigninvestment—bothforfacilitatinginvestmentbeforeitismadeandthetreatmentofinvestmentonceithasbeenimplemented.
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• Leveragethebilateralrelationshiptobuildcooperationinthirdcountriesinareassuchasaidanddevelopmentandinfrastructureandconnectivity.
• Furtherenhancebilateralsecuritytiesasanimportantstepincreatingeffectiveworkingrelationshipsonsecurityissuesamongallcountriesintheregion,therebystrengtheningthefoundationforpoliticalconfidenceandregionaleconomicprosperity.
ChinaandAustraliaarebothintegratedintotheregionalandglobaleconomy,andtheirbilateralrelationshipisnestedinahighlyintegratedEastAsianregion.Chinaisthecentreofregionalsupplychainsanditstradeandinvestmentexpansionhavebeenthedrivingforcesofitsrapiddevelopmentandindustrialisation.Goingforward,regionaltradeandinvestmentliberalisationandintegrationwillcontinuetobekeydriversofChina’sfutureeconomicdevelopmentandreform.TheshareofEastAsiainAustralia’stradeisoneofthehighestofanycountryintheworld,with66percentofAustralia’stradetakingplacewithinEastAsia(Figure7.1).Moreover,AustraliaisastableandsecuresupplierofenergyandrawmaterialstoChinaandtherestofNortheastAsia.
EastAsiaisoneofthemosteconomicallyintegratedregionsintheworld—onparwithEuropebyanumberofimportantmeasures.Economiccooperationhasledpoliticalcooperation,andregionaleconomicintegrationhasbeenmarket-ledratherthaninstitution-led.AsAsianeconomieshaveliberalisedandopeneduptoregionalandglobaltrade,institutionshavebeencreatedtohelpmanageandsecurethesethickeninganddeepeningeconomicrelationships.AsiancountriesopenedtheireconomiestointernationalcompetitionwithintheglobalinstitutionalframeworksanddidsobecausetheyhadgrowingconfidenceintheglobaltradingsystemandtheglobaleconomicordercreatedafterWorldWarIIaroundtheBrettonWoodsinstitutions.
AustraliaandChinahavealsoactivelyengagedinregionalcooperationandinstitution-buildingasawaytopromoteeconomicdevelopmentandreformathome,andtofostercloserpoliticalcooperationinthewiderAsianregion.TherelationshipbetweenAustraliaandChinahasdevelopedinthecontextofdeepeningregionaleconomicintegration,andstrengtheningthebilateralrelationshipservestofosterbroaderregionalcooperation.Forbothcountries,economiccooperationhasunderpinnedregionaleconomicdiplomacyandinstitution-buildingprocessesinAsia.Regionalpoliticalandsecuritycooperation,ontheotherhand,hasbeenpiecemealandlesscomprehensive,butincludesnotableachievements,suchascooperativeeffortsontheCambodianpeacesettlementandtheUnitedNationsTransitionalAdministrationinEastTimor.
ThediversitywithintheAsiaPacificregion—withcountrieshavingdifferenteconomicandpoliticalsystems,andbeingatdifferentstagesofdevelopment—demandsacollaborativeapproachtoregionalism.Regionalcooperationhasoccurredonavoluntarybasiswhereagreementswerebasedonforgingconsensusandorderedaroundpositive-sumeconomicinterests.Importantly,thepoliticalandsecurityrelationshipshavebeenunderpinnedbytheUSallianceframeworkcreatedafterWorldWarII,andUSrapprochementwithChinasince1972.
TheinstitutionsthathavefurtheredregionalcooperationinAsiaandthePacific,includingAPEC,ASEANanditsPlusThreeandPlusSixprocesses(includingthesubsidiaryChiangMaiInitiative),havedonesolargelyonthebasisofnon-bindingcommitmentsandwithoutthecessionofsovereigntytoanysupranationalregionalauthority.Theestablishmentof
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theseinstitutionswascharacterisedbyevolution,flexibility,consensusandvoluntaryparticipation,becauseofthedifferencesinpoliticalandinstitutionalsystemsintheeconomiesaroundwhichtheyhavebeenbuilt.Theyhaveservedtobuildpoliticaltrustandcooperationamongcountriesacrossaregioninwhichpreviouslytherehadbeenasubstantialdeficitinmechanismsthroughwhichthatcouldbedone.Thismodelofcooperationconstitutesanimportantinstitutionalinnovationthathasprovedvaluableinothertheatres,suchasintheglobalG20forum,whichhasasimilarmodusoperandi.
Asianregionalismhasthereforenotproceededattheexpenseof,orinamannerthatundermines,globalinstitutions.Onthecontrary,ithassoughttocomplementandreinforceglobalinstitutions.ThatremainsanoverarchingobjectiveforbothAustraliaandChinaintheirapproachtoregionalcooperation.Theprincipleofopenregionalism—thatis,regionalcooperationandintegrationthatisopentotherestoftheworldandwhichreducesbarrierstoallstatesinanon-discriminatoryfashion—onwhichAsiaPacificeconomiccooperationwasbuilt,hasensuredthatregionalcooperationhasstrengthened,ratherthandetractedfrom,globalcooperation.
Butthingsarechanging.TherapidpaceofeconomicgrowthandintegrationinAsiaisbringingaboutamorecomplexandmultipolarorder,andthrowingupneweconomicandpolitical-securitychallenges.AnewregionalconsensusisneededtoensurethattheprinciplesuponwhichAsia’seconomiccooperationwasbuilt—openregionalism,consensus-drivencooperationandstablerelationsbetweenthegreatpowers—arenoteroded.AustraliaandChinaarewellplacedtoworktogethertoforgethisnewconsensusbecausetheyhavesuccessfullyworkedtogetherinthepasttofosterregionaleconomiccooperationonthesesameprinciples.
ThischapterdescribesAustraliaandChina’sjointinterestsinregionaleconomicdiplomacyandsomeoftheprinciplesthathaveservedtheirpastcooperationwell.ItreviewsthechangestothestructureoftheregionalandglobaleconomythathavealreadyoccurredasaconsequenceoftheriseofChinaandtherestofAsia,andoutlinessomefuturetrends.Thechapterthenexamineswhethercurrentinstitutionalarrangementsareadequateundercircumstancesinwhichthestructureofregionalandglobaleconomicweighthaschangedsignificantly,anddiscussestheareasthataremostinneedofchange.ThechapterconcludesbyidentifyingcommoninterestsandgoalsforChinaandAustraliainregionaleconomicdiplomacy.
Australia and China’s joint interests in regional economic diplomacy
AustraliaandChinashareanumberofcommoninterestsintheirpursuitofregionaleconomicdiplomacy:
• usingregionaleconomicframeworkstostrengthenandreformtheirdomesticeconomies;
• promotinganopentradingenvironmentinAsiathatsupportstheglobaleconomicorder;and
• usingregionaleconomicinstitutionstobuildstrongerframeworksforpoliticalandsecuritycooperationinAsia.
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TheseinterestshaveunderpinnedAustralia’sandChina’sapproachtoregionaleconomicdiplomacyoverthepastthreedecades.AustraliaandChinahaveasuccessfulrecordofworkingtogetherinbuildingthefoundationsforAsia’sregionaleconomiccooperation.
FollowingWorldWarII,AustraliabuiltsteadilyitsengagementwithAsiaandreduceditseconomicdependenceonBritain.Australia’sMenziesgovernmentsignedamomentousbilateraltradeagreementwithJapanin1957,andrenegotiateditstraditionalpreferentialtieswiththeUnitedKingdomastheformationoftheEuropeanCommonMarketloomed.Thissteadydiplomaticshiftwasacceleratedwiththereformsofthe1980s,whichreorientedAustralia’seconomicandforeigndiplomacytowardsAsia.Australiasoughttocapitaliseonthelarge-scaleeconomicgrowthandstructuralchangestakingplaceinAsiaandtheirpotentialeconomicbenefitstoAustralia.TherewasrecognitionthatunlessAustraliaremoveditsprotectionisttradebarriersandundertookmajordomesticeconomicreform,itwouldnotenjoythebenefitsofAsia’seconomicascendancyandriskedbeingleftbehindbyrisingAsianpowers.TradeliberalisationthusbecameakeypolicystrategyandwasviewednotonlyasawaytounleashAustralia’sdomesticeconomicpotential,butalsoasawaytounderpinAustralia’sengagementwithAsia.
In1989,theAustraliangovernmentproposedanewmechanism—APEC—topromoteregionalobjectivesintheGATTUruguayRoundandtofosterlongruneconomicdevelopmentcooperation.APECwasdesignedtofostertradeliberalisationandeconomicreforminAsiaandtobolstertheglobaltradeliberalisationagendaoftheUruguayRound.But,importantly,APECalsoservedAustralia’sgoalofpullingtogetherthetwohalvesofAsiaandthePacific—EastAsiaandNorthAmerica—inacooperativeendeavour.ThisgoalwasdrivenbythealignmentofAustralianandEastAsianinterestsinimprovingaccessforlabour-intensiveandothermanufacturesinNorthAmericanandotherinternationalmarkets,andimprovingAustralia’sowndirectengagementwiththeEastAsianeconomies.APECwasthereforeexplicitlydesignedtolinkthecountriesoftheWesternPacific(includingAustraliaandNewZealand)andEastAsiawiththoseofNorthAmerica,viacommonmultilateraleconomicopeningstrategies.
Crucially,thisperiodofreformcoincidedwithChina’sowneffortstoreformandopenitseconomyandtodeepenitseconomicanddiplomaticengagementwithAsia.Afterthreedecadesoflimitedtradeandothereconomicinterdependence,theintroductionofDengXiaoping’s‘reformandopening’policiesin1978pavedthewayforgreaterChineseengagementwithregionaleconomies.AustraliasoughttoharnessthesechangestakingplaceinChinabyinvolvingtheChineseleadershipinthedevelopmentofideasaboutAsiaPacificeconomiccooperation.EconomistandformersecretaryoftheAustralianDepartmentofTrade,SirJohnCrawford,ledamissiontoChinain1980totalkaboutChina’sparticipationininformalprocessesofregionalcooperation.In1986,China,ChineseTaipeiandHongKongwere,atAustralia’sinitiative,invitedtojointhetripartitePacificEconomicCooperationCouncil(atitsVancouvermeetingofthatyear).AustraliaalsoattemptedtoengageChinainthefirstforeignandeconomicministers’meetinginCanberrain1989,althoughtheTiananmenIncidentearlierthatyearmadethispoliticallyimpossible.In1991,ChinajoinedtheAPECmeetinginSeoul,andin1993,China’sthenpresidentJiangZeminattendedthefirstAPECLeaders’SummitinSeattle.
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APECprovidesChinawithanimportantchannelforparticipatingintheprocessofinternationaleconomicgovernanceandregionaleconomicintegration,aswellaspromotingitsowndomesticpolicyagenda(ChinaAPECDevelopmentCouncil2009).LikeAustraliabeforeit,theChinesegovernmentusedparticipationinAPECandtheregionaltradeliberalisationagendatopushpoliticallysensitivetariffreductionandeconomicreformsathome.AtAPEC’sOsakasummitin1995,Chinaannouncedreductionsintariffson4900items,andwithinayearthesimpleaveragetariffratewasreducedfrom36percentto23percent.ByOctober1997,Chinahadreduceditssimpleaveragetariffrateevenfurther,to17percent.APEC’sagendacloselycoincidedwiththeglobalagenda,anditwasinthiscontextthatChinaundertooktheliberalisationandeconomicreformsnecessaryforitsaccessiontotheGATT/WTO.ButChina’sunilateraltradeliberalisationeffortsandactiveparticipationalsohelpedtobringmomentumtoAPEC,andbroughteconomicgainstoChinaanditstradingpartners,suchasAustralia.
Afterlayingthefoundationsforregionaleconomiccooperationinthe1980s,the1997–1998Asianfinancialcrisisrevealedthebenefitsbutalsothelimitationsofexistingregionaleconomicframeworks.Australia’seconomicsystemandinstitutionsallowedittobenefitfromeconomicintegrationwithAsiawhileprotectingagainstmuchofthepotentialfinancialvolatility.Thefloatingexchangerate,forexample,waskeytoAustraliaavoidingrecessionoranyseveredownturnduringtheAsianfinancialcrisis.Theexchangerateactedasashockabsorberasexchangeratemovementsprotectedagainstvolatilityinthedomesticeconomy.InChina’scase,theAsianfinancialcrisisdeepeneditsunderstandingofthebenefitsofregionaleconomiccooperation.Thecontagion-likespreadofthefinancialcrisisaroundtheregiondemonstratedthatregionaleconomieswerenowdeeplyinterconnected,andthatinthiseraofglobalisation,statescouldnotactaloneintryingtoprotectagainsteconomicvulnerability.Chinareceivedinternationalaccoladesforresistingpressuretodevalueitscurrency—thusavoidingbeggar-thy-neighbourexchangeratecompetition—andforprovidingaidpackagesandlow-interestloanstoitscrisis-affectedneighbours.TheAsianfinancialcrisisincreasedChina’sconfidenceinitsabilitytoplayaconstructiveleadershiproleintheregion,butalsodemonstratedthelimitationsofexistingregionalandglobaleconomicmechanismssuchasAPEC,theWorldBankandtheIMF.
TheAsianfinancialcrisisthereforespurredgreaterregionaleffortstodevelopnewEastAsianeconomicarrangements,suchasASEANPlusThree(includingChina,JapanandSouthKorea)andtheChiangMaiInitiative(CMI).Atatimewhenglobalfinancialarrangementswereperceivedtohavefailedtheregion,thesenewEastAsianarrangementssoughttostrengthenanddeepenEastAsianregionaleconomicandfinancialcooperationaswellasregionalregulatorycapacity.BolsteredbyitsleadershiproleduringtheAsianfinancialcrisis,Chinaplayedanimportantroleinthisregionalcooperationprocess,joiningtheASEANPlusThreegroupandsubsequentEastAsianeconomicarrangementswithenthusiasm.Chinaunilaterallyliberalisedmanyofitskeysectors,includingagriculture,therebyopeningitsmarketstoSoutheastAsianexports.In2002,ChinainitiatedaframeworkagreementfortheChina–ASEANFreeTradeAgreement.China’scommitmenttofurtheropeningup,anditswillingnesstosignuptotherulesandnormsoftheglobaltradingsystemthroughaccessiontotheWTOin2001,gavetradingpartnersconfidenceinthedirectionofChinesereforms.UnilateraltradeliberalisationalsocreatedsignificantgoodwillbetweenChinaanditssmallerSoutheastAsianneighbours.EveninNortheastAsia,wherepoliticalandsecurityrelationshipswaxedandwaned,tradeandeconomicexchangegrewrapidly.
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Beyondeconomicbenefits,AustraliaandChinahavealsoviewedregionaleconomicdiplomacyasawayofbuildingstrongerpoliticalandsecuritycooperationinAsia.Thelegacyofcolonialism,ColdWardivision,andunresolvedhistoricaltensionsbetweenJapananditsneighbourshadstymiedinstitution-buildingprocessesinAsiasincetheendofWorldWarII.AlthoughASEANhadbeenestablishedinSoutheastAsiain1967,thewiderAsiaPacificregionremainedinstitutionallyunderdeveloped.Theregionwascomprisedofstateswithverydifferentpoliticalsystems,aswellasmanynewlyindependentstatesthatwerefiercelyprotectiveofanyperceivedthreatstotheirsovereignty.Indeed,thesefactorshadledASEAN,theregion’smostsignificantexistinginstitution,todevelopparticularpracticesofconsensus,flexibility,non-interferenceininternalaffairsandnon-bindingresolutions,asawayofreassuringpostcolonialstates’anxietiesaboutinternationalinstitution-building.
Giventheseobstacles,theAustralianandChinesegovernmentshavebothobservedthevalueofeconomiccooperationasanon-threateningwayforregionalstatestodevelophabitsofdialogueandcooperation,andtheASEANapproachtoinstitution-buildingasawaytofostertrustandultimatelypoliticalcooperationintheregion.Inaddition,participatinginAPECprovidedavaluablewayforBeijingtoreassureregionalneighboursofitspeacefulrise,andtohelpbuildastableregionalenvironmentthatwouldbeconducivetoChina’sfutureeconomicgrowth(Zhang2014;Zhongetal2014).ChinawasencouragedbythewayinwhichAustralia,JapanandtheSoutheastAsianstatesusedregionaleconomicinstitutionsasawaytoenmeshChinaintoaregionalwebofrelationships,andtodemonstratethebenefitsofregionalcooperation.Chinapubliclyacknowledgedthesebenefitsin1997whenits15thPartyCongressofficiallydeclaredthat‘multilateralism’wasaguidingChinesepolicyprinciple(Harris2000).
Asia’s economic integration
China,AustraliaandthewiderAsiaPacificregionhavebenefitedgreatlyfromthestunninglevelsofregionaleconomicintegrationthathavebeenachievedsincethelate1980s.Despitethecomparativelylowerdensityofitsmultilateraleconomicinstitutions,ascomparedwithEuropeforexample,Asianowenjoyshighlevelsoftradeinterdependenceinresourcesandintermediategoods,andhighlevelsofexportsoffinalgoods.Bymanymeasures,EastAsiaisthemosteconomicallyintegratedregionintheworld,ledbyitsextensiveproductionnetworks(ArmstrongandDrysdale2011).
TheongoingsuccessofAsia’seconomicintegrationiscriticallyimportanttoAustraliaandChina’sprosperity.TradewithEastAsiaaccountsfor66percentofAustralia’stotaltrade(Figure7.1).ThismakesAustraliathemostEastAsian-orientedtradingnationintheworld.Justunder46percentofAustralia’stradeiswithNortheastAsia(ASEAN’s‘PlusThree’countries),higherthananyothermajorEastAsiancountry.AustraliaalsohasthehighesttradedependencewithASEAN,at15percent,oftheothernon-ASEANeconomiesintheASEANPlusSixarrangement(NewZealand,India,China,JapanandSouthKorea).IndonesiaandMalaysiaalsohaveover60percentoftheirtotaltradewithintheASEANPlusSixgrouping,withoveraquarteroftheirtradewithintheASEANgrouping.InChina’scase,justunder27percentofChina’stradeiswiththerestofEastAsia.TheChina–ASEANfreetradeareaisnowtheworld’slargestfreetradeareacomprisedsolelyofdevelopingcountries,withtradeofUS$480billionin2014andtotalmutualinvestmentreachingmorethanUS$150billion.By2020,China–ASEANtradeisexpectedtoreachUS$1trillion(Zhong2015).
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Figure 7.1: Asia Pacific economies’ share of trade with east Asia, 2014
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orea
Austra
lia
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ASEAN+6 ASEAN+3 ASEAN
Source:UNComtradeandauthors’calculations.
ChinaisatthecentreofregionalsupplychainsandhasbeenahubforEastAsiantradewiththerestoftheworld.InthepastitplayedamajorroleintheassemblyofmanufacturedgoodsthatwouldbeexportedtoNorthAmericaandEurope,butthevalue-addedinChinaduringtheproductionprocesshasalreadystartedtoincreaserapidlyandChinaisbecomingamuchlargerconsumerofthosefinalgoods(seeChapter2).ChinaisnowfocusedonfurtherliberalisingregionaltradeandinvestmentaswellasstrengtheningregionalconnectivityandintegrationasawaytoenhancetheinternationalcompetitivenessoftheChineseeconomy,andtograduallybuildaglobal,high-standardsfreetradearea.ChinaisalsothelargesttradingnationgloballyanditsvasttraderelationshipswithNorthAmerica,Europeandtherestoftheworldmeanthatitisakeyglobaltrader.
shared principles
ThesuccessofAsia’sregionaleconomicdiplomacyandtheachievementofdeepeconomicintegrationhasbeenunderpinnedbythreecoreprinciples:openregionalisminsupportofglobalframeworks;consensus-drivencooperation;andstablerelationsbetweenAsia’sgreatpowers.
Open regionalism in support of global frameworks
Regionaleconomicintegrationhasbeenopenandhasdevelopedinsupportofglobalframeworks.Asia’seconomicsuccessesoutlinedabovehavebeenachievedbecauseAsia’seconomicarrangementshavegenerallybeenoutward-lookingratherthaninward-looking.Thatis,theyhaveworkedtostrengthenratherthansubstituteglobaleconomicarrangementssuchastheGATTandWTO.Astradingnations,AsiaPacificregionaleconomieshavelearnedthattheirowneconomicprosperityreliesonopenengagementwithNorthAmerica,Europeandotherpartsoftheglobe.
Openregionalism—regionaleconomicintegrationthatisnotattheexpenseofeconomiesoutsideoftheregionandissupportiveoftheglobaltradingsystem—canbeseenmostprominentlyinAPECandASEAN.AttheAPECsummitinBogor,Indonesiain1994member
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economiesagreedtothe‘Bogorgoals’.ThesewereasetofambitioustargetsthataimedtoachievefreeandopentradeandinvestmentintheAsiaPacific,by2010forindustrialisedeconomiesandby2020fordevelopingeconomies.TheBogorgoalsencouragedmembereconomiestoundertakeunilateralliberalisation—thatis,notpreferentialorbetweenmembersonly—andthereforepromotedfreeandopentradewiththerestoftheworld,ratherthanjustamongAPECmembers.
MuchofAsia’sregionalcooperation—economicallyandgeopolitically—isorderedaroundtheASEANgrouping,whichhasalsopursuedopenregionalism.ThisisbecausemostofASEAN’smajoreconomicpartnershavealwaysbeenoutsideofSoutheastAsia—includingChina,Japan,Australia,theUnitedStatesandtheEuropeanUnion.ForASEANtohavepursuedinward-lookingarrangements—thatis,liberalisationattheexpenseofthesemajoreconomicpartners—wouldnothavebeenpoliticallyoreconomicallysensible.ThisapproachisrecognisedinthedesignoftheASEANFreeTradeArea(AFTA),whichwaslaunchedin1992.AFTAinitiallypursuedpreferentialliberalisationbyonlyremovingborderbarrierstogoodstradedwithintheASEANzone.However,fromtheoutsettherewasanagreementthatthesepreferenceswouldbeextendedtoallexternaltradingpartnersaswell,andthusmultilateralised,whenitbecamepoliticallyfeasibletodosoineachdomesticpolity.
MorerecentlytheASEANregionhasbeenpursuinganambitiousASEANEconomicCommunity(AEC),whichwasestablishedinNovember2015.TheaimoftheAECisto‘transformASEANintoasinglemarketandproductionbase,ahighlycompetitiveeconomicregion,aregionofequitableeconomicdevelopment,andaregionfullyintegratedintotheglobaleconomy’by2020(ASEAN2008).TheAECwouldallowthefreeflowofgoods,services,investmentandskilledlabour,andthefreermovementofcapitalacrosstheregion.BecauseintegrationintotheglobaleconomyisoneofthefourpillarsoftheAEC,integrationintheASEANregionwillnotdiverttradeorcommerceawayfromnon-memberstowardstheASEANgrouping.ThegoalisambitiousbutwouldhelpmoveASEANtowardsasinglemarketandproductionbasethatfurtherstheopportunitiesandeconomicengagementofChina,AustraliaandotherneighboursintheAsiaPacific.
consensus-driven cooperation
ConsensualprocesseshavedrivenAsia’seconomicintegration.Consensushasbeencriticalforachievingcooperationamongagroupofstateswithdiversepoliticalsystemsandlevelsofeconomicdevelopment.ConsensushasalsoencouragedthecooperationofAsia’smanypostcolonialstates,whichhadlittleornopriorexperienceofmultilateralismbeforeWorldWarII,andwhichhavethereforealwaysbeenstronglyattachedtotheprotectionofstatesovereignty.Butthisapproachtoregionalandinternationaldiplomacyhasenduringvalue.Consensus-formingstrategiesreassuresmallpowersthatlargepowerswilltaketheirviewsintoconsiderationinadoptingpolicypositionsandthattheywillnotdominateinstitutions;theyalsoreassurelargepowersthatsmallercountrieswillnotbandtogetheragainstthem.Thisconsensus-buildingapproachhasencouragedAsia’sdiversemixofstatestoparticipateinregionalinstitutions,evenattimeswhentheyhavebeenuncomfortablewiththemembership,structure,approachesortheissue-focusofaparticularinstitution.
Thoughoftencriticisedforbeingprocess-driven(ratherthanoutcome-driven)‘talkshops’,theTrack1.5andTrack2dialogues,meetingsandotherprocessesthathaveaccompaniedthecreationofinstitutionssuchasAPECandtheASEANPlusprocesseshavebeencrucialinshapingsharedregionalunderstandingsabouttheimportanceoftradeandinvestment
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liberalisation,economicreformandmultilateraleconomiccooperation.Inparticular,Asia’sregionalinstitutionshaveactedasforumsforbuildingcriticalconsensusonthreeissues:first,thatopeninguptotradeandinvestmentbenefitsone’sowneconomy;second,thatthesebenefitsarecompoundedifopeningupoccursinconcertwithothercountries;andthird,thatopeningupwithoutdiscriminatingbetweentradingpartnersisthebestmodeofstrengtheningeconomicrelationships.AchievingconsensusontheseissuesunderpinnedAsia’srapidexpansionintradeandinvestmentinthe1990s,liftedtheincomesofAsiaPacificeconomies,andensuredthateconomicrelationshipsdeepenedevenintheabsenceofstrongpoliticalrelationships.ThatAsiahasbeenabletoachievetheselevelsofregionalcooperationandeconomicintegrationisbecauseinstitutionalarrangementshaveevolvedthroughconsensualprocesses,haveprotectedstatesovereignty,havebeenvoluntaryandhaveallowedadiversegroupofstatestomakenon-bindingcommitmentsthatareappropriatetotheirlevelsofeconomicdevelopment.
BOx 7.1: AsiA PACiFiC RegiOnAL iniTiATives AnD THe gLOBAL sysTem
WhenAPECwascreatedin1989,disadvantagetonon-membereconomieswouldhavebeeninconsistentwiththeimportanceofeconomiclinksbetweenmembereconomiesandthoseoutsidethegrouping.APECcooperationwasfoundedontheprincipleofaligningAsiaPacifictradestandardswithglobalstandards,andresultedinextendingandstrengtheningtheglobalGATTprocess.APEChastakeninitiativestothegloballevel.
In1996,APECinitiatednegotiationsonanInformationTechnologyAgreement(ITA)intheWTO,andtheagreementwasconcludedinDecemberthatyear.TheITApreventedcountriesfromintroducingtradebarriersforwhatwerethenrelativelynewformsoftradeininformationandcommunicationstechnology(ICT)goodsandservices.ByrequiringcountriestoapplyzerotariffsandotherbarrierstonewlyemergingICTgoodsandservices,theITAencouragedrapidexpansioninthetradeofthesenewtechnologies.Thisinturnmadepossibletheproliferationofsupplychainsintheelectronicsindustry,whichhavefundamentallychangedthewayinwhichcountries’internationalbusinessisintegrated,andwhichhavedeepenedeconomicinterdependenceacrossAsia.Supplychainsrelyonlogisticsdrivenbyrapidcommunicationsandtechnology,andtheproliferationofsupplychainshasbeencriticalintransformingChinaintothe‘factoryoftheworld’.WithouttheITA’sagreementonzerotariffsfornewlyemergingICTtrade,supplychainswouldnothavedevelopedsoreadilyastheydid.
Morerecently,theITA‘model’hasbeenemulatedfortradeinenvironmentalgoods.In2012,APECnegotiatedtheEnvironmentalGoodsAgreement(EGA),whichremovestariffsontradeongoodssuchasequipmentforairpollutioncontrolandwastewatermanagement.TheglobalmarketforthesenewenvironmentalgoodsandtechnologiesisexpectedtoexpandtoaroundUS$3trillionby2020(DFAT2015a).BuildingonAPEC’sregionalagreement,negotiationsonanEGAweresubsequentlylaunchedonaplurilateralbasis(thatis,withmanybutnotallmembersparticipating)intheWTOin2014.
TheCMI,whichwascreatedin2000inthewakeoftheAsianfinancialcrisis,representsanothercaseinwhichregionalcooperationhassoughttostrengthen—notdivertfrom—globalfinancialarrangementssuchastheIMF.TheCMIendorsesglobal,market-basedprinciplesoffinancialcooperation,andonlypermitsasmallpercentageofitsfundstobereleasedtoailingeconomieswithoutIMFapproval.
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Notallregionalarrangements,processesorinstitutionalinnovationshavebeentheproductofconsensus,butthosethathavehadsuccess,buy-inandownershipbycountriesintheregionhavedonesothroughaprocessofbuildingconsensus.Forexample,theformationofAPECwasaninitiativetakenbyAustraliaandJapan,buttheideaofAPECrequiredmuchsocialisationamongotherAsiaPacificeconomiesbeforeitcouldbeintroducedandaccepted.APEChassubsequentlyevolvedandhasbeenshapedovertimebyitsmembers.TheADB(Box7.2)isanotherexampleofthewayinwhichconsensushasunderpinnedAsia’sapproachtoregionaleconomiccooperationandinstitution-building.Ultimately,exampleslikeAPECandtheADBdemonstratethateconomicinstitutionsandotherregionalarrangementshavehadtoevolveanddevelopthroughconsensualprocesses.Itisoftenassumedthatastatic‘rules-basedorder’wascreatedin1945andhasremainedunchangedsincethattime.Thatisnotthecase.Asneweconomicissuesanddemandshavearisenintheregion,newinstitutions,norms,rulesandregionalarrangementshaveevolvedthroughprocessesofconsensus,communicationandsocialisation.
BOx 7.2: COnsensus AnD THe CReATiOn OF THe AsiAn DeveLOPmenT BAnK
TheprincipleofconsensushasbeenacriticalelementunderpinningtheevolutionofrulesandnormsinAsia.OnekeyexampleistheADB,whichwascreatedin1966.TheADBwascreatedonthebackofJapan’srisingeconomicpower.JapanwasdissatisfiedwithitslackofrepresentationinglobalinstitutionssuchastheWorldBankandInternationalBankforReconstructionandDevelopment(IBRD),whichweredominatedbytheinterestsofcountriesinEuropeandNorthAmerica.JapanalsoviewedtheADBasawayofachievinggreaterinternationalpoliticalpower,andofmaintainingitsexport-ledeconomicgrowthstrategy.ThoughfellowAsianstatessupportedJapan’sdevelopmentalagenda,theywerealsofearfulthattheADBwouldbecomeaplatformforJapaneseregionaldominance.Atthesametime,theUnitedStateswaswaryofJapan’sdevelopment-stateapproachtoeconomicdevelopment.
Thus,althoughJapanhasalwayscontributedthelargestshareofcapitaltotheADB,andholdsthelargestnumberofofficialpositions—includingthatofBankpresident—JapanhasnotdominatedtheADB.Instead,sincethe1980sinparticular,thealmostequalvotingsharesheldbytheUnitedStatesandEuropehavebalancedJapan’svotingshare.Thishasrequiredmemberstatestoengageinaconsensus-buildingprocesstodeterminetheBank’sprinciplesonprocurement,lendingpracticesandissuefocus.Forexample,theUnitedStates’preferenceforprivatecapitalandmarket-basedeconomicdevelopmenthasalwaysbeenbalancedbyJapaneseandEastAsianpreferencesformorestate-activistapproachestoeconomicdevelopment.Sinceitscreation,theADBhascontinuedtoevolveasamultilateraldevelopmentfinancinginstitution.
stable relations between Asia’s great powers
TheachievementofdeepeconomicintegrationinAsiahasbeenunderpinnedbystable,peacefulrelationsamongAsia’sgreatpowers.ThemostimportantoftheserelationshipsisthatbetweentheUnitedStatesandChina.US–Chinarapprochementin1972transformedtherelationshipbetweenthesetwocountriesinwaysthatwereofgreatbenefitnotonlytotheUnitedStatesandChinabutalsotothewiderregion.Since1972,ChinaandtheUnited
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Stateshavedevelopeddeepdiplomatictiesandhighlevelsofeconomicengagement,andhaverecognisedthatstablebilateralrelationsaretheonlywaytoensureapeacefulAsianregion.Moreover,theleadershiproleplayedbytheUnitedStateshasbeenofgreatvaluetobothAustraliaandChina.TheUnitedStateshasplayedaleadingroleincreatingandunderwritingtheglobaleconomicandfinancialsystem,andhasstronglyencouragedChina’sintegrationwithinthatsystem.TheUnitedStates’diplomaticandmilitarypresenceinAsiahasalsoservedasanimportant‘backstop’,whichhasencouragedregionalstates—manyofwhomhaveadversarialpoliticalandsecurityrelationships—tofeelsecureenoughtopursueeconomiccooperationandinstitution-building.ThesearrangementshavebeenhelpfulinanumberofwaystoAsiannationsinthepast,includingthosethatarenotUnitedStatesalliancepartners,suchasChina.
Alongsidebilateralcooperationbetweentheregion’sgreatpowers,Asia’seconomicandotherinstitutionshavealsoservedasimportantvenuesfortrust-building,dialogueandsocialisationaroundregionalnormsofbehaviour.Thisisdue,inpart,tothe‘ASEAN-way’principlesofconsensus,non-intervention,sovereigntyandnon-bindingresolutionsonwhichtheyarebuilt.TheseprincipleshavebeencriticallyimportantinenmeshinggreatpowerssuchastheUnitedStatesandChinaintoregionalmultilateralprocesses.Theseinstitutionshaveneverreplacedtheneedfordirectnegotiationsbetweenthegreatpowersthemselves.Buttheseinstitutionshaveprovidedimportantoccasionsforbringingthegreatpowerstogetherinframeworksrespectfulofwiderinterests.Theyhavealsoprovidedopportunitiesforgreatpowerstoholdoff-the-record,informalmeetingsonthesidelinesofpublicsummits,andhaveimpelledthegreatpowerstolistentotheconcernsofsmallerstatesintheregion.
Changing structure of regional and global economic power
Forthepastthreedecades,Asiahasbeenaremarkablypeacefulandprosperousregion.Asia’speaceandeconomicvibrancyhasbeenunderpinnedby:theUnitedStates-ledeconomic,politicalandsecurityordercreatedattheendofWorldWarII,China’sacceptanceofthatordersince1972,andbytheeffortsofChina,Australiaandotherstofosterregionaleconomiccooperationsincethe1980s.Butthisexistingorderisnowunderstrain—partlybecauseofitssuccessandthedramaticeconomicriseofChinaandotherregionalstates.
Thelatterhalfofthe20thcenturysawtherapidindustrialisationandriseoftheJapaneseeconomyinthe1960sthroughtothe1980s,withthenewlyindustrialisedeconomies(NIEs)ofSingapore,SouthKorea,TaiwanandHongKongfollowinginthe1980sand1990s.ThemajorforceofgrowthintheglobaleconomysincetheturnofthecenturyhasbeenChina,withanaveragegrowthrateof10percentperyearoverthe30yearssincereformandopeningin1978(Figure7.2).ThegrowthratesoftheeconomiesofJapan,ChinaandtheNIEshaveslowedastheyhavebecomelargerandmorematureeconomieswithhigherpercapitaincomes.India’seconomicdevelopmentandtheriseofotherSoutheastAsianeconomiessuchasVietnam,MyanmarandIndonesiaarealreadyshowingpromiseasthenextdrivingforceofgrowthinAsiaandtheglobaleconomy.
China’seconomyhasalreadygrowntobeaslargeasthatoftheUnitedStatesinpurchasingpowerparity(PPP)terms(seeChapter1,Figure1.6).ForwardprojectionsoncurrenttrendswithconservativeassumptionswillseeChinaovertaketheUnitedStatesasthelargesteconomyintheworldinnominalmarketexchangeratetermsbytheendofthe2020s,withmanyprojectingthistohappenearlierinthatdecade.
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ThegrowthofChina’simportanceintheworldeconomyhasoccurredveryrapidly.ThisswiftchangeiscreatingsomeuncertaintyabouthowtomanagethenewresponsibilitiesandchallengesposedbytheriseofChinaandotherregionaleconomies(Zhang2015).ThereisariskthatsomeoftheresponsestothesequickchangescouldunravelthesharedprinciplesthathaveunderpinnedAsia’seconomicachievementstodate.
threats to open regionalism
First,therearegrowingchallengestomaintainingtheprimacyofopenregionalisminAsia.Inthepast,Asia’sdeepeconomicintegrationwasbuiltonthebasisoftheMostFavouredNation(MFN)principle,whichextendstradeandothereconomicbenefitstoallstates,regardlessofwhethertheyaremembersoftheagreementornot.Now,wearewitnessingtheproliferationofexclusive,preferentialtradeagreements(PTAs)inAsia,whichserveonlytodeepeneconomictiesbetweenPTAmembercountries.Someoftheproposedmultinationalpreferentialagreements—suchastheTrans-PacificPartnership(TPP)agreementandRegionalComprehensiveEconomicPartnership(RCEP)—areparticularlylargeandcomprehensive.Whiletheselargeandcomprehensivepreferentialagreementsoffermorebenefitstotheirmembersthannarrowerbilateralagreements,theyalsohavethepotentialtoimposemoreadverseeffectsonnon-membereconomies.Thiscanbeavoided.Agreementsandarrangementsthatarepreferentialandexclusivecanbemademoreinclusiveovertime,justastheAFTAwas,andcreativewayscanbefoundtoextendbenefitstonon-members.HowtonegatesomeoftheadverseconsequencesofnewregionalagreementssuchastheTPPandRCEPisdiscussedlaterinthechapter.
Figure 7.2: Waves of regional and global economic growth
0
2
4
6
8
10
North A
meric
a
& Europe
Australi
a
Japan
South K
orea
Taiw
an
Singapore
(a)
Malays
ia(a)
Thailan
d
Indonesia
China
India
1950–73 1973–97 1997–2010
Waves 1 & 2 Wave 3
%
Source:AustraliaintheAsianCenturyWhitePaper2012andauthors’calculations.
threats to consensus-driven cooperation
Second,therearegrowingthreatstoAsia’sconsensus-basedapproachtoregionalcooperation.Ascross-bordereconomicissueshavebecomeincreasinglycomplex,andhavebeguntoaffectawiderrangeofinterestsandcountries,ithasbecomemoreandmoredifficulttoachieveconsensus-basedregionalcooperationamonglargergroupsof
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countries.Attimes,theprincipleofconsensushasalsobeenusedandabusedasawayforcountriestoavoidmakingprogressonreform.Inthesecircumstances,smaller‘coalitionsofthewilling’havebeenformedtoachievefasterprogressonissuesincludingtradeandinvestmentliberalisation.Forexample,withtheDohaRoundoftradeliberalisationstalled,somecountrieshaveresortedtobilateralorplurilateralagreementsinordertoopenupmarketaccess.Similarly,inareassuchasinvestmentliberalisation,wherethereisnoexistingglobalorregionalregime,smallgroupsofcountrieshavebegunworkingtogethertoprogressbilateraldealsorregionalagreements.Thereisnothinginherentlywrongwithsmallergroupsofcountriesworkingtogethertointroducenewarrangements.Indeed,thepresenceofcoalitionsofthewillingisawell-establishedpracticeinAsia.APEC,forexample,hashistoricallyusedtheapproachof‘pathfinderinitiatives’toachieveprogress;theseallowsomemembereconomiestoworktogetherinestablishingnewcooperativearrangements,whicharethencommunicatedtootherAPECmemberswhoareencouragedtoparticipatewhentheyareready.Inorderfortheseinitiativestosucceedingainingacceptancebynon-participants,however,itisimportantthattheybecommunicatedtransparentlytoothercountriessoastoavoidsurprises,andtobedevelopedinamannerthatdoesnotdisadvantageothercountries.
threats to stable relations between the great powers
Finally,theexistingeconomic,politicalandsecurityorderinAsiaisunderstrainbecauseoftheeconomicriseofChinaandothersintheregion.Thetransitiontoamoremultipolarorderisinevitable,butthechallengefacingtheregionishowtomanagethatordertransitionpeacefully.China’svasttrade,financial,demographic,environmentalandmilitaryfootprintgivesitagrowingandlegitimateinterestinplayingalargerregionalandglobalrole.Atthesametime,whilemajorshiftsintheregionaldistributionofwealthandpowermakecomparableshiftsintheregionalstrategicorderinevitable,AustraliaandotherregionalstatesverymuchpreferthattheUnitedStatesretainsastrongandstabilisingroleinwhateverneworderemerges.ThegoalmustbetoreconfigureanewregionalorderthatenablesaleadingroleforboththeUnitedStatesandChina.ThisnewregionalordermustalsoallowspaceforotherestablishedpowerssuchasJapan,andforrisingpowerssuchasIndiaandIndonesia.Anynewregionalordermustensurethatsmallerandmiddlepowers,suchasAustralia,SouthKoreaandSoutheastAsiancountries,continuetofeelsecureandabletoparticipatewithindependentvoices.
Managingthisordertransitionwillnotbeeasy.Anditwilllargelybeajobforthegreatpowersthemselves.Nevertheless,Asia’smiddlepowersstillhaveavitalroletoplay.TheyshouldcontinuetouseAsiaPacificinstitutionstohelpmanagetheorderlytransition,playingapositiveroleinpromotingcooperativeregionalinitiativesandmoderatinggreatpowerrivalry.Thereisaneedtoensurethatcurrentregionalinstitutionsandarrangementsaresuitableformanagingeconomicintegration,structuralchangeandpoliticalcooperationasAsia’sorderchanges.FrequentdialoguebetweentheUnitedStatesandChinaiscriticallyimportant,anditisimperativethatthisdialoguetakesplaceroutinelyandwithinframeworksthatinvolveinterestsandissuesbeyondtheUS–Chinabilateralrelationship.TherearetworegularmeetingsayearbetweenthepresidentofChinaandthepresidentoftheUnitedStateswithinaframeworkthatincludesothercountries:theAPECsummitandtheG20summit.Whilethereareotheroccasionsforbilateralmeetings,includingstatevisitsandmeetingsoftheUNGeneralAssembly,forexample,theAPECandG20summitsallowforUS–Chinacooperationinthecontextofbroaderregionalandglobalcooperation.Thoseoccasionsshouldbemadeasproductiveaspossibleforbuildingconsensustowardseffectinggradualandpeacefulordertransition.
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AustraliaandChinashouldseektoenhancetheirbilateralsecuritytiesasanimportantelementthatcontributestobuildingeffectiveworkingrelationshipsonsecurityissuesamongallcountriesintheregion.Closerbilateralsecuritytieswillhelptostrengthenthefoundationsofpoliticalconfidenceonwhichregionaleconomicprosperitycancontinuetogrow.AustraliaiscommittedtoitslongstandingalliancewiththeUnitedStates,butthisdoesnotprecludesecuritycooperationwithChina.Thedevelopmentofcloserbilateralsecuritycooperationonarangeoftraditionalandnon-traditionalsecurityissueswillbeanimportantelementinelevatingtheAustralia–ChinarelationshiptoaComprehensiveStrategicPartnershipforChangeandindeepeningstrategictrustbetweenthetwocountries.ThechangingregionalordermakesitincreasinglyimportantforChinaandAustraliatoclearlyunderstandeachother’sapproachtoregionalpoliticalandsecurityaffairs.AparticularareainwhichthereisscopeforexpandingdialoguethatwillcontributetothisunderstandingisrelatedtoChina’sevolvingthinkingaboutitsmaritimeeconomy,inwhichbothcountrieshavedirectmutualinterests.
moving forward with common interests
TheeconomicandpoliticalriseofChinaandotherregionaleconomiesischangingtheAsianorderandbringingaboutneweconomicandpolitical-securitychallenges.Basedontheirsuccessfulhistoryinjointlybuildingregionaleconomiccooperation,AustraliaandChinaarewellplacedtoworktogethertoforgeanewconsensusaroundtheprinciplesthatwillguidefutureregionalcooperation.
AustraliaandChinacandirecttheirbilateralrelationshiptowardcommonregionalinterestsinanumberofpracticalways.Jointcooperationwiththirdcountriescanbenefitfromcomplementarycomparativeadvantagesandcanadvancebroaderregionalcooperation.Thereisscopeforworkingtogether—givenAustralia’sexpertise,regionalinterestsandconnectionstotheUnitedStates—onChineseglobalgovernanceinitiativessuchastheAIIB.Therearealreadyareas,suchasindevelopmentcooperationinthePacific,whereAustraliaandChinaactivelyworktogether.Thesecooperativeendeavoursshouldbeextendedsothatprogressindevelopmentcooperation,infrastructureinvestmentandotherinitiativescanhelptodeepenprogressattheregionallevel.
AsChina’seconomyundertakesitshugestructuraltransformation,manyopportunitieswillbeopenedupinlabour-intensivemanufacturingandthesectorsthatChinatransitionsoutof.India,therestofSouthAsiaandmuchofSoutheastAsiacanemulateChinaandNortheastAsia’seconomicsuccess,realisetheircomparativeadvantageandtransitionintolow-costmanufacturing.RealisingtheseopportunitiesinSouthandSoutheastAsiawillassistinChina’sowntransition.AndChina’sregionalinfrastructureandconnectivityinitiativescanplayamajorrolealongsideexportingChina’sover-capacity,surplussavingsandexpertise.
ThelargestopportunityliesinIndia.Indiacanrealiseits‘MakeinIndia’economicreformagendathroughliberalisinglabourlaws,improvinginfrastructureinvestmentandfinancing,openingtoforeigninvestment,andpursuingregionaleconomicintegration.RegionalcooperationthatfacilitatesamoreopenanddynamicexternalenvironmentwillhelpIndiaandothereconomiesundertakesuchdifficultreforms.SuccessfulreformsinIndiawillleverageitsabundantandgrowinglow-costlabourresourcestoexploitacomparativeadvantageinlabour-intensivemanufacturesandservices.AustraliaandChinahaveastronginterest,andcanplayanactiverole,insupportingIndia’seconomicgrowthambitions.
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strengthening and connecting existing institutions
Asiaisnowhometoacomplexweb,or‘variablegeometry’,ofregionaleconomic,politicalandsecurityinstitutionswithdiversemembershipsandfunctions.EconomicinterdependenceinAsiaandacrossthePacificincludesawidergroupofeconomies,suchasIndia.Inrealitythereisnosingleregionalinstitutionthatcurrentlyaddressesalloftheregion’seconomic,politicalandsecurityissues.
Theestablishedregionalinstitutions,arrangementsandgroupingsinEastAsiaandacrossthePacificdonotencompassalleconomiesandwerenotsetuptodealwiththeinteractionbetweeneconomicandpoliticalaffairs,andtherearegapsincoveragewithinthearchitectureforeconomicandpoliticalcooperation(Figure7.3).
APECremainstheregion’sprimaryvenuefordiscussionofeconomicissues,andhasaparticularfocusontradeandinvestmentliberalisation.ItistheprimaryinstitutionforUSengagementonregionaleconomicaffairs,andtheAPECSummithasprovedtobeanimportantvenueforleaderstodiscusswin-wineconomicissuesandpromoteeconomiccooperationinitiatives.TheroutineworkdoneamongcountriesattheofficiallevelofAPEChasalsoservedtobridgeunderstandingbetweenmembers,todeepencooperationandtoleadtooutcomesthathavebenefitedmembersandnon-membersalike(Box7.1).Thenetworkofofficials,theworkprogram,andtheleaders’meetinghasmeantthatmembereconomiesfeelownershipoftheprocessandtheinstitution.YettherearemajorgapsinAPEC’smembership.AsFigure7.3shows,whileAPEC’smembershipisbroad,thereareanumberofregionaleconomies—includingIndia,Cambodia,LaosandMyanmar—whoarenotAPECmembers.APEC’sdiversemembershipofeconomies,ratherthanstates,makesitaninappropriateplatformfordiscussingEastAsia’spoliticalandsecuritychallenges.WhileinformalmeetingsonpoliticalandsecurityissuestakeplacebetweenleadersonthesidelinesofAPEC,theseissuesarenotonthemainagenda.
Figure 7.3: AseAn, APeC, eAs and ARF membership compared
ARF
EAS
ASEAN+6
ASEAN+3
ASEAN Brunei
Papua New Guinea
New Zealand Australia
India
South Korea
China Japan
Myanmar Laos
Cambodia Thailand
Philippines Indonesia Vietnam
Singapore
Malaysia
Pakistan
North Korea Mongolia
European Union
Bangladesh Canada
Russia United States
Hong Kong Chinese Taipei
Peru Mexico
Chile
Sri Lanka
Timor-Leste
APEC
Source:Authors’schema.
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TheASEANRegionalForum(ARF),createdin1994,hasfocusedmoreonregionalsecurityissues.Itisalargeanddiverseorganisation,involving27participants,includingtheEU.Thoughithasbeenausefulplatformforregionalstatestogettoknowoneanother,andtoparticipateinconfidence-buildingmeasures,theARF’ssizeandthediversecharacterofitsparticipantshasmadeitverydifficulttoachievesubstantialprogressonregionalsecuritydisputes.
TheEastAsiaSummit(EAS)wascreatedin2005andisanotherASEAN-ledinstitution.TheEASemergedoutofproposals,intheearly1990s,tocreateanEastAsianEconomicCaucus.TheAsianfinancialcrisisthenpromptedASEANcountriestoworkwiththeir‘PlusThree’NortheastAsianneighbours—China,JapanandSouthKorea—tobuildanEastAsianeconomiccommunity.WithJapaneagertobroadenitsmembership,India,AustraliaandNewZealandsubsequentlybecamefoundingmembersoftheEASin2005.In2011,membershipoftheEASwasfurtherexpandedtoincludeRussiaandtheUnitedStates.ThisexpansioninmembershiphasalsochangedthecharacteroftheEASfrombeinganorganisationpredominantlyfocusedoneconomicissues,toonewherepoliticalandsecurityissueshavecometodominatetheagenda.IncomparisonwithAPEC,theEAShasneverenjoyedthesamedensenetworkofinstitutionalisedofficialactivityamongitsmembers.Givenitsshiftawayfromeconomicissuesinrecentyears,thereisariskthatmuchoftheEASagendawillbecomedominatedbycountries’politicaldeclarationsratherthaninstitutionalisedcooperation.EAS’mainassetisthatitsagendadoesencompasssecurityissues,andthatitsmembershipincludesallofthemajorpowersinAsiaandthePacific,includingIndia.
Theseinstitutionsandarrangementshaveservedtheregionwelltothispoint,butinquitedifferentways.AsrelativeeconomicandpoliticalpowershiftsintheAsiaPacificandglobally,thereisapressingneedtoconnectandextendexistingregionalarrangementssothatthereisareadyplatformtoaddressnewprioritiesinregionalcooperation.Regionalcooperationhastobuildonandmovebeyondthecoreeconomicagenda.Thewebofeconomic,politicalandsecurityinstitutionsinAsiamustnowbebetterlinkedtoaddressthegapsinmembershipandfunction.TheflexibilityofAsianregionalarrangementsallowsopportunitiestoconnectexistingarrangementsinwaysthatallowthemtoaddressthesenewchallengesandopportunities.
Attheregionallevel,oneoptionwouldbetostrengthentheconnectionbetweentheannualAPECEconomicLeaders’MeetingandtheEastAsiaSummit.Thesetwomeetingsarenowheldback-to-backinNovemberinordertoallowtheUSpresidenttotraveltoAsiaonceayear.Currently,leadersmovefromonehostcountrytotheotheranddiscussdifferentagendaswithdifferentmemberships.ThismeansthatthereisadistinctcontrastinthenatureofthediscussionsatAPECandtheEAS.TheChineseheadofstatedoesnotcurrentlyattendEASmeetings.TheAPEChostandASEANChair(whichhoststheEAS)couldworktogethertoensurethatAPEC’seconomiccooperationagendafeedsintotheEAS’politicalandsecurityagenda,withoutdilutingtheissuefocusofeach.ThiscouldbefacilitatedviajointmeetingsbetweentheAPECandEAS‘troikas’(thatis,theprevious,currentandfutureAPEChostsandASEANChairs)inadvanceoftheannualLeaders’MeetingandSummit.
AnotherwayofstrengtheningtheconnectionbetweenregionalinstitutionalarrangementsmightbetoreachouttoinviteIndiaandotherASEANstatestojointheAPECprocess—notnecessarilyasformalmembersinitiallybutratherasparticipants.TheAPEChosthastherighttoinvitegovernmentleadersfromnon-APECmembereconomiestoattendtheannualLeaders’Meeting.BuildingontheinitiativetakenbyChinawhenithostedAPECin2014,futureAPEChostscouldinviteIndia,Cambodia,LaosandMyanmar—thatis,thosecountrieswhoaremembersoftheEASbutnotAPEC—toattendtheAPECLeaders’Meeting.TheAPEC
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EconomicLeaders’MeetingwillnextbeheldinEastAsiain2017whenVietnamhostsAPEC.In2017,therefore,thereisanimportantopportunityforVietnamtoinviteIndia,Cambodia,LaosandMyanmartoattendAPEC.LeaderscouldthentraveltothePhilippines(whichwillbetheASEANChairin2017)fortheEastAsiaSummit.FindingcreativesolutionstohaveallASEANmembersjoinAPECmeetingswillmakeiteasiertomoreeffectivelyconnecttheseregionalprocesses.EastAsiaandthetrans-PacificrelationshipshavebenefitedgreatlyfromASEANcentralityandthereisgoodreasontopreserveandstrengthenASEANasthefulcrumofregionalcooperation.Australia,ChinaandtherestoftheregionhaveastakeinthesuccessoftheASEANEconomicCommunityandaunifiedandintegratedASEANmakesbroaderAsiancooperationeasier.
Important,cross-cuttingissuesthatrequireclosecooperationsuchasenergyandenvironmentaltransformationshouldbethefocusofhigh-levelpolicydialogueledbyacoalitionofinterestedpowersintheregionandcarriedacrossdifferentforums.Theseissuescutacrossenergysecurity,climatechange,andpoliticalandeconomiccooperation.Theseareissuesthataffectallstatesintheregion,andcanbeadvancedbyleader-levelagreementamongallofthemajorregionalplayers.Theenergytransitionfromfossilfuelstorenewableswillbringnewopportunitiesandchallengesthathavelargetransnationalspillovers.Focusingonanissuesuchasenergytransformationcouldliftthelevelofcooperationbetweencountries,giveregionalarrangementsnewimpetusandprovideaframeworkforcloserpoliticalcooperation.ThisisanissuethataffectsChinaandAustraliaacutely,butalsoaffectsJapan,theUnitedStates,India,Indonesiaandeveryothercountryintheregion,whethertheyareenergyproducers,consumersorboth.Thereiscurrentlynoregionalforumortheatreinwhichenergyissuesareprominentlyontheagenda,butasmallcoalitionofcountriesincludingAustraliaandChinacouldinitiateadialogueinoneormoreoftheestablishedregionalplatformsandcarrypolicydevelopmentforwardacrossalltheseforums.
Atthegloballevel,AustraliaandChinahaveasharedinterestinfeedingregionalinterestsandinitiativesintoglobalarrangements.TheAsianmembersoftheG20—Australia,China,Japan,India,IndonesiaandSouthKorea—andthePacificmembersoftheG20—Canada,MexicoandtheUnitedStates—areallleadersinthevariousAsiaPacificregionalforums.AbetterconnectionbetweentheregionalforumsandtheG20atthegloballevelwillhelptoshapetheG20agenda,toimplementG20outcomesthroughregionalinstitutionsandtobuildconfidenceamongcountriesthatarenotmembersoftheG20initsinclusivenessandcredibility.TheAsianG20membersarethemostimportanteconomiesintheregion,andindividuallyandcollectivelytheyrepresentimportantvoicesinglobalaffairs.Theyalreadyexerciseameasureofinfluenceglobally,andcanrepresenttheinterestsandviewsthatareexpressedinregionalforumsthatoperatethroughaprocessofconsensus.
RegionalinstitutionssuchastheChiangMaiInitiativeMulilateralization(CMIM)andtheASEANPlusThreeMacroeconomicResearchOffice(AMRO)surveillanceunitcanacttostrengthenandreinforcetheglobalfinancialsafetynetandglobalsurveillance.AlthoughthecurrencyswapsinCMIMhaveyettobedrawnon—evenduringtheglobalfinancialcrisis—CMIMandAMROcanbuildtrustandcapacityandplayanimportantroleaspartofthebroaderglobalfinancialsafetynetintheeventofafuturefinancialcrisis(seeChapter8).ThesenewAsianarrangementsmarkasignificantstepforwardinAsianfinancialandmonetarycooperation.Tobetrulyeffective,theyneedtobecoordinatedwiththeIMF.Asia,lefttoitsowndevices,wouldfinditdifficulttomobilisetheresourcesorimposetheconditionsonneighbouringcountriesneededtomanagefinancialcrises.AstrengthenedAMROthat
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coordinateswiththeIMFwillhelpregionalfinancialsurveillance.AustraliaisnotpartytoCMIMorAMRObecausetheyemergedfromASEANPlusThree,butAustraliahasaninterestinhelpingtobuildAMRO’scapacityandplayingasupportingrolewithinCMIM.Morebroadly,theAustralia–Chinabilateralrelationshipshouldincludedialogueandcooperationonissuesthatcanfeedintoandshapethoseregionalforumsandarrangementsinwhichonlyonecountryisamember,suchasCMIM.ThereshouldbecreativewaystohaveAustraliabecomeadefactopartnerinAMRO.ItisinAustralia’sinteresttohelpstrengthenthecoordinationbetweentheIMFandregionalfinancialarrangements(seeChapter8).
TheinstitutionsandarrangementsthathaveservedChina,AustraliaandAsiawellinthepastmustevolvetoreflectnewregionalrealitiesandinterests.Thereislittleappetiteintheregiontocreateentirelynewinstitutions,butexistinginstitutionscouldbere-energisedandtheirconnectionsstrengthened.Andregionaleffortsshouldbeconcentratedonimportantcross-cuttingissuessuchasenergytransformation.AustraliaandChinacanworktogetherwithregionalpartnerstoreformandstrengthentheseexistinginstitutionsandarrangements.
moving towards inclusive regional agreements
TheAsiaPacificregionhasseenaplethoraofbilateralandregionaltradeagreementssignedsincetheearly2000s.ButnoneoftheregionalorplurilateralagreementssignedtodatehavebeenasconsequentialorlargeinmembershipastheTPP,RCEPortheTransatlanticTradeandInvestmentPartnership(TTIP).Theseregionaleconomicagreementsaimtomakemajorprogressontradeandinvestmentliberalisationwheretheglobalsystemhasstalled,andtofurthercross-bordercommerceandexchangeinnewareasofimportancetobusiness,insomecasesbycreatingnewinternationalrules.
RegionalagreementscandeepenregionalandglobaleconomicintegrationandmakeprogresswheretheWTOhasbeenunableto,andintheprocessstrengthenprospectsforprogressatthegloballevel.Yettherearerisksthattheseagreementscanharmnon-members,andthatdifferentagreementswithdifferentmembershipscanbecomeavenuesforcompetitiverule-making,thusfragmentingregionalandglobaleconomicintegration.Thereisstronginterestinavoidingoramelioratingtheseadverseconsequencesinordertobuildaninclusive,globaleconomicsystem.
The12-memberTPPincludesAustralia,theUnitedStates,Japan,Canada,Mexico,Vietnam,Brunei,Singapore,Malaysia,NewZealand,ChileandPeru.LargeAsianeconomiessuchasChina,IndonesiaandIndiaareyettojoin.GiventhestandardsthattheTPPappliesandthefactthatnewmemberswillberequiredtonegotiatebilateralagreementswithallothermembersandberatifiedbyUSCongress,itisunlikelythatChinawillbeabletojointheTPPinthenearfuture.However,theTPPdoesprovidesomecountry-specificcarve-outsandspecialanddifferentialtreatmentfordevelopingmembersregardingtheirtransitionperiods.
ComparedtotheTPP,RCEPcoversabroaderrangeofcountrieswithmorevariedlevelsofeconomicdevelopment.ASEAN’saimisforRCEPtoconsolidateandharmonisetheexistingASEANPlusOneFTAswithChina,SouthKorea,Japan,IndiaandAustralia–NewZealand.TheseFTAsvaryconsiderablyintermsoftheirscope,comprehensivenessandmarketaccesscommitments.RCEPisexpectedtobecharacterisedbyasetofcommonrules,butwithflexibilityfordevelopingcountriestocommittocertainstandardsinreasonabletimeframes,andmarketaccesscommitmentsbyindividualcountriesthattakeaccountoftheirlevelofeconomicdevelopment.
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Figure 7.4: AseAn, RCeP, TPP and possible FTAAP membership
FTAAP
Papua New Guinea Russia
Hong Kong Chinese Taipei
TPP
RCEP
ASEAN Brunei
New Zealand Australia
India
Japan
Myanmar Laos
Cambodia Thailand
Philippines Indonesia
Vietnam
Singapore Malaysia
South Korea China
Canada United States
Peru Mexico
Chile
Source:Authors’schema.
AustraliaispartytoboththeTPPandRCEPandhasaroletoplaywithotherpartners,suchasJapan,indialogue,capacitybuildingandexperiencesharingtobridgethegapbetweenmembersandnon-members.Thisbridge-buildingroleisvitalbecauseAustralia,JapanandothershaveanumberofimportanttradingpartnersthatarenotmembersofboththeTPPandRCEP.TheTPPandRCEPagreementsshouldbeusedtodeepenmarket-basedeconomicinterdependenceandanybarriersagainstnon-membersshouldbewatereddown.Theagreementsneedtobe‘living’agreementsthatchangewithcircumstancesandgiveallmembersavoice.Thecriteriaforaccessiontotheseagreementswillalsobeparticularlyimportantifthebenefitsoftheseagreementsaretobeexpandedbeyondtheoriginalsignatories.
TheTPPandRCEPshouldnotbecomecompetingblocsbutinsteadneedtobemadecomplementary.RCEPdoesnotincludetheUnitedStatesandtheTPPdoesnotincludeChina.ThesearrangementsshouldbedirectedtoenhanceeconomicintegrationinAsiawithoutfragmentingeconomiclinkageswithintheregionorbetweentheregionandtherestoftheworld.
TheTPPandRCEPwillservetheirpurposeonlyiftheyareusedtofosterdomesticeconomicreformagendas.ChinahasbeenhighlysuccessfulinitsstrategyofusingmembershipofexternalorganisationsliketheWTOtoleverageandentrenchmajordomesticreforms.Chinanowhasanopportunitytopursueanewroundofreformsviaexternalengagement,includingfinancialsectorandinvestmentreform,reformofSOEs,lockinginimprovedenvironmentalandlabourstandards,andfurthermodernisingitseconomy.ButtheprospectofachievinganyofthesereformsviatheTPPwillbelongtermratherthanshortterm,particularlybecauseChinaisnotamemberoftheTPPandtherewillbemanyhurdlesfornewmemberstojoiningtheTPP,anditisnotclearwhenaccessionmightbecomepossibleforChina.Moreimportantly,thosereformsandcommitmentsthatChinawillhavetomakeinordertojointheTPPwillhavetobestructuredinawaythatisconsistentwithChina’sdomesticreformgoals.ThemajorchallengeforChina,butmorebroadlyfortheTPP,willbewhethertheTPPisabletocreateanexternalenvironmentforChinaandothernon-membersthatisconducivetotheir
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pursuitofdomesticreforms.Anexclusivesetofarrangementsintheregionthatmakestheexternalenvironmentmoredifficultforfurtheropeningupofeconomiesandimplementingofdomesticeconomicreformsneedstobeavoided.
TheRCEPprocess,ontheotherhand,showsmuchmoreimmediatepromisethroughChina’sparticipationinnegotiatingtheopeningupofborderstotradeandinvestment.China’sWTOaccessionexperiencedemonstrateshowinterestscanaligntocreatewin–wincommitmentsvianegotiation.Itishardertonegotiatedomesticreformexternally.Reformismoresustainableifitisimplementedwithexternalsupportintheformofagreeingtomutuallybeneficialgoals,capacitybuildingandexperiencesharing,andbygivingcountriesspacetofindthebestreformpathfortheirowncircumstancesandinstitutions.Soratherthanexternallymandatingreforms,internationalagreementscanworktoprovideexternalimpetusforongoingdomesticeconomicandregulatoryreformprocesses.
TheRCEPagreementhasthepotentialtocreateanenvironmentforbothmembersandnon-membersthatisconducivetoopeningupofmarketsandtheprosecutionofdomesticreforms.ThereistheopportunitytocreateanagreementthatextendstheprinciplesandmodesofcooperationofASEAN,especiallytheAEC,toabroadergroupingthatincludesmajor-economyneighbourssuchasChina,JapanandIndia,aswellasadvanced-economyneighbourssuchasAustralia,SouthKoreaandNewZealand.ByRCEP’ssettingbindinggoalsandallowingsomecountriestoreachthosegoalsinthemostsuitablewayforthemovertime,withcapacitybuildingandexperiencesharingalongtheway,thebroaderEastAsianregionwillmoveclosertoasinglemarketandproductionbase.
MuchbroaderanddeeperintegrationwouldoccurwiththeEastAsianeconomiesthroughRCEPadoptingthefourpillarsoftheAEC—asinglemarketandproductionbase,acompetitiveeconomicregion,equitableeconomicdevelopmentandintegrationintotheglobaleconomy—andcommittingtomajorliberalisation.Thiswillinvolvecommitmentstocomprehensivefreeingoftradeingoods,servicesandinvestmentandwithaframeworkforeconomiccooperation.Recognisingthatasuccessfulagreementwillrequireanongoingprocess,membersshouldcommittoambitiousbindinggoalsfordeliveryby2025,withbuilt-ininstitutionssuchasworkinggroupsforongoingimplementation.
RCEPhasrealpotentialtoavoidoverlyprescriptiveoutcomes,byprovidingcountry-specificmarketaccesscommitmentsandsettingsomeagreedrulesanddirectionsforfuturework.AswiththeexperienceofASEAN,multilateralisingpreferences—sothatbenefitsareextendedtonon-members—overtimewillbeimportanttoavoidanexclusivemembershipthattruncateseconomicintegrationacrossthePacificorwiththerestoftheworld.WhetherRCEPultimatelyresultsinopenregionalismdependsonthemodeofcooperation,theendgoalsandhowthosearepursued.
RCEPcountriesalreadyaccountforalargershareoftheglobaleconomythandotheTPPcountriesanditsmembersalsoincludeafastergrowinggroupofcountries,ledbyIndiaandChina.RCEPisdiverse,withsomeoftheleastdevelopedcountriesintheregionsuchasCambodia,LaosandMyanmar,whicharenotAPECorTPPmembers.TheGDPoftheRCEPgrouping—onconservativeprojections—couldbeclosetodoubletheTPP’ssizein15years(Figure7.5).
PursuinganambitiousRCEPagreementalongsidetheTPPwillbeimportantforfurtheringeconomicintegration,andAustraliaandChinahavearoletoplayinsettinghighstandardsinthisprocess.Indoingso,AustraliaandChinacanusethebestfeaturesofChAFTA—
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includingtheliberalisationofservicesandinvestmentaccess—tosetthebenchmarksforRCEP.StronginitialliberalisationandcommitmentsforphasedliberalisationininvestmentbyChinaandotherswouldhelptodevelopcompetitiveliberalisationbetweenRCEPandtheTPP.ItwouldalsoensurethatafutureUS–ChinaBITcouldincorporatethebestfeaturesofboththeTPPandRCEP,takingaccountoftheinterestsofthewholeregionratherthanjustbilateralinterests.Thisapproachwouldhelptoachieveconvergencebetweenthetworegionalagreements,therebyaddressingthebiggestproblemtheycurrentlyface:namely,thattheUnitedStatesandChinaarenotpartytobothagreements.
EarlyconsolidationoftheTPPandRCEPisanunrealisticobjective.Thetrackrecordofconsolidatingsmallerbilateralagreementshasnotbeengoodandhastendedtoleadtothecreationofadditionallayersratherthanconsolidation.Thelonger-termconvergenceoftheTPPandRCEP,however,canbepursued.Apracticalwayforwardwouldbetomobiliseacoalitionofthewillingtoworktogetherindefiningthepathforwardinlinkingthesetworegionalagreements.Australia,asamemberofbothagreements,hasacrucialroletoplay,butChinaandothersthatarepartyonlytooneagreementarealsoimportantforfindingcreativewaystobridgethegapsbetweentheTPPandRCEP.
Figure 7.5: gDP projections of RCeP and TPP groups, 1980–2050, at purchasing power parity
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Note:IMFprojectionsto2020followedbyprojectionsbasedonanestimateofpotentiallabourproductivityforcountriescurrentlyintransitiongiveninstitutionalqualitymeasuredbytheWorldEconomicForum’sGlobalCompetitivenessIndex.Source:HubbardandSharma2016.
ArelatedinitiativeistheefforttodeveloptheFreeTradeAreaoftheAsiaPacific(FTAAP),whichwasputbackontheregionalagendain2014whenChinahostedAPEC(APEC2014a).TheFTAAPbuildsontheongoingregionalundertakingsoftheASEANPlusThree,TPPandRCEPandaimstofurtherAPEC’sregionaleconomicintegrationagenda.Consistentwiththeprinciplesofeconomiccooperationthathaveservedtheregionsowelluntilnow,APECleadershaveagreedthattheFTAAPshouldsupportandcomplementthemultilateraltradingsystem,worktohelpachievetheBogorgoals,andbepursuedwithastep-by-step,consensus-basedapproach.Itwouldalsoneedtobeahigh-quality,‘nextgeneration’agreementandruninparallelto—notaspartof—theAPECprocesssothatnon-bindingvoluntarycooperationcanbepreservedinAPEC.
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TheprinciplesthathaveservedEastAsiaanditstrans-PacificcooperationsowellinthepastshouldguidetheformationandarchitectureoftheFTAAPsothatitstrengthenstheWTOandtheglobaleconomicsystem.RecognitionoftheimportanceofASEANcentralityandextendingthebestfeaturesoftheAECwillbeimportantinachievingahigh-qualityagreementthatmovestheregiontowardsasinglemarketintheAsiaPacific.BuildingonthesharedprinciplesthathaveunderpinnedAsia’seconomicintegrationtodate,itisalsoimportanttoensurewherepossiblethatregionalagreementsdonotunderminetheglobalmultilateralsystembyadverselyaffectingnon-members.
BOx 7.3: BuiLDing A muLTiLATeRAL Regime FOR gOveRning FOReign DiReCT invesTmenT
TheglobaltradingsystemhasbeenintegralforChina’sintegrationintotheglobaleconomyandregionalarrangementssuchasAPEChavehelpedinthis.Asinvestmentflowshavebecomemoreimportantintheregion,thelackofaregionalorglobalinvestmentregimeisemergingasasignificantgapinthemultilateralarchitecture.Chineseoutwarddirectinvestmentisalreadylargeandwillonlybecomemoreimportantregionallyandglobally.AustraliaisamajorrecipientofChineseinvestment,andbothcountrieshavearoletoplayindevelopingarrangementsattheregionalandgloballevelsthathelpwiththemanagementofforeigninvestmentandfurtherregionaleconomicintegration.
Currently,thelackofaregionalorglobalregimeforinvestmenthasledtoamixofbothunilateralpolicies(mostlyonthepartofrecipientcountries)andbilateralpolicies,usinginvestmenttreatiesandeconomicagreementsthathavevaryingprovisionsandprotections.AustraliaandChinahaveaninterestininitiatingdialoguearoundthearticulationofacommonsetofprinciplestogovernforeigninvestment—bothforfacilitatingpre-establishmentforeigninvestment(beforeitentersacountry)andthenationaltreatmentofpost-establishmentforeigninvestment.ThismightbeginwiththeimplementationofChAFTA(seeChapter4).AustraliaandChinacanalsocarrytheirworkonaninvestmentagreementundertheaegisofChAFTAintotheRCEPnegotiations.Withoutregionalguidingprinciples,thereisariskthatagreementsbetweenlargecountries—suchastheUnitedStates–ChinaBilateralInvestmentTreaty(BIT)—willbecomethedefaulttemplateforthosebetweenallstatesintheregion.Itisimportantthattheinterestsofsmallercountriesarerepresentedinthesediscussionssothatoutcomesareintheinterestsofallinvestorsandrecipients.
Promoting infrastructure investment as multilateral regional goods
PromotinginfrastructurefundingandinvestmentisaparticularpriorityinAsiaandthePacific.TheWorldBankhasestimatedthateachadditional10percentofglobalinvestmentininfrastructureincreasesglobalGDPgrowthbyonepercentagepoint.Giventhemodestandunevengrowthintheglobaleconomy,increasinginfrastructureinvestmentisimportantformanycountries.Inparticular,thereisgreatdemandforinfrastructureinvestmentwithintheregion.TheADBhasestimatedthatAsiawillneedUS$8trillioninnationalinfrastructureandUS$290billionininfrastructureconnectingeconomiesby2020(ADB2009).MeetingthatUS$8trilliondeficitinregionalinfrastructuredemandby2020iscriticaltothecontinuing
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growthanddevelopmentofregionaleconomies.Yet,asiswidelyrecognised,therearecurrentlyanumberofconstraintsoninfrastructureinvestment.ThescaleoffundingthroughthemultilateraldevelopmentbankssuchastheWorldBankandtheADB,whicharesmallrelativetothesizeofdemand,hasshrunkinrecentyears.Indeed,sincethe1990s,someoftheexistingmultilateralbanks,suchastheWorldBank,haveincreasinglyfocusedonfunding‘social’projectsinareassuchaseducation,health,environmentandurbandevelopment,ratherthanfundinginvestmentinroads,railways,portsandotherinfrastructureprojects.Moreover,theAPECConnectivityBlueprint(2015–2025)releasedatthe2014APECSummitrecognisesthatthequalityanddistributionofinfrastructureintheregionremainsuneven,andthatmanycountrieslackfinancialsupportforinfrastructurefunding.ThereisclearscopeforintermediatingAsiansavingsandfacilitatinggreaterprivatesectorfinancingtocopewiththehugeshortfallinregionalinfrastructureinvestment.
China’slaunchoftheAIIBisanimportantmomentintheemergenceofChinaasacontributortoregionalandglobalpublicgoods(Lin2015).ChinaalreadyhasanumberofexistingavenuesthroughwhichitfinancesinfrastructureprojectsinAsia,includingtheChinaDevelopmentBank,itsnewOBORinitiative,theSilkRoadFundandtraditionalbilateralfinancing.Throughtheseavenues,ChinaseekstostrengthenAsianconnectivityandeconomicintegrationthroughinvestmentinroad,rail,shipping,aviation,telecommunications,powerandenergypipelineinfrastructure.ButtheAIIBrepresentssomethingnew.IndevelopingtheAIIB,Chinahasvoluntarilycommitteditsresourcestoamultilateralbodywithformalgovernancestructuresandwithexternaloversight.WhilethismultilateralapproachnecessarilylimitsChina’sfreedomofaction,itoffersmanyadvantagestoChinaandthewiderregion.
First,multilateralisingfinancingdecisionscaninsulateChinafrombilateralpoliticaltensions.Withcompetitionamongrecipientsforlargeinfrastructureinvestmentprojects,investmentdeployedthroughmultilateralprocessesarelesslikelytobecomepoliticised.Whencommercialdecisionstakeplaceonaunilateralorbilateralbasis,theyruntheriskofbeingsecond-guessed,orbeingviewedasconnectedtounrelateddisputesordisagreements.
Second,itisinChina’sdirectinteresttoensurethattheAIIBmeetsallthestandardsofamultilateralinstitution.TheAIIBisunderintensescrutinyandtheinternationaltoleranceformisstepswillbelow.WhileChinaoriginallyformedtheconceptoftheAIIB,itsgovernancearrangementshavebeenshapedbyitsmanyfoundingmembers,andshouldensurethattheAIIBmeetsalltheaccountabilityandtransparencystandardsofothermultilateraldevelopmentbanksandhasanappropriatelyskilledinternationalworkforce.ThedownsideofbuildinginthoseprocessesandproceduresisthatitmaytakelongerthanChinaandrecipientcountriesmaywishfortheAIIBtobecomeasignificantplayerintheregion.ButChinawillbenefitsignificantlybecausethereisnoquestionthattheAIIBtrulyisamultilateralinstitutionandnotonecontrolledbyChina.ThisdoesnotmeanthattheAIIBneedstomirroralloftheproceduresoftheexistingmultilateraldevelopmentbanks.Onthecontrary,theAIIBshouldseektobemoreeffectiveandefficientthantheothermultilateraldevelopmentbanks.Indoingso,thisdemonstratesthatChinacanmakeaneffectivecontributiontoprovidingglobalpublicgoodsandactivelyleadamultilateralorganisation.Moreover,theareasoftheAIIB’soperationswheretimeandcareshouldbetaken—suchasrigorouscreditassessments,carefulprojectselection,carefulattentiontoenvironmentalandsocialissuesandstrongaccountingandtransparencyarrangements—areoneswhereChinacanlearnfromtheexperienceofothers.Assuch,thereareanumberofindirectbenefitsthatChinacangainfromthecarefulestablishmentoftheAIIB.
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TheOBORinitiativeaimstoconnectAsia,theMiddleEast,EuropeandAfrica.ItisaboldplanbyChinathatcouldgreatlyfacilitateinfrastructureconnectivityandeconomicintegrationwithinandacrossregionsandsub-regions(StateCouncilofthePeople’sRepublicofChina2015).China’ssurplussavingsandinfrastructuredevelopmentexpertisecanbemobilisedforthebenefitofthedevelopmentofothercountriesthatlackcapitalandinfrastructuredevelopmentexpertise.ItcanalsoeasesomeoftheovercapacityissuesinChinawhileexpandingtradeandcommerceforChineseandothercompanies.AsthesuccessofthisChineseinitiativerequiresactiveinvolvementofothercountriesbasedontheirowninterests,theOBORinitiativecanalsoprovideaplatformforcooperationbetweendevelopedanddevelopingeconomies(Zhang2016b).AustraliaisactivelydevelopingtheNorthernAustraliaregionandhasstronginterestinbeingpartoftheOBORinitiative.BeyondthebilateralinterestinAIIBandOBOR,bothAustraliaandChinahaveaninterestinregionalinfrastructurebuildingandconnectivitythatwouldbemademoreeffectivethroughbilateralandregionalcooperation.
Ultimately,China’scontributionsviatheAIIBandOBORformanimportantplankinAsia’swiderconnectivityagenda.China’sneighbourhoodinSoutheastAsiahasawell-developedASEANMasterPlanforConnectivity(AMPC).TheAMPCisaregionalplanfortransportandinstitutionalconnectivitydesignedtobringcountriesclosertooneanother,andtofacilitatebetteraccesstotrade,investment,tourismandpeople-to-peopleexchanges.TheAIIBandtheAMPCsharesimilargoals.China’scapitalandexpertiseinbuildinginfrastructureisalreadyhighlysoughtafterinSoutheastAsiaandelsewhere—Chinese-developedports,high-speedrailandmajorinfrastructureprojectssuchastheTrans-AsianRailwayNetworkandAsianHighwayNetworkhaveearnedChinaanimpressivereputation.WorkingalongsidetheAMPCwillhelpChinatoprioritiseinvestmentandembedcooperationamongrecipientcountries.Forinstance,roadsandrailnetworkswillconnectcountrieswithsharedborders,whileasystemofshortseashippingwilllinkmaritimeSoutheastAsiawithportsforroll-onroll-offvessels.
TheAIIBrepresentsanimportantstepinChina’sprovisionofregionalandglobalpublicgoods.AsuccessfulAIIBwillmeanChinesefunds,expertiseandleadershipcanbeleveragedtosupportdemandforinfrastructureinvestmentinAsiaandbeyond.ItisintheinterestsofAustraliaandthewiderregiontoseetheAIIBsucceed.
ButtheAIIBisnottheonlyimportantinfrastructureinvestmentinstitutionoperatinginAsia.TheADB,WorldBank,andunilaterallendersanddonorsareallimportantforinfrastructuredevelopmentinAsia.Apositivedevelopmentisthatinitsinitialoperations,theAIIBisfocusingonco-financingarrangementswiththeADBandtheWorldBank.However,thereisadangerthatsomeoftheplayersmayactindependentlyandattimesatcross-purposes.Itwouldbeproductivetoensureacommonunderstandingandcoherencetotheinfrastructureinvestmentnetworkintheregion.Therewouldbevalueinministersandseniorofficialsfromthecountriesintheregionregularlydiscussingpriorities,strategiesandmutualinterestsininfrastructuredeliverytofurtherregionalconnectivity.Regionalinfrastructurefundingandinvestmentisclearlyacross-cuttingissuethatwouldbebestservedbyhigh-levelpoliticaldialogue.WhileASEANhastheAMPCforadvancingconnectivityamongitsmembers,AustraliaandChinacouldinitiateabroaderdialogueinvolvingregionalcountries,regionalandmultilateraldevelopmentbanks,internationalfinancialinstitutionsandrecipientregionalgroupingssuchasASEAN.Movingtowardsestablishingacommonframeworkforinfrastructureinvestmentandfundingintheregionwouldbeamajorcontribution.Existingarrangementsshouldbeusedcreativelyandnon-exclusivelytofosteranimportantdialogueofthiskind.
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Australia, China and the next decade of regional cooperation
AustraliaandChinahaveenjoyedgrowingprosperityasadirectresultofthedomesticeconomicreformsandregionaleconomicintegrationinitiativestheyhavejointlypursuedoverthepastthreedecades.ButlargechangesarenowunderwayinAsiaduetothechangingstructureofregionalandglobaleconomicpower.Closecooperationandcommunicationisrequiredinordertoavoidmisunderstandingsanddisputes,tonarrowdifferences,andtomaintainandbuildtrustamongcountriesintheregion.Theshifttowardsamorecomplexandmultipolarorderhasalreadycreatednewtensionsandhasbeguntoerodesomeoftheregion’ssharedprinciples.ThemajorchallengesnowfacingAsia’sregionaleconomyrequireinnovativesolutions.
AustraliaandChinashareacommoninterestinforginganewconsensusonthesharedprinciplesofcooperationthatcanbringfurthereconomicinterdependence,buildpoliticalcooperationandmaintainstablerelationsbetweentheregion’sgreatpowers.
Theregionalandglobaleconomicsystemsarechangedasaresultofwhatlargeeconomiesdobythemselvestomanagetheirinteractionswithothereconomiesandpolities.Butifwearetoachieveapeacefultransitiontoamoremultipolarworld,thesechangesmusttakeplacethroughcollectiveconsensusamongallthecountriesthatareaffected.ThischapterhasidentifiedanumberofareasinwhichcollaborationbetweenChina,Australiaandtheirpartnersinregionaleconomicdiplomacywillbeofspecialimportanceinthecomingdecades.
Practicalprogresscanbemadeinstrengthening,extendingandbetterconnectingtheestablishedregionaleconomiccooperationarrangements,suchasAPEC,theASEANPlusframeworksandtheEAS,andinsecuringaframeworkforpoliticalconfidenceandsecuritywithinwhicheconomicprosperitycanbeattained.AstartingpointwillbetobetterconnectthecooperationanddialogueoneconomicissuesthattakesplaceinAPECandtheASEANPlusprocesseswiththecooperationanddialogueonpolitical-securityissuesdiscussedwithintheEAS.Important,cross-cuttingissuesthatrequireclosecooperation,suchasenergyandenvironmentaltransformationaswellasregionalinfrastructurefundingandinvestment,shouldbethefocusofdialogueledbythemajorpowersintheregionandcarriedacrossdifferentforums.
AustraliaandChinahaveastrong,sharedinterestinmobilisingacoalitionfordefiningthepathforwardinforgingtheTTPandRCEPtogethertowardsaFTAAPthatstrengthenstheWTOandtheglobaleconomicsystem.TheChAFTAagreementcansetbenchmarksthatwillhelpwithambitiousandhigh-qualityoutcomesintheRCEPagreement,especiallyintheinvestmentchapter.AustraliaandChinacanpioneerservicessectoropening,capitalisingonAustralia’spotentialroleasagoodtestinggroundforliberalisation.ChinacanuseChAFTAasatestinggroundforahighqualityUS–ChinaBIT.
Asia’sfutureeconomicgrowthandintegrationisincreasinglydependentoninvestmentincriticalinfrastructure.AustraliaandChinawillbothbenefitiftheregionisbetterconnectedthroughsea,roadandrailnetworksandotherconnectivityprojects.TheAIIBisanimportantnewchanneltofundingAsia’sinfrastructureneeds.Startingahigh-leveldialogueamongalltheactorsintheregion—bothfundersandrecipients—aimedtowardsestablishingacommonframeworkforinfrastructurefundingandinvestmentwouldreducecosts,bringbetterunderstandingandhelpimproveconnectivity.
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CHAPTER8collaboration in the global system
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Key messAges
AustraliaandChinabothbenefitfromstrongglobalinstitutionsthatareinclusive,rules-basedandpromoteopenandefficientinternationalmarkets.AneffectiveglobalgovernanceframeworkwillbecriticaltothesuccessofChina’seconomictransitionandtheresilienceoftheglobaleconomy.Butmanyoftheseinstitutionswerecreateddecadesagoanddonotreflectcurrentrealitiesoftheglobaleconomy.Australia,Chinaandotherpartnerscaneffectincrementalchangeinreformingglobalgovernance.
AustraliaandChinahavepowerfulinterestsinentrenchingtheG20asthepreeminentforumforglobaleconomicgovernance.WithouttheG20,Australiamaybeexcludedfromasmalleralternativegrouping(suchasa‘G10’)which,dominatedbydevelopedratherthanemergingeconomies,wouldalsoseeChinawithlessvoiceinglobalrule-setting.AustraliaandChinashouldactivelyusetheG20,ensureitsagendaisinclusiveandtargeted,ensurecontinuitybyprioritisingitsmulti-year‘two-in-five’growthagenda,anddeepenitsworkonglobalgovernancereform.Mostimportantly,deficienciesintheglobalfinancialsafetynetcreatesystemicrisksthatthreatenthetrading,financialandproductionnetworksthatareintegraltotheAustralianandChineseeconomies.
• AustraliaandChinacollaboratewithintheG20onglobalfinancialsafetynetissuesonfourkeyfronts:thenextstageofIMFreform,implementingarrangementstomaketheIMFandregionalfinancingarrangementsmorecohesive,renegotiatingbilateralloansandstrengtheningdomesticmacroeconomicframeworks.
• Inthenearterm,Chinashouldworktobuild-uptheanalyticalcapacityoftheASEANPlusThreeMacroeconomicResearchOfficeandstrengtheninstitutionalcollaborationbetweenregionalinitiativesandtheIMF.Inthelongerterm,AustraliaandChinashouldencourageG20discussionsonthenextstageofIMFquotareform,assumealeadingroleinrenegotiatingbilateralloansbetweenG20countriesandtheIMF,andfocustheG20growthagendaonimprovingmacro-financialresilienceofallcountries.
AustraliaandChinabenefitmorefrommultilateraltradeliberalisationthanfromplurilateralorbilateralinitiatives.Butincreasedfragmentationisswellingbusinesscosts,reducingtradeflowsandweakeningproductionnetworks.
• AustraliaandChinashouldleadagreaterG20focusonthemultilateraltradingsystemandinitiateapragmatic,incrementalprocessonWTOreformanddefineapathwayforRCEPandotherarrangementsliketheTPPtoraisethestandardofregionalagreementsandstrengthentheWTO.TheyshouldalsoencouragetheuseoftheG20growthstrategiestoachieveambitiouscommitmentsundertheTradeFacilitationAgreement.
AustraliaandChinacantakeotherimportantstepstoprogresscollaboration.
• AustraliaandChinashouldinitiateastep-by-stepprocesstowardsamultilateralframeworkforinvestment,aswellasincreasingandstreamliningmultilateralfundingforinvestmentininfrastructure.AustraliaandChinashouldcollaborateintheG20towardsinstitutingmorestructuredcooperationbetweentheAIIB,theBRICSNewDevelopmentBankandexistingmultilateraldevelopmentbanks.
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• BothcountriesshouldworkwithintheG20topromoteglobalenergygovernancereformthataddressesthesubstantialgapsinexistingframeworksandinstitutionsliketheInternationalEnergyAgency.
• AustraliaandChinashoulddeveloptheirpartnershipwithintheglobalresponsetoclimatechange.Thiscooperationcandrawonavarietyofexistingforumsfordialogueattheofficialandpoliticallevels,includingministerial-levelconsultationsandacademiccollaborations.
Theglobaleconomicsystemhasmanydimensions:trade,finance,energy,development,security,climateandmanymore.Ensuringthatmarketsareopen,inclusiveandgovernedbyapredictableandstablesetofrulesandnormsiscriticaltotheirsuccessfulfunctioning.AustraliaandChinawillbothbeactivebeneficiariesofgoodoutcomesinallofthesedimensions.
Thesystemofrules,normsandinstitutionsthatgoverntheinteractionsbetweencountries,inallofthesedimensions,iscollectivelyreferredtoasthe‘architectureofglobaleconomicgovernance’.Thisarchitectureisbecomingmorefragmented.IntheaftermathofWorldWarII,theglobalgovernancesystemconsistedoflargemultilateralinstitutionsliketheUnitedNations,IMFandWorldBank.Today,itismorediversifiedacrossmultilateral,regionalandbilaterallayers.Thisfragmentationhaschallengedtheabilityofglobalpolicymakerstorespondadequatelytotheneedsoftheinternationalcommunity.
Thearchitectureofglobaleconomicgovernanceisnowinneedofreform.Thechangingstructureoftheglobaleconomyandtheriseofemergingmarketeconomies,particularlyChina,havepresentedimmenseopportunitiesfortheworldbuthavealsopresentedchallengesforglobalgovernance.Globalinstitutionsthathaveservedtheinternationalcommunitywellhavenotkeptupwiththesetransitions.Theyareinneedofreformandthegapsthathaveemergedinglobaleconomicgovernanceneedtobefilled.
TheG20isnowtheworld’sprimaryvehicleforsuchareformofglobaleconomicgovernance.ItisvitalthattheG20’sstatusasthe‘globalsteeringcommittee’isentrenched.TheG20istheonlyforuminwhichitispossibletodetermine,andremake,theprioritiesoftheinstitutions,forumsandorganisationsthattogethermakeupthearchitectureofglobaleconomicgovernance.Inaddition,theG20istheonlyforuminwhichadvancedandemergingeconomiescancooperateinthisgovernancereformonanequalfooting.
MakingsurethatthishappensissomethingthatisparticularlyimportantforbothAustraliaandChina.ThedeclineoftheG20wouldrepresentasubstantialriskforAustralia,giventhatAustraliaismuchmorelikelytobeexcludedfromthesmallerad-hocgroupingsofgreatpowerswhichwouldlikelythenemerge.AsforChina,thesesmallerad-hocgroupingsmightwellbedominatedbyadvancedeconomies,andChina’sinputinthemwouldbeaffordedlessweight.Asaconsequence,therewouldbelessinternationalbalanceintheglobalprocessofeconomicrule-setting.
AustraliaandChinaareinapositiontocooperate,inimportantways,inensuringthatthisobjectiveisachieved.Actingtogether,AustraliaandChinashouldensurethattheG20agendaremainsinclusiveandthatitsmembersworkcollaborativelyonglobaleconomicissuesina
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waythatresonatesacrossthefullmembershipoftheG20andbeyond.Inparticular,AustraliaandChinacanpromotetheG20byactivelyusingitasaforuminwhichmajorglobalissuesareraisedandnegotiated,insteadofthatbeingdoneinanad-hocwayinotherglobalorregionalbodies.
TherearefivekeyareasofglobalpolicymakinginwhichAustraliaandChinashareaninterestinstrengtheningtheG20’sleadership.
ThefirstpriorityareaforAustraliaandChinaistoensurecontinuityintheG20agendabymaintainingitscorefocusongrowthandstrengtheningtherecoveryfromtheglobalfinancialcrisisof2007–2008.Itisnearlyadecadesincethiscrisisstruck,andyettheglobalrecoveryisstillnotcomplete.TheG20isinapositiontomakeadifferencetothestrengthofthisrecovery:the‘two-in-five’agendathatAustraliainitiatedwhenitheldtheG20presidencyin2014hasputitinapositiontodojustthis.Thisagenda,agreedattheG20Leaders’SummitinBrisbaneinNovember2014,isaprocessinwhichG20membersundertooktocarryoutpolicieswhich—whentakentogether—wouldensurethatglobalGDPis2percenthigherbytheyear2018thanitwouldotherwisehavebeen.Thisagreementwasasignificantachievement,butthefollow-throughsinceBrisbanethenhasbeenpatchy.Chinacanstrengthenthisfollow-throughbyreinvigoratingtheG20MutualAssessmentProcess(G20MAP).Thetwo-in-fiveprocesscouldalsoplayanimportantpartinaresurrectionoftheG20’sleadershiproleininternationalcooperationonmacroeconomicpolicies.ThiswasarolethattheG20heldin2008–2009duringtheglobalfinancialcrisis;itisimportantthatittakesthisroleagain.TheG20’sabilitytotakealeadinstrengtheningtheglobalrecoverywillalsobehelpedbyitsabilitytopromoteinfrastructureinvestmentworldwide.Thisagendaitemisdiscussedinmoredetailbelow.
ThesecondpriorityareaforAustraliaandChinaistoensuretheadequacyoftheglobalfinancialsafetynet.Therearebiggaps.Itistoosmallandtoofragmented.Thisreducesitscoverage,consistencyandresponsiveness.AustraliaandChinahaveacommoninterestinastrong,inclusiveandresponsiveglobalfinancialsafetynet,centredonarepresentativeIMFandwithstrongcooperationamongthemajoreconomies.AustraliaandChinashouldusetheirinfluenceintheG20,IMFandregionalarrangementstofocusonfivekeyissues:thenextstageofIMFquotareform;thenecessity,atbothglobalandregionallevels,ofcountriesbeingabletoobtainliquidityfinancingasnecessary,includingtheurgentneedforChinatogainaccesstothegroupofcountriesthatareabletoobtainverylargecurrencyswaps;theimplementationofarrangementstomaketheIMFandregionalfinancingarrangements,suchastheChiangMaiInitiativeMultilateralization(CMIM),morecohesive;renegotiatingbilateralloansbetweenG20countriesandtheIMF;andusingtheG20growthstrategiesandpeerreviewprocesstoboosteffortsonstrengtheningdomesticmacroeconomicframeworkstoimproveresilience.
Thethirdpriorityareaistrade.AustraliaandChinabenefitmostfromtradeliberalisationwhenitismultilateralratherthanbilateralorplurilateral.AustraliaandChinashouldworktosupportthecohesivenessoftheglobaltradingsystembyencouragingtheG20torefocusonthemultilateraltradingsystemratherthanonregionalorbilateralalternatives.ThisshouldincludeafocusonwhatincrementalandpragmaticstepscouldbetakenonWTOreform.AustraliaandChinashoulduseregionalarrangements,suchasRCEP,toraisethestandardforcohesiveregionalagreements,pushingforbettercollaborationbetweentheWTOandregionalagreementsandbydeliveringambitiouscommitmentsundertheTradeFacilitationAgreementbygivingthestructuralreformsundertheG20growthstrategiesastrongertradefocus.
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Thefourthpriorityareaisinvestment.ThereisscopeforAustraliaandChinatosupporttheG20inconsolidatingtheworkoftheWTO,G20,OECD,UNCTADandothersonaprocesstowardsamultilateralframeworkforinvestment.Thereisalsospecificscopeforgreatermultilateralcooperationoninfrastructureinvestment.AustraliaandChinashouldpromoteinfrastructureinvestmentintheG20asacross-cuttingthemetobringG20countriestogethertotakeactiononmultiplefronts,includinggrowth,macroeconomicmanagement,development,trade,energyandclimatechange.ThereisscopeforbettercooperationandsynergiesbetweentheAIIB,theBRICSNewDevelopmentBankandexistingmultilateraldevelopmentbanks.TheG20shouldcontinuetosupportdevelopmentbanksinoptimisingtheirresourcesbyleveragingprivate-sectorfinance.SuccessinthisareawillclearlybehelpfulintakingforwardtheG20’sagendaofpromotingasustainedworldwiderecoveryfromtheglobalfinancialcrisis.
ThefifthandfinalkeyareaforcollaborationbetweenAustraliaandChinaconcernsenergytransformationandclimatechange.Theglobalenergygovernancearchitecturehasfailedtokeepupwithsignificantchangesinglobalenergymarketsandtheglobaleconomy,andneedstobereformed.AustraliaandChinashouldsupportthepositivemomentumintheG20onglobalenergygovernancereforminbuildingandadaptingexistingorganisationsandensuringthattheyworktogethereffectively.CloselyrelatedtotheneedforenergycollaborationisthefactthatAustraliaandChinabothhaveavitalinterestinsupportingastrongglobalresponsetoclimatechange.China’seconomicandclimatechangestrategyisincreasinglygearedtowardslow-carbongrowth.Australiahasthepotentialtobecomeanexporteroflow-carbonenergy,whichcouldsupplyChina.AustraliaandChinashouldworktogetheronbothclimatechangeandenergystrategies.Thisshouldinvolvegovernment,industryandtheresearchcommunity.Anexistingresearch-basedcollaborationmodelcouldbescaleduptoaninternationalinitiative.
Australia and China within the global system
ThefoundationsoftheeconomicpartnershipbetweenAustraliaandChinaaremultilateralandglobalincharacter.TherearemanyareasinwhichcollaborationbetweenChina,AustraliaandtheirpartnersinglobalaffairswillbecomeincreasinglyimportantbecauseChina’sroleintheglobaleconomyisgrowing.Althoughparticipationinsomeglobalorregionalinstitutionsisuniquetojustoneofthetwocountries,AustraliaandChinahavemoreincommonthannotgiventhenatureoftheireconomictiesandtheirlocationintheworld.
AustralianandChineseleaders,ministersandseniorofficialshaveagreaterrangeofopportunitiesforregularengagementnowthaneverbefore.Figure8.1givesasnapshotofhowAustraliaandChinaengageinglobalgovernance—theinstitutionstheyhaveincommonandthosetheydonot.
Figure8.1providesseveralimportantinsights.First,itshowsthescaleofmultilateralcooperationbetweenAustraliaandChina.TheleadersofbothcountriescometogetheratleastfourtimesayearattheG20,APEC,EastAsiaSummitandUnitedNations.ThefinanceministersofbothcountriesmeetaroundfivetimesayearjustfortheG20,aswellasseparateregularmeetingsforAPEC,ASEAN,theIMFandtheWorldBank.CentralbankgovernorsmeetregularlyattheBankforInternationalSettlements,G20andAPEC.Foreachoftheseinstitutionsandforums,hundredsofAustralianandChineseofficialsareengagingonanalmostcontinualbasisinsupportoftheirministersandleaders.
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Second,Figure8.1illustratesthebreadthofissuesonwhichAustraliaandChinacooperatethroughmultilateralinstitutionsandforums.Today,almosteverydomesticpolicyissuehasaninternationaldimension,andmostinternationalissuescanhavesignificantdomesticconsequences.Asaresult,theagendasofinternationalinstitutionsandforumshaveincreasedexponentiallyovertime,coveringabroadrangeofissuesfromtrade,finance,development,tax,financialregulationandmacroeconomicpoliciestoissueslikesecurity,humanrights,climatechange,theenvironmentandreformingtheglobalgovernancearchitectureitself.
Third,AustraliaandChinahavemoreincommonintheseaffairsthannot.TheinstitutionsinwhichAustraliaandChinacooperatearemoreinfluentialandsystemicallyimportantthantheinstitutionsuniquetojustoneofthecountries.Theseprocesseshavehelpeddevelopextensivepersonalnetworksofleaders,ministersandofficials,aswellasrepresentativesfrombusiness,labour,academiaandcivilsociety.
Finally,Figure8.1highlightsthelargenumberofregionalinstitutionsinwhichAustraliaandChinacooperate,someofwhichcompetedirectlyorindirectlywithexistingglobalinstitutions.TheonlymajorglobalinstitutionsinwhichAustraliaandChinadonotbothparticipatearetheUnitedNationsSecurityCouncil(whichexcludesAustralia),andtheOECDandrelatedInternationalEnergyAgency(whichexcludeChina,althoughChinaparticipatesinbothinstitutionsthroughanassociatestatus).
Figure 8.1: Australia and China in the global governance architecture
China only Australia only Both China and Australia
• UNSecurityCouncil
• NewDevelopmentBank(formerlytheBRICSDevelopmentBank)
• ChiangMai
• Brazil-Russia-India-China-SouthAfrica
• OneBelt,OneRoadInitiative
• Trans-PacificPartnership
• AsianDevelopmentBank
• InternationalEnergyAgency
• PacificIslandsForum
• OECD
• ANZUStreaty
• CommonwealthHeadsofGovernmentMeeting
• G20
• ASEAN+6
• UNGeneralAssembly
• EastAsiaSummit
• APEC
• IMF
• WTO
• WorldBank
• RegionalComprehensiveEconomicPartnership
• InternationalEnergyForum
• AsianInfrastructureInvestmentBank
• BankofInternationalSettlements
Source:Authors’schema.
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the Australia–china relationship and sustaining international cooperation
TheAustralia-Chinarelationshipisofgeopoliticalsignificance,bothforeconomicreasonsandforreasonsofpoliticaleconomy.ThisisdespitethedisparitybetweenChinaandAustraliaintermsofeconomicandpoliticalweight.ItisthisfactthatmakesAustralia–Chinacooperationparticularlyimportant,bothinrelationtostrengtheningtheG20’sroleinglobaleconomicgovernanceandinrelationtothefivekeyareasofglobalpolicymakingdiscussedabove.
ThegeopoliticalsignificanceoftheAustralia–ChinaeconomicrelationshipstemsfromAustralia’sroleasamajorsupplierofprimarycommodityinputstotheChineseindustrialsystem,andtheemergingfutureofbilateralservicestrade,directinvestmentandeconomicpartnership.Prosperityinthetwoeconomiesgoestogether.Suchprosperityisvitalfortheworldeconomy.
WhileitseconomyiscloselylinkedtoChina,andtoAsiamoregenerally,Australia’sstrategicandpoliticalalliancewiththeUnitedStateshasbeenconfirmedasparamountbysuccessiveAustraliangovernments.AustraliahasastrongincentivetoavoidconflictbetweenitseconomicpartnersanditsUSalliance.Australia’sabilitytosteersuchamiddlepathisgreatlyhelpedbyitslonghistoryofengagementwithglobaleconomicinstitutionssuchastheIMF,WorldBank,WTOandUNagencies.FormanyyearsAustraliahasplayedanimportantrolebothinthegovernanceoftheseinstitutionsandinthedeterminationoftheirpolicystances.Australia’sabilitytokeeptheAustralia–Chinarelationshipwithinsuchabroadmultilateralframework,whileatthesametimebuildingonthebilateralrelationship,givesAustraliatheabilitytomakeasignificantcontributiontothetaskofaddressingglobalchallengesanddisputes.SuchacontributionbyAustraliamighthelptheworldtoavoidthecounterproductiveandunnecessaryfragmentationofrelationships,somethingthatwillhurtbothcountries.
Onmanyissues,themosteffectivewayforAustraliaandChinatoengagebilaterallywillbetoworktogetherwithinmultilateralframeworksandtodevelopcoalitionsoflike-mindedcountriesthatcanattractbroadersupportforaction.CollaborationbetweenAustraliaandChinaisitselfsymbolicofthesortofglobalcoalitionsthatneedtobebuilt—thosethatformacrossthedividesofadvancedandemergingeconomies.Thefocusofcoalition-buildingeffortsshouldbeonbothprocessandcontent.
Onprocess,AustraliaandChinahaveacommoninterestinensuringthattheglobalandregionalrules,normsandinstitutionsthatgoverninteractionsbetweencountriesareeffective,inclusiveandcomprehensive.ThisReporthasalreadyarguedthattheG20istheprimaryvehicleforachievingthis.Thischapterwillillustratesomeofthechallengesfacingglobalgovernancemechanisms,andwillidentifythecommoninterestswhichAustraliaandChinahaveinworkingwiththeirpartnersintheG20inaddressingthesechallenges.
Oncontent,AustraliaandChinashouldworkwithintheseglobalframeworkstopromotethecommonglobalintereststhatthetwocountriesshareinrelationtoparticularareas.ThisReporthasalreadymentionedfiveoftheseonwhichthischapterwillfocus:fosteringglobalmacroeconomicpolicycooperation;strengtheningtheglobalfinancialsafetynet;strengtheningthemultilateraltradingsystem;fosteringbetterglobalcoordinationofinfrastructureinvestment;andaddressingglobalenergypolicyandclimatechange.
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strains on the global governance architecture
AttheendofWorldWarII,countriessetaboutbuildinganewglobalordertogoverntheinteractionsbetweencountriesandpromotepeace,stabilityandgrowth.Thisglobalarchitecturehasservedtheglobalcommunitywell.IthasprovidedaframeworkwithinwhichAustraliaandChinahavebeenabletopursuetheirnationaleconomicandpoliticalgoals.Itscoredesignremainsimportanttoservingthoseobjectivesconsistentlywiththeinterestsofothercountries.Althoughithasbeenrelativelyresilientuptothispoint,anumberofrelatedforcesarenowstrainingthisarchitectureanditwillneedtobereformedifitistobeaseffectiveinthefutureasithasbeeninthepast.
Onesuchforceisglobalisation.Emergingeconomiesnowconstitutealargeshareoftheglobaleconomy(Figure8.2).Economiesaremoreconnectedandintegratedthaneverbefore.Figures8.3and8.4illustratethisthroughtwokeyandrelatedtransmissionmechanisms:tradeandcapitalflows.From1980to2015,globaltradeflowshaveincreasedsix-fold.Similarly,therehasbeenasignificantincreaseinthesizeofgrosscapitalflows.Globalgrosscapitalflowsincreasedfromlessthan5percentofglobalGDPduring1980toapeakofaround20percentby2007.
Thisincreasedinterconnectednessmeanscountriesaremoresusceptibletothepoliciesandeventsineachother’seconomies.Italsomeansthattheglobalinstitutionsandforumsdevelopedtogoverntheinteractionsbetweencountrieshaveamuchlargertaskontheirhands,requiringincreasedresourcesandabroaderfocus.
Figure 8.2: share of global gDP (ppp) Figure 8.3: global trade volumne of goods and services (1980=100)
100
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700
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1994
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Advanced economies
Emerging market anddeveloping economies
19801987
19942001
20082015
Source:IMFWEO2015.
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Figure 8.4: global capital flows since 1980
%
20
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10
5
0
-5
-10
-15
-20
Liabilities (inflows) Assets (outflows) Net flows
1980
1984
1988
1992
1996
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2008
Source:Hawkinsetal2014.
Whilethesizeoftheglobaleconomyhasincreased,countries’relativesharesofglobalGDPhavechanged.Figure8.2showsthechangeinthecompositionofglobalGDPfrom1994to2015.EmergingmarketanddevelopingeconomiesnowcontributeagreatershareofglobalGDP(purchasingpowerparity)thanadvancedeconomies.Asthecompositionoftheglobaleconomychanges,sotoomustthecompositionoftheinternationalinstitutionsandforumsthatgovernit.Failuretodothisnotonlymeansthattheseinstitutions’decisionswillappearlesslegitimate,butitwouldalsoimpairtheireffectiveness,duetothereductioninthefundingandcoverageoftheiractivities.
Innovationandadvancesintechnologyalsoacttostraintheexistingglobalgovernancearchitecture.Newtechnologiesalterthewaysinwhichcountriesinteract,potentiallyrequiringnewgovernancestructurestodealwithemergingissues.Advancesintechnologyandtransportation,forexample,havechangedthewayinwhichcountriestrade,fromimportsandexportsoffinalproductstoglobalandregionalproductionnetworks.FinancialinnovationhassimilarlyposedchallengesthathaverequirednewregulatoryframeworksthroughthecreationoftheFinancialStabilityBoardandBaselIII.
Retaining the g20 as the preeminent forum for global economic governance
Formanyyears,theG20remainedbelowtheradar,workingquietlybuteffectivelyattheleveloffinanceministersandcentralbankgovernors(Hulst2015).Thischangedin2008when,facedwiththeglobalfinancialcrisis,theneedforsignificantmacroeconomicpolicycooperationledtotheevolutionoftheG20asaforumfornationalleaders.Leadersidentified‘inconsistentandinsufficientlycoordinatedmacroeconomicpolicies’asarootcauseofthecrisis,andrespondedwiththelargestcoordinatedpolicyresponseinhistory,consistingofliquiditysupporttostabilisemarkets,theuseofconventionalmonetarypoliciestosupportdemandandfiscalstimuluspackagescoordinatedacrossalmostallG20countries.
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In2009,underthepresidencyoftheUnitedStates,G20leadersdeclareditas‘thepremierforumforinternationaleconomiccooperation’.Itsattentiongraduallyshiftedfromfightingthecrisistoimplementingthelonger-termpolicies,bothmacroeconomicandstructural,thatwerenecessarytopromotestrong,sustainableandbalancedgrowth.AlthoughthelegitimacyoftheG20asa‘self-appointedclub’isquestioned,theG20istodayestablishedastheonlyglobaleconomicforumwhereadvancedandemergingeconomiescooperateonanequalfooting(Hulst2015).
Since2008,theG20’sagendahasexpandedsignificantly.Itnowincludesspecificagendaitemsdevotedtogrowth,employment,trade,anti-corruption,financialregulation,tax,infrastructure,investment,development,climatechange,energy,foodsecurity,remittancesand,attimes,pandemicsandterrorism.Aconsistentandcross-cuttingthemeoftheG20hasbeenglobalgovernancereform.TheG20hasemergedastheworld’sprimaryvehicleforreformingtheglobalgovernancearchitectureandinhelpingsteertheprioritiesoftheinstitutions,forumsandorganisationsthatunderpinit.TheG20isoftenreferredtoasthe‘globalsteeringcommittee’,withafocusonrules-basedandmarket-orientedapproaches.ThisisanareainwhichtheG20hasaclearcomparativeadvantagegiventhecompositionofitsmembership,reflecting,inparticular,thegrowingdynamismoftheAsiaPacificregionandtheglobalinfluenceofemergingeconomies.
G20decisions,whichtaketheformofpolicyproposalsratherthanenforceablepolicystrategies,mustinmostcasesbebroughtbeforethegovernanceorgansoftreaty-basedinstitutions,suchastheIMF,andbeadoptedbythemonbehalfoftheglobalcommunity.TheG20cannotdecideforothers,althoughthevotingpowerthatG20membershaveinmostinternationalinstitutionsmeansthattheirproposalsarelikelytobecomedecisions(DrysdaleandDerviş2014).
the importance of the g20 to Australia and china
UnliketheG7,theG8ortheformerG10,theG20includesAustraliaandChina.TherearenoguaranteestheG20willbeapermanentfixture,letaloneremainasaglobalsteeringcommittee.Leadershaveavarietyofmultilateral,regionalandbilateralinstitutionsandforumsavailabletothem,aswellastheabilitytocreatenewonesiftheyseefit.IftheG20stopsbeingeffectiveintheeyesofleaders,thentheG20mayquicklyfinditselfreplaced.
LosingtheG20wouldrepresentaparticularriskforAustraliagivenAustraliaismuchmorelikelytobeexcludedfromalternative,smallergroupingsthanisChina,asAustraliaislessimportanttotheglobaleconomy.ButChinafacesriskstoo.ShouldtheG20fallintodisuse,anewsmallergroupingmaybedominatedbyadvancedeconomies,whichmaynotshareChina’sperspectives,concernsandchallengesasanemergingeconomy.Thereisaworsedanger,still,thatcompetingnon-cooperativecentresofglobalpowerareestablished—suchasaBRICSversusG7dichotomy—althoughthesearetobeavoidedwithinaforumliketheG20too.
TheG20isthebestavenueforAustraliaandChinaininfluencingtherules,normsandinstitutionsofglobalgovernanceandthedeliveryofglobalpublicgoods.WorkingwithinthisframeworkisoneofthemosteffectivewaysforAustraliatoengagewiththeinternationalsystem.Australiahasastrongincentivetohaveaseatatthetableandinfluencehowthisframeworkdevelops.Asakeybeneficiaryofglobalgovernancereform,Chinaalsohasa
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strongincentivetoplayanactiveroleinthesediscussions.Asglobalgovernanceevolvestoreflecteconomicrealities,Chinawillfinditselfplayinganincreasingroleinglobalinstitutionsaswellasinshapingtherulesandnormsthatunderpinthem.
IncreasedChineseleadershipinglobalgovernancewillbeofsignificantimportanceintothefuture,particularlywithintheG20.Vines(2015)hasarguedthattwothingsarerequiredforeffectiveChineseleadership.Thefirstisdomesticcompetence.ThisrequirestransformingChina’smodelofeconomicdevelopmentfromexport-ledgrowthtoconsumption-ledgrowth,supportedbyaresilientfinancialsystem(seeChapters1and2).Thesecondisgloballeadership.Thismeansdevelopinganunderstandingofhowtoactontheworldstageandanunderstandingofhowtheactionsofdifferentcountriesmightbebroughttogether.Mostimportantly,thisrequiresChina,andallcountries,tonurtureaforuminwhichinformationisexchanged,preferencesarticulated,discussionstakeplaceandcompromisesreached.TheG20istheidealforumforthistotakeplace.Assuch,maintainingtherelevanceandeffectivenessoftheG20shouldbeatoppriorityforChina.
TheG20isnotjustameansforAustraliaandChinatoinfluenceglobaloutcomes.Itisalsoameansforinfluencingoutcomesandprioritiesdomestically.Whenusedstrategically,theG20canbeaneffectivewayofprovidingpoliticalcovertohelpundertaketoughdomesticreforms.Thiswasondisplay,inparticular,inhowcountriesrespondedtotheglobalfinancialcrisis.Coordinatedstimulusgavepoliticalcovertogovernmentsinimplementingtheirownfiscalmeasures.Showingthatothercountrieswereundertakingsimilaractionsnotonlygavethesepoliciescredibility,italsohelpedalleviateconcernsthatothercountriesmightfree-rideonthefiscalleakagesfromonecountrytoanother.Thecoordinatedlooseningofmonetarypolicysimilarlyhelpedreducetheriskofalossofconfidenceorcurrencyattack(Vines2015).
maintaining the relevance and effectiveness of the g20
TherearepracticalthingsAustraliaandChinacandobothindividuallyandjointlytohelpmaintaintherelevanceandeffectivenessoftheG20.AustraliaandChinamustensureitsagendaisinclusive.Theyshouldworkcollaborativelynotonlyonissuesthatare\importanttotheglobaleconomy,butalsoonissuesthatbothcountriescanexhibitstrongleadershipontohelpmotivateothers.Importantly,AustraliaandChinamustensurethereiscontinuityintheG20’sagenda.
Thetwo-in-fiveagendahasputtheG20inapositiontoensurecontinuityandsupportfortheglobaleconomicrecovery.In2014,countriesputforwardover1000reformswiththegoalofensuringthattheG20GDPin2018is2percenthigherthanitwouldotherwisehavebeen.Countrieshavesinceimplemented,revisedandaddedtothesereformsin2015and2016throughacomprehensivepeerreviewprocess.ThisprocessshouldplayanimportantpartintheresurrectionoftheG20’sleadershiproleininternationalcooperationonmacroeconomicpolicies.Thetwo-in-fiveagendacanhelpovercomethe‘growthversusausterity’debatewithintheG20byprovidinganacceptablemeansforcountriescommittedtoausteritytoundertakepublicinvestmentwhileallcountriessimultaneouslyundertakesupply-sidereformstoboostpotentialoutput.This,inturn,helpsboostglobalaggregatedemandandtakessomepressureoffmonetarypolicy.
Astrategyofinvestingmoreininfrastructureandcarryingoutsupply-sidereformswillstimulateglobaldemand.Thiswouldleadtothecreationofcapitalassets,whichincreasethesupply-sidepotentialoftheeconomy,andwouldalsoincreasedemandduringtheinvestment
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period.Whilepublic–privatepartnershipscanhelpoptimisepublicresources,infrastructureinvestmentwillalsoenableamoderationofausterityinadvancedcountriesthathavefiscalspaceforpublicinvestment.Thejustificationwouldbethatinvestmentininfrastructureleadstothecreationofassetsthatcanbeusedascollateraltotheadditionalpublicsectordebtincurred.Policymakersmaybemorewillingtomoderateausterityintheknowledgethatadditionalinfrastructureinvestmentwillnotleadtoaworseninginthepublicsectorbalancesheet.
IntermsoftheG20agenda,anotheroptionforachievingcontinuitywouldbetocreateapermanentG20secretariat.G20countrieswouldcontinuetotaketurnshostingtheG20Summit,butthesecretariatwouldhelpmanagetheexpandingagendaandensurecontinuityfromoneyeartothenext.Thecostofhavingapermanentsecretariat,however,isthattheG20losesitsstatusasaninformalforum;itmakestheG20lesscountry-ownedasthesecretariatwillbecomeitsownpoliticalentitywhichmustthenbenegotiatedwith,slowingdownreformprocesses.Pastexperiencewithotherinternationalforumsthatcreatedpermanentsecretariatswouldalsosuggestthatthisdoeslittleinimprovingcontinuityandthat,instead,itisthepoliticalwillofcountriesthatdetermineswhetheranyparticularsummitissuccessfulornot.GiventheG20hasroutinelyrejectedthenotionofapermanentsecretariat,emphasisingtheG20’slong-rungrowthagendaislikelyabetteroptionforpromotingcontinuity.
AustraliaandChinacanalsopromotetheG20byactivelyusingittoraiseandnegotiateglobalissues,insteadofusingotherregionalorglobalalternatives.ThisincludeshavingleadersandministersusetheG20forkeyannouncementsthatareofglobalsignificance,aswellasusingtheG20astheplatformforimportantnegotiations.AustraliaandChinacanalsopromotetheG20bybeingambitiousinthecommitmentstheymakeandinencouragingothercountriestodothesame.
EnsuringtheG20remainsaneffectiveforumrequiresAustraliaandChinatoactivelyavoidG20gridlockbynotsupportingorparticipatingintheformationofdamagingstrategicblocs.Inparticular,thismeansavoidingaG7versusBRICSscenariowherecountriesagreetopre-aligntheirpositionswithintheG20.ChinaandAustraliashoulddeliberatelyandpubliclyapproachtheG20onanissue-by-issuebasisandseektobuildcoalitionsonindividualissuesacrossadvanced,emerginganddevelopingdivides,aswellasgeographicallyacrossEurope,Asia,theAmericas,AfricaandtheMiddleEast.
supporting a stronger global financial safety net
Theglobalfinancialsafetynetconsistsoftheinternationalfinancialresourcesandinstitutionalarrangementstohelpcountriesexperiencingafinancialoreconomiccrisisandpreventingitscontagion.ItisoffundamentalimportancetotheAustralianandChineseeconomiesthroughthestabilityitprovidestotheglobalfinancialsystembyensuringcountriescanaccessliquidityfinancingasnecessary.Itsupportsstabilitybyactingasafinancialbackstop,providingemergencyfinancingwhereacountryisunabletomeetexternalpaymentsandcannotaccessmarkets(Sterland2013).Thesafetynetalsoactsasaformofinsurance(Shafik2015).Countriescontributeresourcestothesafetynetand,knowingtheywillreceiveassistanceiftheyexperienceproblemswiththeirexternalpayments,aremorewillingtoopentheireconomies.BothAustraliaandChinahaveplayedkeyrolesinstrengtheningthesafetynetin
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thepast.ThisincludesthroughtheirquotaandbilateralcontributionstotheIMF,theirsupportforG20-ledinitiativesaroundIMFreformand,forChina,throughitsleadershipinregionalinitiativesandestablishingcurrencyswaplinestobolsterthesafetynetintheAsiaPacific.
ItisthereforeimportanttoensuretheadequacyandeffectivenessoftheglobalfinancialsafetynetaspartofthereformoftheinternationalmonetarysystemthattheIMFshouldadvance.AsPBoCGovernorZhouXiaochuanstatedonbehalfofChinatotherecentInternationalMonetaryandFinancialCommittee(Zhou2016),thisrequiresenhancingtheroleoftheIMF,improvingitslendingfacilities,allowingregionalfinancialarrangementstoplayabettersupplementaryrole,andfurtherimprovingthesovereigndebtrestructuringmechanism,withbettercoordinationamongcreditorsanddebtorsandwideruseofitsenhancedcontractualclauses.
Giventhestronginstitutions,macroeconomicpolicyframeworkandflexibilityoftheAustralianeconomy,itisunlikelythatAustraliawillrequireanydirectsupportfromtheIMFinthefuture.ThisissimilarlythecaseforChinagiventhesignificantdomesticbuffersandpolicyspaceavailabletoChineseauthorities—andalsobecause,intheeventthatChinadidrequireexternalassistance,thesheersizeofitseconomywouldmeantheamountofsupportrequiredwouldutterlydwarfthecapabilitiesoftheIMFandallregionalinstitutionscombined.Externalsupportwouldinsteadcomefromcountriesintheregionandthereserve-assetcountries,particularlytheUnitedStatesandtheEuropeanUnion.BigplayercooperationhastobetheanchorforanIMF-basedfinancialsafetynet.TherelevanceoftheglobalfinancialsafetynettoAustraliaandChinaisinthefundamentalroleitplaysinstabilisingtheglobalfinancialsystemgivenitsprovenabilitytotransmitshocksintotheAustralianandChineseeconomiesthroughtradeandinvestmentchannels.
Australiaisanopeneconomythatisdependentonforeignsavingstofinanceinvestment,particularlyforitsminingandresourcessectors,andoninternationaltradeformaintainingitshighstandardofliving.Australianauthoritiesholdlimiteddomesticreserves,relyinginsteadontheeconomicflexibilitythathasbeendevelopedintheAustralianeconomyovermanydecades.AlthoughtheflexibilityofAustralia’seconomy,particularlyitsfloatingexchangeandinflation-targetingmonetarypolicy,helpsitweathervolatilityfrominternationalmarkets,theAustralianeconomyisneverthelesssusceptibletoglobalandregionalshocksthroughtradeandinvestmentchannels.Australiasignificantlybenefitsfromthestabilityderivedfromthesafetynetandfromhavingstrongmechanismsandinstitutionsunderpinningit.AustraliaalsobenefitsfromensuringtheIMFremainscentraltotheglobalfinancialsafetynetbecause,unlikeChina,AustraliadoesnotyetparticipateinanyregionalfinancingarrangementssuchastheCMIMortheEuropeanStabilityMechanism(ESM).
WhileChinadoesparticipateinregionalinitiativesandhassignificantdomesticreserves,theChineseeconomyhasshownitselftobeincreasinglysusceptibletointernationalshocks.TheAsianfinancialcrisis,theglobalfinancialcrisisandmorerecentlytheso-calledTaperTantrumin2013havehighlightedthesusceptibilityoftheChineseeconomytoglobalshocksthroughfinancialchannels.Theseshocks,particularlytheEuropeandebtcrisis,havealsohighlightedthesusceptibilityoftheChineseeconomytoreducedglobaldemandthroughtradechannels.ChinaisakeybeneficiaryfromglobaleffortstohavetheIMF,andglobalgovernancemoregenerally,betterreflecttheeconomicrealitiesofthe21stcentury.ThesereformswillbekeytofacilitatingChina’seconomictransitionandhavingitplayamoreactiveroleintheglobalfinancialsystemofthefuture,aswellasinhavinginputintohowglobalrules,normsandinstitutionsdevelopovertime.
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Ensuringthatcountriescanaccessliquidityfinancing,bothregionallyandglobally,intimesofdifficultyisofcriticalimportance.Theresponsetotheglobalfinancialcrisis,particularlythroughthecurrencyswaplinesestablishedbetweencentralbanks,showedboththeimportanceofensuringadequateaccesstoliquiditybutalsotheadhocandunpredictablenatureinwhichthisiscurrentlysupplied.TheglobalfinancialsafetynetisparticularlyimportantforAustraliaandChina.Emergingmarketeconomiesaremoresystemicallyimportanttotheglobaleconomythaneverbeforeandmanyofthemarefacingdifficulttransitionsandsignificantrisksintheshorttomediumtermthatthreatentoreducetheconfidenceofinvestorsinholdingassetsintheseeconomies.CapitaloutflowsfromemergingmarketshavesurgedtowardUS$1trillionover2014–2015.Thatisapproximatelydoubletheamountthatexitedemergingmarketsduringtheglobalfinancialcrisis(NNInvestmentPartners2015).AccordingtotheBankforInternationalSettlements,investorsareincreasinglyfocusedongrowingvulnerabilitiesintheemergingmarketeconomiesastheyreassesstheglobalgrowthoutlook(BIS2015).
Figure8.5showsthateconomicactivityintheseeconomiesisnowprojectedtoslowforthefifthsuccessiveyear(IMF2015a).Thesedowngradesreflectcommonaswellascountry-specificfactors.Commonfactorsincludeweakerdemandfromadvancedeconomies,weakergrowthinoilexports,adjustmentsintheaftermathofcreditandinvestmentbooms,aweakeroutlookforexportersofothercommodities(includinginLatinAmerica),aswellasmoredifficultexternalfinancingconditions.Shoulddownsiderisksincreaseormaterialisefortheemergingmarketeconomies,theglobalfinancialsafetynetwillhaveacriticalroletoplayinpreventingcontagionandbufferingitseffectsontheAustralianandChineseeconomies.But,asthefollowingsectionexplains,thesafetynet,atpresent,istoosmall,toounresponsiveandtoofragmentedtoplaythisrole.
Figure 8.5: imF gDP forecasts for emerging market and developing economies
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the evolution of the global financial safety net
In2003,thesafetynetconsistedpredominantlyoftheIMFandtheUS$365billionitheldtofightcrises(AustralianTreasury2014).Sincethen,thesafetynethassignificantlyincreasedinsizebuthasfragmentedincomposition.Thereareseveralreasonsforthisfragmentation.ThemostsignificantistheslowpaceinreformingtheIMFsoastoboostitspermanentfundingandmakeitsgovernancestructuremorerepresentativeofthecontemporaryglobaleconomy.
TheslowpaceofIMFreformhasmadetheIMFmorereliantonsecondarysourcesoffunding,suchasbilateralloancommitments,andhasmadetheglobaleconomymorereliantonregionalandbilateralalternativesoutsideoftheIMF.In2010,theeuroareacreatedtheEuropeanFinancialandStabilityFund,whichlaterbecametheEuropeanStabilityMechanism,torespondtotheEuropeandebtcrisis.Similarlyin2010,BRICScountriescreatedtheUS$100billionBRICScurrencyreservepoolandthe13ASEANPlusThreecountriescreatedwhatisnowtheCMIM—apoolofforeignexchangereservesthatexpandedtoUS$240billionin2012(Kawai2015).
Fortheemergingmarketeconomies,theseinitiativesoccurredbecauseofinsufficientIMFresourcesaswellasdissatisfactionwiththeIMF’sresponsetotheAsianfinancialcrisisandtheslowpaceofIMFreform.Thishasalsoseencountriesincreasedomesticandbilateralbuffersthroughforeignexchangereservesandbilateralswaplines,respectively.ForeignexchangereserveshaveincreasedfromlessthanUS$2trillionin1990tooverUS$11trillionin2016whilethevalueofcurrencyswapsutilisedduringtheglobalfinancialcrisiswasoverUS$600billion(AustralianTreasury2014).
ThesechallengesaremoreapparentinAsiathananywhereelse.WhileAsiaislargecomparedtootherregions,thesafetynetinAsiaishighlyfragmentedandpatchyinitscoverage.Asof2016,itconsistsoftheIMF,CMIM,BRICScurrencyreservepool,bilateralcurrencyswaplines,domesticforeignexchangereservesand,potentially,theWorldBankandtheADB—whichprovidedliquiditysupportduringtheAsianfinancialcrisis.
Ofcourse,this‘fragmentation’isnotnecessarilynew.Historically,mostcriseshaverequiredsomeformofacoordinated,adhocresponsebetweendifferentinstitutions,organisationsandcountries,whetheritbeMexicoin1994(requiringacoordinatedresponsefromtheUSadministration,USFederalReserve,theIMFandBankforInternationalSettlements)orAsiain1997(withresourcesfromtheIMF,WorldBank,ADB,theUnitedStates,Japanandothers).Butthesizeofthecurrentdesignatedsafetynetistoosmalltoassisteventhoseeconomiesthatarerelativelysmallandnotnecessarilysystemicallysignificant.
Quantifying the size and adequacy of the safety net
Quantifyingthesizeofthesafetynetmeansaddingtogetheritsmultilateral,regionalandbilateralcomponents(Figure8.6).TheglobalcomponentconsistspredominantlyoftheIMF.AsofJune2015,theIMFhastotalresourcesofUS$1.3trillion,whichincludesitsquotaresources,resourcesfromtheIMF’sNewArrangementstoBorrowandGeneralArrangementstoBorrow,andbilateralloanswiththeIMF.TheregionalcomponenttotalsaroundUS$840billioniftheresourcesavailableinthemajorregionalarrangementsareaddedtogether—theEuropeanStabilityMechanism,theCMIMandtheBRICScurrencyreservepool.Finally,agoodproxyforthesizeofswaplinesduringatimeofcrisisistousethepeakvalueofthedollarswaplinesduringtheglobalfinancialcrisis.Thesepeakedataround
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US$600billion,althoughitshouldbenotedthatmanyoftheseswaplinesnolongerexist(theUnitedStatesstillhasunlimitedswaplineswiththeUnitedKingdom,EuropeanUnion,SwitzerlandandJapan)andadditionalswaplineshavebeencreatedsincethen,particularlybyChina.
Addingthesecomponentstogether,theoverallsafetynetisaroundUS$2.7trillion:about50percentcomesfromtheIMF,20percentfromswaplines,20percentfromtheEuropeanStabilityMechanismand10percentfromBRICSandtheCMIM.TheIMF(2016)estimatesthesafetynettobearoundUS$3.7trillion.ThislargernumberappearsbecausetheIMFincludesadditional,albeitsmaller,regionalfinancingarrangements.Ifweweretoincludeevenmoreregionalarrangements,includingregionaldevelopmentbanks,whichhavehistoricallyplayedaroleincrisisresponse,thesizeofthesafetynetisevenlargerstill,calculatedinthisReportataroundUS$4.6trillion.Howeverastheanalysisbelowshows,theadequacyofthesafetynet’ssizeisquestionableevenusingtheselargerestimates.
Whiledomesticforeignexchangereservescouldbeaddedasafourthcomponent,thesereservesaregenerallyacountry’sfirstlineofdefence.Althoughimportant(asdiscussedbelow),itcanbearguedthattheyarenomorepartoftheglobalfinancialsafetynetthandomesticmacroeconomicpolicy.
Theadequacyofthesafetynetrelatestoitssizeandcomposition,which,inturn,influencesitscoverage,consistencyandspeedinrespondingtoacrisis(IMF2016).Countriesarenowmoreexposedtofinancialcontagionthaneverbefore,soalargersafetynetmakessense.ButtheUS$2.7trillionfigurerepresentedabove,ortheIMF’sUS$3.7trillionfigure,overstatethesafetynetthatisactuallyavailable.
First,Figure8.7showsthat,ifweexcluderesourcesthatarenotimmediatelyavailable,thesizeofthesafetynetdropstoaroundUS$1.75trillion.FortheIMF,muchofitsresourcesaretiedupinexistingprogramsorcomefromborrowingcommitmentsthathavenotbeenpaid-in.Asaresult,itsresourcesdropfromUS$1.3trilliontoUS$421billion.Similarly,theforwardcommitmentcapacityoftheESMdropsfromUS$500billiontoUS$369billion.ItshouldalsobenotedthatthedollarswaplinesfromtheUSFederalReservemaynotnecessarilybeofthesamesizeorextendedtothesamecountries.HowtheUSFederalReservechosethesecountriesalsoremainsunclear.
Second,whetherasafetynetofUS$1.75trillionisadequateornotdependsonthesizeofthecrisisthatitisrespondingto.TheIMF(2016)notesthatthesizeofthesafetynet,andparticularlytheIMF’sresources,havenotkeptpacewiththe25-foldincreaseinglobalcapitalflowssince1980(Lagarde2016).Ithasalsofailedtokeeppacewiththeincreasingstockofdebtamongtroubledeconomies.Greece,forexample,representsjust0.25percentofglobalGDP(PPP;IMF2016).ButiftheIMFwererequiredtoshouldertheburdenoftheGreekbailoutonitsown(approximatelyUS$279billionsince2010),thiswouldabsorbalmost70percentoftheIMF’scapacity.Aworsescenariowouldbebailingoutalargereconomy,suchasSpain.Spainrepresents1.5percentofglobalGDP(PPP;IMF2016)andhasUS$669.5billionofdebttorefinanceinthefiveyearsfrom2015to2020(Gilbert2014).ThiswouldexhausttheIMF’scapacityandmostoftheESM.
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Figure 8.6: The components of the global financial safety net
Total IMF resources; $1,312
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Currencies; $367
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Source:Authors’calculations.
Third,theadequacyoftheglobalsafetynetdependsonwhatismeantbytheterm‘global’.Theactualsizeofthesafetynetdependsonthecountryinquestion.ForAustralia,thesafetynetconsistsentirelyoftheIMFanditsswaplinewithChina,sinceAustraliadoesnotparticipateinanyrelevantregionalinitiatives.Similarly,swaplinesareonlyavailabletothosewhocannegotiatethem,anditisworthnotingthatemergingmarketsanddevelopingeconomieswereexcludedfromtheUSFederalReserveswaplinesintheglobalfinancialcrisis.TheIMF(2016)acknowledgesthatthesafetynet’scoverageisincreasinglypatchy,whichisaparticularriskfornon-developedcountries.
Fourth,marketconfidenceisreducedwheninvestorsareunabletoseeadesignatedwarchestandnecessaryinstitutionalarrangementstorespondtoacrisis.Assumingthatonlyadhocinternationalcooperationwillbeforthcomingduringatimeofcrisisisnotconducivetomarketconfidence.Italsoerodestheimplicitinsurancepolicy,whichencouragescountriestoopentheireconomiesinthefirstplace(Shafik2015).Havingastrongsafetynetcanhelpencouragecross-borderinvestmentandincreaseconsumptionthroughreducedprecautionarysavings.
Fifth,increasedfragmentationmeansgreaterdependenceontheabilityofdifferentinstitutionsandarrangementstocoordinatewithoneanotheratatimeofcrisis.Thiscanmeanaslowerandlessconsistentresponsefromonecrisistothenext(IMF2016).TheG20identifiedtheseconcernsasreasonsfordevelopingprinciplestoguidecooperationbetween
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theIMFandregionalfundingarrangements(RFAs)(G202011).TheIMF(2016)hasalsofoundthatmostcountrieswouldneedtouseseveralelementsofthesafetynettofullycovertheirfinancingneeds,thecoordinationofwhichtheIMFcalls‘astrongassumption’.
Figure 8.7: Total resources compared to available resources
Swap lines during the GFC; $600
Total IMF resources; $1,312
Total IMF resources; $421
European stability mechanism; $369
Chiang Mai; $240
BRICS; $100
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Finally,theseregionalfinancingarrangementsareweaksubstitutesfortheIMF.Theclosenessofcountriesthatparticipateinregionalarrangementsmeansthatimposingpotentiallypainfulbutnecessaryconditionalitycanbedifficultanduncomfortable.Thenarrowerbaseofresourcesmeanstheyarelessreliable,lessdiversifiedandmoreriskyforcontributingcountries.Surveillanceactivitiesalsotendtobepartialastheglobalpictureisnotasobvious.
Forthesereasons,theIMFshouldremainatthecentreoftheglobalfinancialsafetynet.ItsdiversemembershipandlonghistoryprovidestheIMFwithseveraluniquefeaturesthatareirreplaceableataregionalorbilaterallevel.TheIMFhasthegreatestcapacitytoraiseresourcesintimesofneedandtoensurethatcreditriskisdiversifiedgloballytothegreatestextentpossible.Assuch,itprovidesthemosteffectiveandlowcostinsuranceagainstcrises.
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Avenues for collaboration between Australia and China in the g20
ReformingthesafetynetwouldbenefittheAsianregioniftheIMFtakesaholisticapproachthataddressestherootcausesofitsfragmentation.ThisrequiresafocusonincreasedandmorepermanentfundingfortheIMF,bettertailoredfinancingfacilitiestomeettheneedsofAsianeconomies,anewphaseofreformstogiveAsianeconomiesagreatervoiceintheIMF,andbettercooperationbetweentheIMFandRFAs.
TheglobalfinancialsafetynetisapolicychallengethatG20financeministersandcentralbankershavebeenatthefrontierofforcloseto15years.ItisanissueuniquelysuitedtotheG20asallcountriesbenefitfromthepositiveexternalitiesthatflowfromaneffectiveglobalfinancialsafetynetthattakesinglobal,regional,bilateralandnationalarrangements.
TheG20isuniquelysuitedtoaddresstheinadequaciesofthecurrentsafetynet.One-thirdoftheIMF’sfundingfrombilateralloanswillstarttoexpireover2016and2017,andtheG20willneedtodiscussthenextstageofIMFreformfollowingtherecentratificationofthe2010quotareformsbytheUnitedStatesCongress.TheG20’shistoryhasshown,however,thateffortstoachievesweepingchangestoglobalgovernance,so-called‘grandbargains’,havebeenunsuccessful,exceptperhapsinthecontextofanemergencyonthescaleoftheglobalfinancialcrisis.ThefocusoftheG20undertheFrenchpresidencyin2011,forexample,wastotakeaholisticlookattheinternationalmonetarysystemwithafocusonradicalreforms.Theoutcomesachievedfromthisprocess,however,weresignificantlylessthantheamountofpoliticalcapitalthatwasexpended.
Instead,theG20shouldfocusonwhatpragmaticstepsitcantakeinsupportinganincrementalprocesstostrengthenthesafetynet.Tothisextent,AustraliaandChinashouldsupportG20effortsontheissueoftheglobalsafetynetfromfourkeyperspectives:thenextstageofIMFreform,implementingarrangementstomaketheIMFandRFAsmorecohesive,renegotiatingbilateralloans,andstrengtheningdomesticmacroeconomicframeworks.
imF reform
IMFreformisthelinchpinforaddressingthechallengesfacingtheglobalfinancialsafetynet.China’sG20presidencyin2016presentsanawkwardcontradictionwherethecountrychairingtheglobalsteeringcommitteeremainsgrosslyunderrepresentedinmanyoftheworld’smostimportantinstitutions.Whiletheratificationofthe2010IMFreformshelpedaddressthis,thereisstillmuchtobedone.AustraliaandChinashouldencouragetheG20tostartaconversationonthenextstageofIMFquotareform.Thiswillbeanincrementalprocessovermanyyears,anditisreasonabletoexpecthesitationfromsomemembers,notablytheUnitedStates,inwantingtoadvanceanewroundofreformssoquicklyaftertheratificationofthelastround.However,momentumfromtherecentsuccessofthe2010reformsshouldnotbelost.
ThereareanumberofotheraspectsofIMFreformthatsimilarlystillneedtotakeplace.Thisincludesbringingforwardthe15thGeneralReviewofQuotasandimplementingtheagreementreachedin2010wherebyadvancedEuropeancountrieswouldfreeupanIMFboardchairforanemergingmarketeconomy.ThereisalsoadditionalworktodoinreviewingtheIMF’squotaformula,althoughresolutiononthisissuewillrequireapoliticalsolutionandwillnotbesolvedthroughtechnicalreviews.Finally,thereisalonger-termopportunityforAustraliaandChinatobeginplantingtheseedsforhavingarepresentativefromanemergingmarketeconomyappointedastheheadoftheIMFattheendofLagarde’sterm.
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ReformstotheIMFcouldalsofocusonitsfinancingfacilitiestoensuretheyaremeetingtheneedsofitsmembers.Thiscouldincludeagreateruseofprecautionaryfinancingtomakethesafetynetfaster,moreflexibleandmoreresponsive.TheIMFtookasignificantstepinthisdirectionindevelopingtheflexiblecreditlineandtheprecautionaryandliquiditylinein2010.Thesefacilitiesareaimedatstronglyperformingeconomieshitbyexternalshocks—theso-called‘innocentbystanders’.TheIMF(2016)hasfoundthatwithoutpromptliquidityprovision,innocentbystanderscanquicklybecomevulnerableduringsystemiccrises.Thisisalsoamotivationforcountriestostockpileforeignexchangereserves.Havingagreaterfocusonprecautionaryfinancingcouldhelpbettermeettheneedsofmembers,reducefragmentationandimprovetheIMF’sresponsetocrises.
composition of the sDR basket of currencies
On13November2015,IMFstaffrecommendedtherenminbi(RMB)beincludedintheSpecialDrawingRights(SDR)basket(IMF2015c).China,ofcourse,continuestohaveakeyroletoplayinthisregard.LiberalisationofChina’scapitalaccountispivotalnotonlytotheRMB’sinclusionintheSDR,butalsoforChinatoplayanincreasingroleintheglobaleconomymoregenerally.Importantly,theRMB’sinclusioncanbeusedbyChinaasacatalysttohelpdrivedifficultfinancialreformsathome.
strengthening collaboration between the imF and RFAs
WhilereformingtheIMFisthebestwaytoaddressthechallengesfacingthesafetynet,thereareotherstepsthatcanbetakentomakethepatchworkofglobalandregionalinitiativesmorecohesive.Regionalandbilateralinitiativescanhaveanimportantrolewithinthesafetynet,buttheymustberigorousandstructuredsoastocomplementtheIMF.AttheCannesSummitin2011,leadersendorsed‘G20PrinciplesforCooperationbetweentheIMFandRegionalFinancingArrangements’(G202011).ThisshouldbeusedasthebasisfordevelopinganoverarchingframeworkforbettercooperationbetweentheIMFandRFAs.
Suchaframeworkcouldbegraduallydevelopedandstrengthenedthroughinformalandformalmethods.Informally,regulardialoguescouldbeheldbetweentheIMFandRFAstoreachabetterunderstandingonhowtocoordinatewitheachother,suchasestablishingproceduresforinformationsharingandjointlyconductingcrisisscenarioexercises.ThissuggestionwasputforwardbySouthKoreain2012andreceivedbroadsupport(G20IndiaSecretariat2014).IthasalsobeencanvassedbytheIMF(2013)asapracticalsteptofine-tunethecurrentflexibleapproachtoIMF–RFAcooperation.
Moreformally,theG20couldtaskaworkinggrouptodevelopdetailedguidelinesonIMF–RFAcooperation.Suchanagreementcouldformalisetheexpectationthatco-financingoperationswouldbesubjecttocertainprinciplesandsafeguards,similartothosestipulatedundertheIMF’slendingframework.Thedetailedguidelinescouldprovideconcreteguidanceonhowtheseprinciplescouldbeachieved.ThisproposalhasalsobeencanvassedbytheIMF(2013)andshouldbeconsideredbytheG20.
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Renewing bilateral funding of the imF
TheexpirationofUS$369billionofIMFbilateralloanfundingover2016and2017requiresanurgentresponseunderChina’sG20presidency.ThisfundingrepresentsathirdoftheIMF’sfundinganditspotentiallossintroducesanunacceptableamountofsystemicriskintotheglobaleconomyatatimewhenmanyeconomiesaregoingthroughdifficulttransitions.Theseloansmustberenewed.
However,AustraliaandChinashouldnotlosesightoftheultimategoal,whichislong-term,adequateandsustainablefundingfortheIMF.Whilethesebilateralloansarecriticalinfillingashort-termgap,theirrenewalshouldformpartofabroaderdiscussionaroundthetimetablesforquotareformsothat,ultimately,thesebilateralloanscanbefoldedintolonger-termformsofIMFfinancing.
strengthening domestic frameworks
Finally,thesafetynetalsoneedstobeconsideredinabroadercontext.Itisnotapanacea.Itis,andshouldremain,alastresort.Thereneedstobeanequalfocusondomesticreformstobuildsoundmacroeconomicframeworkswithincountriestocushionagainsteconomicshocksandensureflexibleresponses.AustraliaandChinashouldensurethatthemacroeconomicfocusoftheG20growthstrategiesisnotlost,andthatthesestrategiesandtheG20peerreviewprocessexpresslyconsiderhowdomesticframeworkscouldbestrengthened,withanalyticalsupportfromtheIMF.
supporting and promoting the global trading system
Theglobaltradingsystemreferstotherules,normsandinstitutionsthatgoverninternationaltrade.Althoughitcanbecharacterisedinmanyways,thesystemconsistsofmultilateral,plurilateralandbilateralcomponents.Bilaterally,itconsistsofhundredsofFTAsorotherformsoftradeagreementthathaveemergedoverthelast20years.Plurilaterally,thesystemconsistsofregionalandcross-regionalagreementssuchastheNorthAmericanFreeTradeArea(NAFTA),TPP,RCEPandTTIP.Multilaterally,thesystemconsistsoftheWTOandthemultilateralagreementsithasproduced.
AustraliaandChinaactivelycooperatemultilaterallythroughtheWTOaswellasbilaterallythroughChAFTA,whichhassetnewdirectionsintradepolicystrategy.Differencesemerge,however,inregardstoplurilateralarrangements.WhileAustraliaandChinacooperatethroughRCEPundertheauspicesofASEAN,AustraliaisamemberoftheTPPwhileChinaisnot.Figure8.8givesasnapshotofhowAustraliaandChinafitwithintheincreasinglycomplexglobaltradingsystem.
Allthreeofthesecomponents—multilateral,plurilateralandbilateral—areimportantandrelevanttotheAustralia–Chinarelationship.AustraliaandChinaarebothtradingnations.Bothcountrieshavebenefitedimmenselyfromtheglobaltradingsystemthroughincreasedconsumption,investmentandhigherproductivitythroughthemoreefficientallocationofresourcesthattradeliberalisationfacilitates.
Exportsrepresentabout21percentofAustralianGDPandabout23percentofChina’sGDP.ComparethistotheUnitedStates,whereexportsrepresentjust13percentofGDP,anditisclearthatAustraliaandChinahavestronginterestsintheefficiencyandeffectivenessofthe
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globaltradingsystem.AustraliaandChinahaveaparticularinterestinensuringtheglobaltradingsystemsupportsregionalandglobalvaluechainsbyfacilitatingtradeandinvestmentflowsacrossborders.Thishasbeenaidedbyimprovementsinphysicalinfrastructureandlogisticsservices,rapiddevelopmentsofinformationandcommunicationtechnology,andfallsintradebarriersandtradecosts,allofwhichhavehelpedexpandtradeandforeigninvestment.ThefactthattheWTOhasbeenlockedinadecade-longpreoccupationwith20thcenturytradeissues(suchastariffsandagriculture)intheDohaRoundhasmerelyexacerbatedthisregionalisationeffect(Baldwin2013).
AustraliaandChinagainthemostfromtradeliberalisationwhenitismultilateral,ratherthanbilateralorplurilateral.Inshort,theGDPand,moreimportantly,consumptiongrowthenjoyedbyAustraliaandChinawillbebiggerwhenliberalisationeffortsareundertakenwithinlarger,andpreferablyworldwide,groups(McKibbin1998).Thelargerthegroup,thegreaterthepotentialformoreefficientallocationofresourceswithintheseeconomiesis.Inlargergroupingsthestimulationofdemandforexportsandcapitalastradebarriersarealsolowered.Alargergroupingalsohelpspreventtradebeingdivertedawayfromnon-participatingcountries.
TherearethreepriorityareasforcollaborationbetweenAustraliaandChina.First,giventhebenefitsofmultilateraltradeliberalisationtobothcountries,AustraliaandChinashouldrefocustheG20’seffortsonboostingthemultilateraltradingframeworkbypromotinganincrementalprocessthroughwhichtheG20canworktowardsWTOreformoverthecomingyears.Second,AustraliaandChinashouldfocustheireffortsintheG20,WTOandRCEPontakingpracticalstepstotrytoreducefragmentationintheglobaltradingsystem.Third,giventheimportanceofinvestmenttotheeffectivenessoftheglobalandregionalvaluechainsAustraliaandChinaparticipatein,bothcountriesshouldsupporttheG20onanincrementalprocessthatsupportsamultilateralframeworkforinvestment.
Figure 8.8: Australia and China within the global trading system
NS PACIFICTNERSHIP
TPPTM
World Trade Organization162 members
TPP
United States
Peru
Canada
Mexico
Chile
TRANPART
T
RCEP
India
China
Korea
Philippines
Indonesia
ThailandMyanmar Malaysia
Vietnam
Brunei
Singapore
New Zealand
Australia
Japan
Laos
Cambodia
ASEAN
Source:Authors’schema.
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Promoting multilateral liberalisation and WtO reform through the g20
TheresponsibilityforglobaltradegovernancehasrestedwiththeWTOsinceitscreationin1995.Itsmembershiphasgrownto162asofMay2016.TheWTO’scentralfunctionistoprovideaforumforinternationaltradenegotiations,whichresultsinWTOagreements.TheWTO’sotherfunctionsincludeadministeringWTOagreements,monitoringnationaltradepolicies,andprovidingtechnicalassistanceandtrainingfordevelopingcountries(Baldwin2013).
TheWTOisthepreferredvehicleforpursuingtradeliberalisationandmanagingtheglobaltradingsystemforboththeAustralianandChinesegovernments.Itistheonlyorganisationthatcantakeacomprehensiveviewoftheincreasingcomplexitiesoftheevolvingeconomicengagementsbetweencountries.ButWTOnegotiationshavenowbeenstalledfortwodecades,largelyoveradivideonmajorissuessuchasagriculturesubsidies,industrialtariffsandnon-tariffbarriers.
Asaresult,theWTOhasnotkeptupwiththeevolutionoftheglobaltradingsystem,particularlythedevelopmentofglobalandregionalvaluechainsandtheintertwiningoftrade,investment,intellectualpropertyandservices.WhiletheWTOremainedfocusedontariffsandagriculture,morecomplexglobalandregionalproductionnetworkswereforming.WithoutWTOreformthatallowsentrenchmentofthestrongerregulatoryandinstitutionalarrangementsnecessaryformorecomplexinternationalcommercialties(intrade,servicesandinvestment),theglobaleconomyrisksthesteadydeclineintherelevanceofoneofitsmostvaluableinternationalinstitutionsandtheconsequentlossofextraordinaryopportunitiestoimprovegloballivingstandardsandcreationofapermanentlyfragmentedglobaleconomicsystem.
ThedifficultyinreformingtheWTOisnotincomingupwithalternativerulesorinstitutionalframeworksbutinachievingpoliticalagreementthatreformisrequiredandonwhatformitshouldtake.Thefocusneedstobeondevelopinganincremental,inclusiveandrobustprocessthroughwhichsuchissuescanbediscussed.TheG20presentsthemosteffectiveforumgivenitsglobalgovernancefocus.
TheG20’sfocusontradehasbeenmovinginthewrongdirectioninrecentyears,givinggreateremphasistoFTAsandregionalagreements.UnderAustralia’sG20presidency,asunderTurkey’s,thefocuswasondomesticstructuralreformsinnationalgrowthstrategiestoreducethecostofdoingbusiness,streamlinecustomsprocedures,reduceregulatoryburdensandstrengthentrade-enablingservices.Whiletheseareimportantareasoffocus,theG20’skeyareaofcomparativeadvantageisintendingtothemultilateralsystemandshapinghowbilateral,plurilateralandmultilateralcomponentsfittogether.Increasingly,communiquésdepicttheG20asaforumforinformationsharingontradeissuesratherasthedrivingforceforinstigatingnecessaryglobalgovernancereform.
TheG20needstorefocusonthemultilateraltradingsystemanddevelopaprocessformovingforwardonWTOreform.PangestuandNellor(2014)providepracticalsuggestionsonhowaG20processcouldbedeveloped,buildingonthecreationofadesignatedG20workinggroup.TheysuggestthatleadersannouncetheappointmentofanEminentPersonsGroup(EPG)comprisedofhighlyregardedpeopleininternationalgovernance,tradeandotherareas,taskedtomakerecommendationsontheglobaltraderegimeandspecificallyontheprinciplestobeobservedbyG20membersastheyconsidergovernancereforminregardstotrade.ThecompositionoftheEPGshouldreflecttheneedtomovetradediscussionsbeyondthenegotiationparadigmtoreflectthebroadereconomic‘wins’ofastronger,moremodernregime.
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ReformingtheWTOandentrenchingitsauthorityisofcentralimportancetoAustraliaandChina.Regionalagreementsarefragmentingtherelationshipandbothcountriesbenefitthemostfromtradeliberalisationthatisundertakenacrossthelargestnumberofcountriespossible.WTOreformisalsothelinchpinforaddressingfragmentationintheglobalsystem,whichbenefitsneitherAustralianorChinagiventheincreasedcostoftradeandinvestmentitentails.
Integraltothiswillbegivingthebusinesscommunity(representedthroughtheBusiness20,or‘B20’)agreatervoicewithintheG20.TheB20hasafundamentalroletoplayinadvisingG20leaders,ministersandofficialsonthepracticalstepstheG20cantaketoimprovetheeaseoftradinganddoingbusinessacrossborders,particularlybyproducingamorecohesiveinternationaltradearchitecture.TheG20needstoensureitprovidesplatformsfortheB20tomakeitsrecommendationstoleaders,includingsignificantengagementbyleaders,ministersandofficialswiththeB20anditsrecommendations.ResponsibilityalsofallstotheB20toensureitsrecommendationsarespecific,targetedandfirmlyrootedinarobustevidence-base.TheB20canplayacontinuedroleintheimplementationofthoserecommendationsandshouldnotconcernitselfonlywiththerecommendationsthemselves.
A more cohesive and integrated global trading system
ThereareotherpracticalstepsAustraliaandChinacouldsupporttohelpaddressfragmentationintheglobaltradingsystem.Calledthe‘noodlebowleffect’inthecontextofAsia,tradefragmentationrisksreducingtradeandinvestmentflowsbyincreasingthecostandcomplexityofdoingbusinessacrossborders(Urata2013).Thesecostsincludedifferentandcompetingtariffschedules,exclusionlists,rulesandstandards.Sincethecoexistenceofbilateral,plurilateralandmultilateralagreementsisunlikelytochangeanytimesoon,thefocusshouldbeonachievinggreatercoherencebetweenthesediverseagreements.
Preferentialtradeagreementshavepositiveandnegativeeffects.Thepositiveeffectscomefromtheexposureofuncompetitive,shelteredhomeproducerstocompetitionfromlower-costpartnercountrysuppliers.Thenegativeeffectsarethattheseagreementsdiverttradeawayfrommoreefficientandcompetitivethirdcountrysupplierstowardspartnersupplierswhoonlybecomecompetitivebecauseofthepreferentialtreatmenttheyreceiveundertheagreement(Armstrong2015;seeChapter7).Havingalargenumberofintertwinedpreferentialtradeagreementsnotonlyriskstradediversionbutalsoexacerbatesthesenegativeeffectsbyincreasingcomplexityandcompliancecosts.The‘noodlebowl’canmakeAsianfirms—particularlysmall-andmedium-sizedenterprises,whichdisproportionatelyuseFTApreferences—facecostlybusinessproceduresandcumbersomerequirements(Baldwin2013).Ensuringcoherencebetweentheseagreementshelpseliminatethesenegativeeffects.
ThegoalfortheTPPandRCEPmustbetoensuretheyactasastepping-stonetowardsmultilateralisation.TheTPPwassignedinFebruary2016,althoughitstillawaitsapprovalintheUSCongressandinotherjurisdictions.ThereisariskthattheserulesandstandardshavebeennegotiatedbilaterallysuchthattheTPPmayhavesomeofthecharacteristicsofaseriesofbilateralarrangementsratherthanagenuinelycommonsetofregionalrules.Thisisfarfromidealintermsofeconomicefficiencysinceitwillprotectsupplierswithinthearrangementagainstlowercostsuppliersoutsideit,suchasChina,IndonesiaorEuropeforinstance,divertingtraderatherthancreatingit(Drysdale2015).
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ThefocusofAustraliaandChinashouldnowbeonworkingwithpartnersinRCEPtoensureitisnotonlycomplementarywiththeTPPbutgoesfurtheronkeyissuessoastoraisethestandardforregionalagreements.ThisrequiresastrongpoliticalcommitmentfromleaderstobetterintegratethefiveASEANPlusOneFTAswithChina,Japan,SouthKorea,IndiaandAustralia–NewZealand.Fromapracticalpointofview,theASEANPlusSixcountriesshouldadoptagradualapproach,whichhasbeenshowntobeeffectiveintheestablishmentoftheASEANFreeTradeArea(AFTA),intariffelimination,aswellasaco-equalapproachinthedefinitionofrulesoforigin(Urata2013).
Thereareotherpracticalthingsthatcanbedonetohelpensurecoherencebetweentheseagreements.Theseincludeencouragingrationalisationandflexibilityofrulesoforigin,upgradingoriginadministration,improvingbusinessparticipationinFTAconsultationsandstrengtheningsupportsystemsforSMEs(Baldwin2013).TherearealsoimportantwaysinwhichtheWTOprocesscanbeusedtoassistwiththeseregionalintegrationeffortstohelpensuretheyactasstepping-stonesformultilateralisation.Forexample,theWTOandASEANcouldcollaborateonjudicialandmonitoringfunctionstoensuregreatercoherencebetweenglobalandregionalrules(Oshikawa2013).
Finally,implementationoftheTradeFacilitationAgreement(TFA)offersopportunitiesforreducingthecostoftrade.The2015OECDTradeFacilitationIndicatorsfindthattheimplementationoftheTFAcouldreduceworldwidetradecostsbybetween12.5and17.5percent.CountriesthatimplementtheTFAinfullwillreducetheirtradecostsbybetween1.4and3.9percentagepointsmorethanthosethatdoonlytheminimumthattheTFArequires(OECD2015).
AustraliaandChinashouldusetheirinfluenceintheG20tomodifytheG20growthstrategyprocesstorequireeachcountrytoincludespecificreformstoimplementtheTFA.Tradeisalreadyacomponentofthegrowthstrategies;however,todateithasbeenoneoftheweakestareas.TheTFAprovidessomethingtangibleforcountriestoaspireto.TheOECD’sTradeFacilitationIndicatorsshouldbeusedtomeasureandreportonthelevelofambitionbeingdisplayedbyindividualcountries.
multilateral cooperation on investment and infrastructure
Whiletradebarriershavetypicallyfallenoverpastdecades,barrierstoforeigndirectinvestmentremainhigh.ThenDirectorGeneraloftheWTO,PascalLamy,callsthisagapininternationalcooperation:
Weseetheabsenceofmultilateralrulesoninvestmentasagapincooperation.Currentbilateralarrangementsarenotasatisfactorysubstituteforacomprehensiveinternationalinvestmentagreement(Lamy2013).
BarrierstoforeigninvestmentareasignificantissueforAustraliaandChina.Foreigninvestmentflowsarefundamentaltothespreadofglobalproductionnetworks,fromwhichAustraliaandChinaaresignificantbeneficiaries.
Asacapital-importingcountrythatreliesonforeignsavingstofinanceinvestmentinfundamentalsectorsofitseconomysuchasmining,resourcesandagriculture,Australiahasastronginterestinensuringthesechannelsremainopen.ForChina,likemanydevelopingcountriesinAsia,muchofitssuccessinparticipatinginglobalvaluechainshascomefrom
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beingabletoattractthenecessaryinvestmenttobuildproductionbases.Since2008,EastAsia,andChinainparticular,attractedthelargestshareofglobalforeigndirectinvestmentbecauseofitshighgrowthrateandlargemarkets(ZhangandWang2014).
Globally,subduedinvestmentremainsastubbornlegacyoftheglobalfinancialcrisis.G20leadersnotedin2014that‘tacklingglobalinvestmentshortfallsiscrucialtoliftinggrowth,jobcreationandproductivity’(G202014).Figure8.9showstotalinvestment(publicandprivate)asapercentageofGDPforadvancedandemergingmarketeconomies.Foradvancedeconomiesinparticular,investmenthasstruggledtoreboundfromitsfallfollowingtheglobalfinancialcrisis.Whileinvestmenthasbeengrowingrapidlyovertimeforemergingmarketeconomies,ithasplateauedsince2009andisnowgrowingatalowerrate.Emergingmarketeconomieshavealsofacedsignificantinvestmentchallengesinrecentyearsasglobalcapitalflowsrespondtomonetarypolicychangesinadvancedeconomies.Improvingdomesticinvestmentclimatesisacriticalelementinaddressingthis.
Addressingtheseglobalinvestmentchallengeshasthreecomponents.Thefirstisdomestic.Improvingdomesticinvestmentandfinancingclimatesisessentialtoensuringthecompetitive,stableandpredictablereturnsnecessaryforattractingprivatesectorinvestment.AustraliaandChinashouldsupporttheG20inthespecialfocusithasgiveninrecentyearsonreformstoimprovedomesticinvestmentenvironments.Theseincludeincreasedpublicinvestmentininfrastructure,regulatoryandinstitutionalreformstoleveragepublic–privatepartnerships,introducingtaxincentivestoraiseinvestmentandenhancingaccesstofinanceforSMEs.
Thesecondcomponentinaddressingtheglobalinvestmentchallengeismultilateral.Therehasbeenanunrelentingmovementtowardstheadoptionofadefactoinvestmentagreementatthegloballevelthroughavarietyofmultilateral,regionalandbilateralinitiatives(Dhar2013).TheseincludeinvestmentmeasuresunderGATT,theWTOAgreementonTrade-RelatedInvestmentMeasures(TRIMs),theOECD’sDeclarationandDecisionsonInternationalInvestmentandMultilateralEnterprises,UNCTAD’sInvestmentPolicyFrameworkforSustainableDevelopment,theG20’sGlobalInfrastructureHub,andregionalinitiativessuchastheEuropeansinglemarket,NAFTA,theASEANInvestmentAreaandtheinvestmentcomponentofRCEP.Theseinitiativeshavedevelopedgoodpracticeguidelinesforforeigninvestment,butthisisinsufficient.Acaseemergesforaneventualmultilateralagreementoninvestmentcoveringtransparencyoninvestmentrulesandinvestorfacilitation,ideallyhousedintheWTO(Baldwin2013).
TheG20standsasthemosteffectiveforumforcontinuingthispush.Ithasalsotakenimportantstepsinregardstotheneedforcollective,multilateralactiononinvestmentthroughitsglobalinfrastructureinitiativeandworkonSMEfinancing.ThenextstepisfortheG20toconsolidatetheworkdonetodateandbeginaholisticdiscussionarounddevelopingamultilateralforeigninvestmentframework.Importantly,theG20’sworkalsoneedstoaddressincreasingfragmentationbetweenregionalagreementsandtheinvestmentmechanismstheyembody,specificallyoninvestor–protection.Theinvestor–protectionmechanismsembodiedinanumberofregionalagreements,particularlytheTPP,aswellasthedifferencesbetweentheseagreements,acttosignificantlyfragmenttheexistingsystem.Consolidatingtheexistingworkonamultilateralforeigninvestmentframeworkneedstohaveaspecificfocusonachievingharmonyacrossthesemechanisms.
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Figure 8.9: investment as a percentage of gDP
10
15
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30
35
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1994
19
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1998
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2002
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Advanced economies Emerging market and developing economies
Source:IMFWEO2015,Investment(publicandprivate)asapercentageofGDP.
DespitealltheshortcomingsofthedeadlockedDohaRoundWTOnegotiations,thebestframeworkforsuchaninitiativeisstilltheWTO.NotonlydoesitalreadycontaingeneralprinciplesonMFNstatus,nationaltreatment,generalexceptionsandtherighttoregulate,amongotherkeyelements,butitalsohasthemosteffectivesystemunderinternationallawtosettledisputesbetweenstates.Theshapeofsuchanagreementandwhatflexibilitieswouldbeavailableforspecificcountriesaremattersthathavetobediscussedandsettledduringthenegotiations(Jara2013).
ZhangandWang(2014)haveshownthataforeigninvestmentframeworkcouldbeobtainedbyconsolidatingtheworkdonebytheG20,UNCTADandtheOECD.Butitshouldgofurther,toahigher-levelarrangementthatrealisesanintegratedframeworkbeyondTRIMs.Itisimportantthatasingleagreementatthemultilaterallevelbetheultimategoal.Basiccomponentsshouldincludetransparencyoninvestmentpolicies,rulesandregulations,withaclearidentificationofagenciesresponsibleforissuingrelevantlicenses,permitsandapprovals.Foreigninvestorsshouldalsoberequiredtocommittotransparencyintheirlabourandenvironmentalstandards,andpublicscrutinyoftheirconformance.
Thethirdcomponentforaddressingtheglobalinvestmentchallengerelatesspecificallytoinfrastructureinvestment.AccordingtotheOECD,totalglobalinfrastructureinvestmentrequirementsby2030fortransport,electricitygeneration,transmissionanddistribution,waterandtelecommunicationswillcometoUS$71trillion,orabout3.5percentoftheannualglobalGDPfrom2007to2030(OECD2012).Howeveritiswidelyrecognisedthatpublicinvestment,includingthatfromthemultilateralandnationaldevelopmentbanks,willbeinsufficienttomeettheglobalshortfallininfrastructureinvestment.Greaterprivatesectorinvestmentininfrastructurewillbefundamental.Althoughinvestmentopportunitiesareplentifulacrossdevelopedanddevelopingcountriesalike,investorsarenotfullyseizingthem—oftenduetogapsinthedomesticinvestmentenvironment(OECD2012).
InfrastructureinvestmentisasignificantdomesticpriorityforthegovernmentsofbothAustraliaandChina.Thereareanumberofbenefitstobothcountriesfromsupportingacontinued,andgreater,internationalfocusonthisissue,bothasparticipantsintheglobaleconomyandforcountry-specificreasons.
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ThecommoninterestsbetweenAustraliaandChinaoninfrastructureinvestmentshouldbecapitalisedonwithininternationalforumsandinstitutions.ThefocusofthecollaborationeffortsbetweenAustraliaandChinashouldbeonmaintainingastrongfocusthroughChina’sG20presidencyoninfrastructureinvestment.Asdiscussedearlier,thisisacross-cuttingthemethatiscapableofassistingonmultiplefronts—includinggrowth,macroeconomicpolicycoordination,development,trade,energyandclimatechange.Infrastructureinvestment,particularlythroughtheG20’stwo-in-fivegrowthagenda,hasthecapacitytobridgethegapintheinternationalcommunityontheneedformacroeconomicpolicycooperation.Itprovidesamuch-neededframeworkforsurpluseconomiestoincreasepublicinvestmentandcontributetoglobalaggregatedemandwhiledeficiteconomiesundertakecommensuratestructuralreformtoboostthesupplysideoftheireconomies.
ChinashouldbuildontheeffortsofAustraliaandTurkey,utilisingtheG20growthstrategyandmutualassessmentprocessestodeliverambitiouscommitmentsfromG20membersand,fromTurkey’spresidency,usingtheestimated1percentagepointincreaseintheaggregateG20investment-to-GDPratioasameansfortargetingG20efforts.ThereiscontinuedscopeforgreaterpublicinvestmentfrommanykeyG20countriesaswellasincreasedeffortsacrossthemembershipinimprovingdomesticinvestmentenvironmentsandidentifyinginnovativewaysofcrowdinginprivatefinance.
AustraliaandChinashouldusetheirinfluenceintheG20toachievebettercooperationandsynergiesbetweentheAIIBandNewDevelopmentBankwithexistingmultilateraldevelopmentbanks.ChinahasalreadyoutlinedthisasapriorityintheconceptnoteforitsG20presidency.Thereshouldsimilarlybeanincreasedfocusoncoordinatingfundingbetweenthesedifferentinstitutions,centredonaconcretelistofbankableprojectsthatcouldbedevelopedthroughG20support.TheG20shouldcontinuetosupportanddrivetheeffortswithindevelopmentbankstooptimisetheirresourceswithaneyeonhowbesttoleverageprivate-sectorfinance.
supporting global energy governance reform and action on climate change
Theexistingarchitectureforglobalenergygovernancehasbeendescribedas‘amess,withmanyactors,manypriorities,littlecoherenceandlimitedeffectiveness’(Florini2012).Therearecountlessmultilateral,regionalandbilateralinitiativesrelatingtoenergy.Figure8.10givesasnapshotofjustafewofthemandshowshowAustraliaandChinafitinwiththisbroadframework.
Theneedforglobalenergygovernancereformiswellrecognised,particularlybytheG20,whichhashadaspecialfocusonthisissueinrecentyears.Theglobalenergysectorhasundergone,andcontinuestoundergo,significanttransitions.WorldenergyconsumptionandtradeusedtobedominatedbythedevelopednationsoftheOECD,butnowmajordevelopingnationslikeChina,IndiaandBrazilareamongstthelargestplayers(Hirst2012).Countries,likeChina,whichjustafewyearsagoweremajorenergyexporters,havebecomeenergyimporters.Chinaisnowtheworld’slargestenergyconsumerandtheworld’slargestoilimportingcountry.TheUnitedStates,whichusedtobethelargestoilimporter,hassimilarlymadespectaculartechnicalprogressinoilandgasproductionandisnowheadingtowardsself-sufficiency.
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Globalenergygovernancehasnotkeptupwiththesetransitions(Hirst2015).Itisnowwidelyrecognisedamongpolicymakersandcommentatorsalikethattheglobalenergygovernancearchitectureneedstobereformed.Atpresent,thereisnogenuinelyglobalenergyorganisationthatcanbringthemajorenergyconsumercountriesaroundtotabletoaddressthecoreenergychallengesofsecurity,equity,developmentandtheenvironment(Hirst2015).
Figure 8.10: Australia and China within the global energy governance architecture
China
Australia
IEA
CEM
G20
IEF
OPEC
United StatesBahrainAzerbaijan
Afghanistan
India
Libya
Algeria
Angola
UAE
Kuwait
Turkey
Russia
ArgentinaUganda
Zambia
Yemen Singapore
SomaliaSenegalSyria
OmanMali
Malta
Malaysia
Kenya
Gabon
Jordan
Guinea
Eritrea
Djibouti
Ethiopia
Egypt
Comoros
Chad
Bulgaria
BruneiDarussalam
Colombia
Burkina Faso
Kazakhstan
Lebanon
MauritaniaPhilippines
Panama
Sudan Pakistan
Sri Lanka Mozambique
Nigeria
MoroccoVietnam
Tunisia
Tanzania
Nigeria
Qatar
Venezuela
Saudi ArabiaEcuador
Iran
Iraq
United Kingdom
Indonesia
Ireland
South Africa
Hungary Austria
GreeceBelgium
Czech Rep
Slovak Rep. Luxembourg
KoreaSpain
JapanGermany
Canada FranceItaly
DenmarkSwedenNorway
Finland
Brazil
PortugalPoland
SwitzerlandNew Zealand
Netherlands
EU
UAE
Mexico
Bangladesh
Acronyms:OrganisationofPetroleumExportingCountries(OPEC),InternationalEnergyForum(IEF),InternationalEnergyAgency(IEA),Groupof20(G20),CleanEnergyMinisterial(CEM).Source:Authors’schema
Thefactthatmajoremergingmarketanddevelopingeconomiesareunderrepresentedintheglobalenergygovernancearchitectureisaseriousproblemforseveralreasons.First,itlimitsthescopeforglobalcooperationonenergypolicy,whichiscriticalinaddressingbroaderchallengesarounddevelopment,infrastructure,theenvironmentandclimatechange.
Second,amajorobjectiveofinternationaldiplomacymoregenerallyisinmanagingtheinclusionofthesenewpowersinglobalgovernancesothattheymakepeacefulcontributionstoworldleadership.Thisisespeciallytrueinthefieldofenergy,whichhashistoricallybeenasourceofconflict.
Third,theInternationalEnergyAgency’s(IEA)limitedmembershipunderminesglobalenergysecuritybyweakeningtheIEA’semergencyoilplans.TheseplansrelyonIEAmembersholdingstrategicoilreservesequivalentto90daysofimports.Themorecountriesthatareabsentfromthesearrangementstheweakerthesereservesare.Hirst(2015)hassimilarly
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shownthattheexistinggovernancestructurepreservesthedividebetweendevelopedanddevelopingcountries.TheIEA’srestrictedmembershipresultsinitbeinginsufficientlyengagedontheenergychallengesfacingdevelopingnations,particularlydevelopmentandaccesstoaffordableenergy.Thisleavesabiggapattheheartofitsprocess.
Finally,theexistingfragmentedgovernancearchitecturehasresultedinaseriouslackofcooperationonspecificareasofenergytechnologyandpolicy.Technologycollaborationhasrightlybeenidentifiedasacrucialdimensionofclimatechangemitigationand,asdescribedabove,thishasledtothecreationofanumberofnewcollaborationsinthemostimportantareas.Unfortunately,mainlyduetothelimitedmembershipoftheIEA(andnotwithstandingthefactthattheIEA’stechnologynetworkshavebeenopenedtonon-membersoftheIEA),thesecollaborationshavegenerallynotbeenbuiltontheIEA’snetworksbuthave,tosomeextent,duplicatedthem(Hirst2012).Thereisanobviousneedforbettercoordinationofthesebodiesthroughbroadergovernancereform.
the benefits of governance reform to Australia and china
TheenergysectorplaysavitalroleinboththeAustralianandChineseeconomies.Giventhesignificantextenttowhichthissectorisshapedbyglobalforces,AustraliaandChinahaveastrongcommoninterestinensuringtheyareactivelyparticipatinginglobalenergypolicymakingandinshapingtherules,normsandinstitutionsthatwillgovernthissectorintothefuture.
TheslowdowninglobalcommoditypricesandthedeteriorationinAustralia’stermsoftradeinrecentyearshaveillustratedtheextenttowhichglobalforcesshapetheAustralianeconomythroughitsenergysector.Australiaistheamongtheworld’slargestexportersofLNG,coalanduranium,andAustralia’simportancetoglobalenergymarketswillcontinuetogrow(DepartmentofIndustry2014).
Chinaistheworld’slargestenergyconsumerandhasbeenthekeydriveroftheincreaseinenergyconsumptiongloballyoverthelast10years(EIA2015).In2009,itwentfrombeinganetexportertoanetimporterofcoalforthefirsttimein20years.Itisnowthelargestproducerandconsumerofcoalintheworldandaccountsforalmosthalfoftheworld’scoalconsumption.Chinaissimilarlytheworld’ssecond-largestconsumerandimporterofoilandthefourth-largestconsumerofnaturalgas.
MultipleAustralianprimeministershavenotedthedeficienciesintheexistinggovernancearchitectureandtheneedforreform.PrimeMinisterTurnbullinNovember2015said‘thereformoftheInternationalEnergyAgencyisveryimportant…theIEA’smembershipshouldreflecttherealityoftheenergyproducersandconsumersof2015,notthe1970s’(Turnbull2015).Similarly,forChina,inaspeechinAbuDhabiin2012,thenpremierWenJiabaohighlightedthedeficienciesintheexistingarchitectureandproposedmultilateralcooperationonenergy‘withintheframeworkoftheG20’ChinahassincebeenastrongsupporterandadvocatefortheG20’sworkonreformingglobalenergygovernance(Hirst2012).
Importantly,theUnitedStatesandotherkeycountriesarealsostrongsupportersoftheG20’seffortstoreformtheglobalenergyarchitecture.WhenSecretaryofState,HillaryClintonadvocatedforChineseandIndianmembershipoftheIEA(Hirst2012),andHenryKissinger,thefoundingfatheroftheIEA,hascalledfortheevolutionoftheinstitution,notingthatit‘standsatacriticaljuncture’(Kissinger2009).IntheirNewDelhisummit
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communiqué,theBRICSnationshavesaidthat‘strengtheningrepresentationofemerginganddevelopingcountriesintheinstitutionsofglobalgovernancewillenhancetheireffectiveness’(BRICS2012).
EnsuringsecurityandtheroleofstrategicoilstockpilesaresimilarlyimportantissuesforbothAustraliaandChina,fordifferentreasons.Chinahasbeenbuildingitsoilstocksforsometimenow(Hirst2012).Australia,ontheotherhand,doesnotstockpileoilreserves.Asaresult,AustraliahasbeeninbreachoftheIEATreatyforsometime.ThisgivesAustraliaastrongincentivetoworkwiththeIEAandemergingeconomies,particularlyChina,inhelpingshapetherulesandnormsthatwilloperateintothefuture.
supporting the g20’s progress in reforming global energy governance
WhiletheG20hasmadesignificantprogressontheissueofglobalenergygovernancereform,thereisstillmuchworktobedone.ItisintheinterestsofAustraliaandChinatosupportthisincrementalprocessandtheChineseG20presidencyprovidesauniqueopportunitytodoso.
Althoughtherewassomediscussionofenergytopicsin2012and2013,itwasnotuntil2014,undertheAustralianpresidency,thatenergybecameamajorpartoftheG20’sremit.Hirst(2015)outlinesthreehighlysignificantdevelopmentsfromthe2014G20summit:first,leadersagreedtoworktogethertoachievenine‘G20principlesonenergycollaboration’,includinghavingenergygovernancereflecteconomicreality;second,leadershadG20energyministersmeetin2015andreportonthewayforward;andthird,leadersconsolidatedtheroleoftheG20energysustainabilityworkinggroupasaregularforumforG20seniorofficials.
Itisimportantnowtobuildonthispositivemomentum.ThisshouldfollowthepragmaticapproachthathasbeenadoptedbytheG20,whichfocusesonbuildingandadaptingexistingorganisationsandensuringthattheyworktogethereffectively.HirstsuggeststhatapracticalwaytodothiswouldbetohavetheG20’sEnergySustainabilityWorkingGroupcommissionfromthemaininternationalorganisationstheiranalysesoftherolestheycanplayindeliveringtheprinciplesagreedbytheG20,includinghowtheycancooperatewithotherorganisations,theactionsthattheyareplanningandanygapsthattheysee.
G20energyministerscouldreporttoleadersonprogress,offertheirsuggestionsonhowtoimprovecooperationbetweentheorganisationsandfillgapsinthedeliveryoftheprinciples.TheIEAhasavitalroletoplay,especiallyinhowitrespondstotheG20’scallsto‘makeinternationalenergyinstitutionsmorerepresentativeandinclusive’.TheIEAcouldconsiderfurtherstepstowardscloserrelationswiththeotherpartnercountriesintheAssociationinitiative.
climate change and energy transformation
ChinaandAustraliabothhaveavitalinterestinstrongglobalactiontolimitfutureclimatechange.Bothcountriesareparticularlyexposedtotheexpectedfutureimpactsfromclimatechange,whichwouldbringsignificanteconomicandsocialrisks.TheUNParisAgreementonclimatechangeprovidesasolidbasisfornationallydeterminedyetinternationallyagreed,andtosomeextentcoordinated,actiononclimatechange.
TheParisAgreementsetsoutastronglong-termglobalambitionoflimitingglobalwarmingtolessthantwodegrees,thatwasagreedtobyallcountries.Itputsinplaceasystemofnationallybasedpledgesforemissionstargetsandactions,andamechanismforregularreviewandratchetingupofnationalpledges.BothChinaandAustraliahavebeensupporters
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oftheagreement,andintheirrespectivecapacitiescontributedtothesuccessfulconclusionsofthenegotiationprocess.Bothcountriescanpositionthemselvestomaximisegainsfromsuccessfulglobalactiononclimatechange.
Aspartofthis,thereareopportunitiesforAustraliaandChinatojointlydevelopnewstrategiesforgrowthinbothcountriesbasedonthelow-carbontechnologiesofthefuture.SuchstrategiescouldentailAustraliasupplyingresourcesandenergy,aswellasspecialisedknowledgeservices,andChinautilisingAustralia’sinputstosupportitsindustriesandthenprovidecapitalforinvestmentsinAustralia.Thispatternissimilartowhatisalreadystartingtooccur.However,thenewwavesofeconomicintegrationandgrowthwouldrelyondifferentresourcesandnewtechnologies.
Chinaisstrengtheningitsclimatechangepolicyportfoliowiththeaimofachievinga60to65percentreductionintheemissionsintensityofitseconomy(theratioofcarbondioxideemissionstoGDP)in2030comparedto2005,withapeakincarbondioxideemissionsby2030orearlier.The2020targetisa40to45percentreductioninemissionsintensityrelativeto2005(GovernmentofChina2015).
Chinaisontracktoachieveits2020target,andcanachieveoroutperformthe2030targetifthecurrentpolicyeffortisintensified.Thetargetsrequireanaverageannualreductioninemissionsintensityofaround4percent.Chinahasachievedthisonaverageoverthelast10years,largelybywayofreducingtheenergyintensityofitseconomy(Figure8.11).Thiswasmadepossiblethroughimprovementsinenergyefficiencyandstructuralchange.China’sslowingeconomicgrowthisnowtendingtomakeitmorechallengingtoachievethe4percentannualdecarbonisationrate.However,ifthatratecontinuestobeachievedthenaslowingeconomymeansthatthepeakinemissionswillbeachievedearlier.
Figure 8.11: China’s annual growth in gDP, CO2 emissions, energy and emissions and energy intensity, 2005–2014
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GDP CO2 emissions Energy use Energy intensity of GDP (Energy/GDP)
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Source:BP2015(fortotalprimaryenergyuseandCO2);IMF2015a(forGDP).
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Infuture,limitingandthenreducingemissionswillrequiremuchgreaterstructuralchangeinChina’seconomytowardshighervalue-addedactivities;continuedimprovementsinthetechnicalefficiencyofpowergeneration,industry,transportandhousing;andasustainedshiftawayfromcoalasthemainstayofenergysupplytowardsrenewableenergy,nuclearpowerandgas,withremainingcoalusepotentiallyequippedwithcarboncaptureandstoragetechnology(DeepDecarbonizationPathwaysProject2015;Tengetal2014).Thesechangesarealreadyunderwayanditisexpectedthattheycanbesustainedatrelativelyhighannualratesfordecadestocome(JotzoandTeng2014).
Australia’snationalemissionstargetisareductionof26to28percentinemissionslevelsat2030relativeto2005(DepartmentoftheEnvironment2015).Achievingthiswillrequireaturnaroundinemissionstrends.Itistechnologicallypossibletoachievethisandmoreambitioustargets,includingnetzeroemissionsbymid-century(Denisetal2014).Thekeyisasustainedshiftfromcoaltowardsrenewableorotherzero-carbonenergysources,acceleratedimprovementofenergyefficiencyandsequesteringcarbonemissionsontheland,includingthroughforestplantations.
ArecentstudyofAustralia’soptionsforfuturesustainabilityandeconomicgrowth(Hatfield-Doddsetal2015)foundthatAustraliais‘freetochoose’atrajectorythatwillresultinbetterlong-termenvironmentaloutcomesandsustainedeconomicgrowth:thetechnicalopportunitiesarethere,butthenewtechnologiesandactivitieswillbecomewidelyusedonlyifthereisdeliberateandbroad-basedpolicyintervention.
Benefiting from low-carbon growth
Chinahasrecognisedtheopportunitiesfromlow-carbongrowthandhasbeguntograsptheminanumberofareas,ashavesomeWesterncountries.Archetypalexamplesarerenewableenergysystems,whichduringthelastdecadehaveseenmassiveimprovementsintechnologyandcosts,andtheemergingwaveofelectricvehicles.ForChinatoachievethetransitiontoaninnovation-driveneconomywithanenvironmentallysustainabledevelopmenttrajectory,Chinawillneedtoinvestsignificantlyinresearchanddevelopmentandknowledgeindustries(JinandZhang2016).
InAustralia,policydevelopmentandbusinessinvestmentonthewholehasbeenmoredefensivetodate,witharelativelystrongemphasisontraditionalresourceextractingindustries.ToquoteMartinParkinson(2015):
Thiscapacityfortechnologicalleap-frogging,combinedwiththeneedtoaddressglobalandgeographicallyspecificenvironmentalproblems(i.e.climatechangeandairandwaterpollution),liesbehindChina’smassiveinvestmentsinlow-emissionstechnologies.TheUSisalsoinvestingmassivelyinthesetechnologies.Australiaisnot.
ReducingcarbondioxideemissionsgoeshandinhandwithotherChinesepolicyobjectives,includingimprovingairquality,improvingenergysecuritybyshiftingawayfromfossilfuelsandtheemergenceofnewmanufacturingindustriesintheproductionofwindturbinesandsolarpanels,forexample(TengandJotzo2014).
ItislikelythatChinaisalreadypastthepointofpeakconsumptionofcoal,astheproductionofcommoditiessuchassteelandcementisdeclining,theefficiencyofcoalusekeepsimprovingandalternativeenergysourcesaregrowing.China’scoalimportshavefallenandathree-
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yearbanonapprovalsofnewcoalmineshasrecentlybeenputinplace.Therateofemissionsgrowthhassloweddramaticallyinthepasttwoyears,andsomeobserversbelievethat‘peakCO2’couldoccursoonerthanisimpliedinChina’semissionstargets(GreenandStern2015).
ForAustralia,themostsignificanteffectsarerelatedtoexportsofenergyandenergy-intensiveproducts.Alow-carbontransitioninChinaandgloballyposesnear-termdifficultiesforsomeindustries,butalsolonger-termopportunities—potentiallyofverylargemagnitudes—forothers.
Internationalmovestowardslower-carbonenergysystemsmeanlessfavourableconditionsfortheexport-orientedfossilfuelindustry,inparticularforproducersofthermalcoal(asdistinctfromcokingcoalusedforsteelproduction).Globalcoaldemandgrowthhasbeentailingoff,andsteamcoalpriceshavefallen(byaround60percentoverthelastfiveyears)(WorldBank2016).
CoaldemandcontinuestoriseinmanydevelopingcountriesincludingIndia,butthisgrowthcannotlastiftheworldistoachievemeaningfuloutcomesonclimatechange.Eveniftechnologytousecoalwithcarboncaptureandstoragebecametechnologicallymature,thelonger-termoutlookforglobalcoaldemandisweakening.
DemandinChinaandgloballyfornaturalgas,bycontrast,isincreasingandisprojectedtoincreaseforsometimegivenincreasingclimateaction.Gasismuchlowerincarbondioxideemissionsthancoal,andisasuitablebridgefromcoaltoazero-emissionsenergysystem.ItalsoburnsmuchmorecleanlythancoalandisthereforeattractivetoChinaandmanyothercountriesinthebidtoreduceairpollution.Australia’sgasindustryisbenefitingfromstrongglobaldemand.Demandforuranium,whichAustraliaalsoexports,issettoincreaseaswell.
Inthelongertermhowever,Australia’sopportunitiesasanenergyproducerlieinentirelynewindustries.Australiahasverylargetechnicalandeconomicpotentialtobecomean‘energysuperpower’inacarbon-constrainedworld(Garnaut2015).
Australia as a zero-carbon energy supplier to china
Achievingtheglobalgoaltokeeptemperaturerisestowellbelowtwodegreeswouldrequireacompletede-carbonisationoftheworld’senergysystem(IPCC2014).ThepaceanddepthofthistransitionlargelydetermineshowclosetheworldcangettothegoalsetoutintheParisAgreement.
InscenariosrunbytheDeepDecarbonisationPathwaysProject(DDPP2015),adetailednationallygroundedtechnicalstudy,underatwo-degreecompatibletrajectory,electricitybecomesnearlycarbon-freeby2050,withaveragecarbonintensityacross16majorcountriesreducedbyafactorof15belowits2010value.TheChineseDDPPstudyshowsascenariowithdramaticallyreducedemissionsbyshiftingelectricityproductiontoamixofrenewablesourcesandnuclearpowerandbyequippingthemajorityofremainingfossilfuelpowerplantswithcarboncaptureandstorageby2050.
Australiaisinafavourablepositionasalargescaleproducerofrenewableenergy,onaccountofitspracticallyunlimitedaccesstoarangeofdifferentrenewableenergysourcesincludinghighinsolationrates,largeamountsofavailableland,extensivetechnicalexpertiseandbusinessframeworksinenergyindustries,andacomparativelystableregulatoryandinvestmentenvironment.Australiaisthuswellplacedtosupplyalargeshareofitsdomesticenergyusefromrenewableenergysources.
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Agloballow-carboneconomycouldbringnewandlarge-scalecomparativeadvantageforAustralia.First,Australiacouldbeaproducerofenergy-intensivecommoditiesusingzero-emissionselectricity(Denisetal2014).Thiscouldinclude,forexample,aluminium,whichrequireslargeamountsofelectricitytoproduce.GiventhatthemajorityofAustralia’sheavyindustryinstallationsarerelativelyold,thiswouldmeanbuildingupanewstockofindustrialinfrastructure.
Second,Australiacouldbeanexporterofrenewableenergy,producingfuelssuchashydrogenormethanolinAustraliausingrenewableenergyandexportingthesetothedenselypopulatedareasofEastAsia(Drew2015).Producingandshippingsyntheticrenewablefuelswoulddrawonabroadlysimilarengineeringbaseandindustrialstructuresasexistingindustriessuchasnaturalgasproductionandprocessing.
ThepotentialforAustraliaasalargeproducerofzero-carbonenergyisobvious;however,theprospectsforbuildingexportindustriesbasedonthatpotentialrequiremuchfurtherinvestigation.Researchisneededinto:thetechnologicalbasisforproducingexportablerenewableenergyandenergy-intensiveproductsusingrenewableenergy;whetherandtowhatextentAustraliahasacomparativeeconomicadvantageandcostadvantagethatwouldwarrantproductionforexport;towhatextentsuchenergyandenergy-intensiveproductscouldfitinwithChina’sfutureenergyandindustrialsystem;andwhatpolicyandregulatoryframeworkswouldbeneededtofacilitatethedevelopmentofthesetechnologiesandindustries.
Thepotentialbenefitsofarenewables-basedenergyexportindustryforAustraliainadecarbonisedworldeconomyareverylarge,asarethepotentialbenefitstoChinaofhavingasecuresourceofsuchlow-carbonenergyandenergyintensiveproductstosupplementdomesticproduction.
A new agenda for cooperation
AustraliaandChinacanbenefitbybroadeningandextendingthebilateraldialogueandcollaborationonclimatechangemeasuresandthetransitionofenergysystems.
Afirstplankistointensifygovernment-to-governmentcooperationonclimatechangeissues.TheParisAgreementhaspreparedthegroundforanewphaseofinternationalcollaborationsonclimatechange.AustraliaandChina’sobjectivesonclimatechangearecompatibleandcomplementary.Thetwocountriescanbuildonavarietyofforumsfordialogueattheofficialandpoliticallevel,includingtheministerial-levelconsultationsonclimatechangethathavetakenplaceonseveraloccasionsandtheAustralia–ChinaClimateChangeForumsheldattheANUandtheUNSWinrecentyears.
Second,thetwocountriesshouldstrivetofacilitatebusinessandinvestmentrelationshipsintheareasofclimatechangeandlow-carbonenergy.Thismayinvolvereducingremainingregulatoryhurdlestoinvestmentinnewenergytechnologies,especiallyforChineseinvestmentinAustralia.Thetwocountriescanalsostrivetoenhanceknowledgeexchangeatthebusinesslevel.Thereisalsoacriticalopportunitytobetterinvolvethefinancialsectorcooperativelyacrossbothcountriesthrough‘greenfinance’.AspartofabroaderfocusofintegratingfinancialservicesandfinancialflowsbetweenAustraliaandChina(discussedindetailinChapter5)bothcountriesshouldexplorehowcooperationonfinancialproductsandfinancialservicescanbetailoredtoimproveaccesstofinanceforgreenprojects,suchasinvestmentinrenewableenergyandlow-carbontechnologies.
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Third,experiencehasshownthatactivesupportbygovernmentsforresearchinenergytechnologydevelopmentcanbringsubstantialbenefitsinacceleratingtechnologicalchange.Chinahasprovidedsubstantialsupportinmanydifferentformstothedeploymentofrenewableaswellasnuclearenergy,andadvancedenergy-savingtechnologies.InAustralia,therearenewgovernmentinstitutionsthathaveprovedsuccessfulinsupportingthedevelopmentanddeploymentofcleanenergy,especiallytheAustralianRenewableEnergyAgency(ARENA)andtheCleanEnergyFinanceCorporation(CEFC).ThesemodelsmaybeattractiveforChinaalso.Themodelofco-financingcommercialinvestmentsincuttingedgecleanenergyviaagovernment-financedbodyliketheCEFCmayprovesuccessfulinstimulatinginvestmentinnewenergyoptionsintheAsianregion.OptionstolinkthistooperationsoftheAIIBmaybeworthinvestigating.
Finally,collaborationshouldbefosteredbetweenresearchorganisationsanduniversitiesinAustraliaandChina,intheformofjointinitiativesonscientificresearchandengineeringaswellaseconomicandregulatoryframeworks.PromisingmodelsexistsuchastheAustralia–ChinaResearchProgramonClimatePolicy,whichhasbroughttogetherresearchersfromseveralleadingAustralianandChineseuniversitiestoworkonspecificjointresearchprojects.Theprogramhasoperatedatrelativelysmallscale,convenedattheANUandwithparticularsupportatTsinghuaUniversityinChina.Itcouldbereadilyexpandedtocoverabroaderrangeofissuesandawiderrangeofresearchinstitutions,andscaleduptoanationalinitiativeinbothcountries.
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CHAPTER9conclusions
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Conclusions
ChinaandAustraliaarenaturaleconomicpartners.China—already,ononemeasure,thelargestnationaleconomyintheworld—hasreliedonAustraliafortherawmaterialsitrequiredtoindustrialise;Australia,asmallopeneconomydependentontrade,hasoutperformedmostofitsadvancedcountrypeersthanksinnosmallparttoitstradewithChina.AsthenextphaseofChinesedevelopmentproceeds,thereiseveryreasontobelievethatthisrelationshipcanbecomeofevengreaterimportancetoChinaandtoAustralia.ChinaandAustraliaalsoshareaprofoundcommoninterestintheevolutionofinstitutionsofregionalandglobalgovernanceandcooperationtoreflecttherealitiesofthe21stcentury.Inthissense,theChina–Australiarelationshiphas,ifstewardedwithprudenceandforesightbythepublicandprivatesectors,thepotentialtobecomeapowerfulforceforstabilityandprosperitybeyondthebilateralrelationship.
ThereisnoeconomicorgeopoliticalfutureforChina,AustraliaortheworldthatwouldnotbeimprovedbyChina’ssustainedandbalancedeconomicgrowth.AndyetthefuturedirectionofChinesegrowthwillbeverydifferentfromthatoverthepastfourdecades.TheforcesofchangethathavealreadyunleashedawaveofconsumptiongrowthareaffectingtherelationshipwithAustraliaprofoundly.EconomicreformandliberalisationcanintensifytheongoingchangeinthestructureoftheChineseeconomyand,whilethesechangesimplyalessheavyrelianceinAustraliaontheresourcesectorforeconomicgrowth,thereareopportunitiesforgrowthinagriculture,advancedmanufacturing,investment,finance,healthcare,education,tourismandotherservices.Buttheseopportunitieswillnotmaterialiseautomatically;theirbenefitscanonlybebroughttofruitionthroughconcertedreformandactiononbothsides.Itwillrequiresubstantialrepositioningofpolicyandcommercialstrategiesbybothcountriesandthedevelopmentofastillcloserrelationshipbetweenthetwocountries.
Therecenthistoryofthegrowingtiesbetweenthetwocountriesshowsthatthedeterminedpursuitofadeeperrelationshipyieldstangiblebenefits.TheinstitutionsandpolicyframeworksthathaveemergedtoprovidestructurefortherelationshipinrecentyearsprovideastrongstartingpointforthenextphaseoftheChina–Australiapartnership.
AustraliahasembracedChina’sopennessandreformasacriticalfactorinAsianprosperityandstability,andChinahasembracedthepartnershipwithAustraliaasastrategicelementinitsforeigneconomicpolicystrategies.Bothcountrieshaveinvestedheavilyintheirpartnership.Thepath-breakingrecordoftheAustralia–Chinapartnershipinopeningtheresourcetrade,foreigninvestment,regionalcooperationinitiativesandChina’saccessiontotheWTOprovidesalegacyonwhichtobuildnewinternationalstandardsintotheirbilateraltrade,investmentandallotherdealings.Theirhigh-levelComprehensiveStrategicPartnershipandtheChina–AustraliaFreeTradeAgreement(ChAFTA)aremajorinstitutionalassets,embodyingmutualtrustandpracticalcommitment,thatcanbedeployedtomanagechangeoverthedecadesahead.Stillcloserengagementandinstitutionalarrangementsareneededtocapitaliseontheopportunitiesthatthesefoundationspresent.
ChAFTAisablueprintforinitialchange,notanend-pointinthebilateralrelationship.Ajointworkplanforachievingchangewillnotonlydefineprogressinthebilateraltrade,investmentandcommercialrelationshipoverthecomingdecade;itwillalsoprovidethefoundationforAustraliaandChinapushingliberalisationandreformintheAsianregionandsettingoutthepathwaytowardsreformandstrengtheningoftheglobaltradeandeconomicsystems.
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Thescaleandsignificanceofdevelopmentsthatarenowtakingplace—especiallyinChinathroughitsadvancetowardsahigh-incomeeconomyanddeeperfinancialintegrationwiththeworld—recommenddeeperbilateralinstitutionalarrangementsbetweenAustraliaandChina.Thesearrangementswouldbuildonexistingbilateralframeworks,includingintheareasofinvestment,tourism,peoplemovement,scienceandeducationalexchanges,withboldnewbi-nationalinitiatives.Theywillneedtobedirectedatcapturingtheopportunitiesintherelationship,andmanagingtherisksandprocessesthatareaninevitableconsequenceoflarge-scaleeconomicandsocialchange.
Bothcountrieshaveadeepintersectionofinterestsinworkingtogethertostrengthentheestablishedregionaleconomiccooperationarrangements(suchasAPEC,theASEANPlusframeworksandtheEastAsiaSummit)andtosecuretheframeworkofpoliticalconfidenceandsecuritywithinwhicheconomicprosperitycanbeattained.ButtherearegapsinregionalpolicystrategiesthatAustraliaandChinamustnowworkmoreactivelywithregionalpartnerstofill.
TheAustralia–Chinarelationshipisanchoredinglobalinstitutionalandpoliticalarrangements.Australiahasadirectandimportantstake,inpartnershipwithChina,inworkingtoensureChina’ssuccessintheassumptionofitsroleofsharedleadershipinglobaleconomicaffairs.
AustraliaandChinashouldaspiretoabilateralrelationshipofthehighlevelandscopethattheyestablishedduringthefoundationalperiodofeconomictiesinthe1980s,whentheyagreedona‘modelrelationship’forcooperationbetweencountrieswithdifferentsocialsystemsandatdifferenteconomicstagesofdevelopment.TheenormoustransformationofChina’seconomicmodelandtheimpactthatthisishavingontheAustralianeconomycallsfortheelevationandcalibrationoftheirpartnershiptoachievethesegoals.
new model for the relationship
• TheframeworkofanewmodelforeconomiccollaborationrequirestheAustralianandChinesegovernmentstoelevatetheAustralia–Chinarelationshiptoaunique,higherlevel,inaComprehensiveStrategicPartnershipforChange.ThispartnershipshouldpromotechangethroughtheachievementofjointgoalsinthebilateralrelationshipandforgecommonprioritiesandinitiativesonregionalandglobalissuesthroughtheStrategicEconomicDialogueandparallelministerialmechanisms.
• TheAustralianandChinesegovernmentsshouldunderpintheirStrategicEconomicDialoguewithjointpolicytaskforcesandworkinggroupsonpolicyandinstitutionalchangethat:
– developinitiativesonissuesflowingfromthedialoguesandothercommitments;
– workwithstateandprovincialauthoritiesindevelopingtheseinitiatives;
– encourageprogramsofresearchwithinandbeyondgovernmentandhighereducationalinstitutionsonlonger-termaspectsoftherelationship;
– engagewiththebusinesssectorsinbothcountriesinundertakingtheirwork;
– promotejointtrainingandthedevelopmentoflong-termworkingassociationsinkeyareasamongtheofficialsofbothcountries;and
– reflectuponcommunityinterestsandconcernsinbothcountries.
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• Bothgovernmentsshouldwork,inthedecadeahead,todeveloptheirnewpartnershipintoacomprehensivebilateralframeworktreatythatembedsfrequenthigh-levelgovernmentdialogue;institutionalisesandenfoldsofficialbilateralexchangesandtechnicalcooperationprogramsbetweeneconomicandforeignaffairsministries,includingbranchesofthemilitary;poolsapproachesbetweenfederal–stategovernmentsinAustraliaandcentral–provincialgovernmentsinChina;andprovidesforthecomprehensivesettingofstrategicbilateralobjectivesinaforwardagenda.Thereisprecedentformovingtowardsacomprehensivebilateraltreatyinthe1976BasicTreatyofFriendshipandCooperationbetweenAustraliaandJapan.
• Thehigh-levelcapacitiesnecessarytothisengagementshouldbepromotedthroughtheestablishmentbybothgovernmentsofanindependentandwell-resourcedbi-nationalAustralia–China(Ao–Zhong)Commissiontoboostthelevelandrangeofpolitical,scientific,official,businessandcommunityexchangesbetweenthetwocounties.ItsnearestparallelinAustralianexperiencewouldbethetreatyarrangementbetweenAustraliaandtheUnitedStatesthatestablishedtheAustralian–AmericanFulbrightCommission.TheAustralian–AmericanFulbrightCommissionisanindependentbi-nationalnon-profitorganisation,establishedbyatreatybetweentheAustralianandUSgovernments,thatpromoteseducationandculturalexchangebetweenAustraliaandtheUSthroughmanagingabilateralexchangeprogramstudents,researchersandscholars.
Partners for change
Inthenextdecade,theAustralia–Chinarelationshipwillbere-shapedbythelarge-scaletransformationsnowunderwayineacheconomy.InChina,theeconomicstructureisshiftingtowardstheservicessectorandhigh-technologymanufacturing,whileconsumerspendingisbecomingalargerpartoftheeconomyashouseholdincomesrise.
Chinafindsitselfatapointinitseconomictrajectorythathasinsomeothercountriesprovedchallenging.Somemiddle-incomecountries,especiallyinLatinAmerica,haveseenrelativelyweakgrowthratesandproductivitystagnation.Othercountries,likeJapanandthe‘Tiger’economiesofEastAsia,adaptedtheirinstitutionsandpoliciestothechallengesofmiddle-incomestatusandconsequently‘graduated’tohigh-incomestatusrelativelyquickly(KharasandGill2016).China,AustraliaandtheworldatlargewouldallgainimmeasurablyfromChina’srapidprogressionfrommiddle-incometohigh-incomestatus.Butthepaththroughmiddle-incomestatuswillneedtobesupportedbyreformstoliftChinaupthemanufacturingvaluechainandincreaseproductivityacrosstheeconomy(Huang2016).Theseproductivity-enhancingreformswillsupportChina’seffortstomovefromamodelofgrowthcentredonimitatingideasfromadvancedeconomiestowardsamodelofgrowthbasedondomesticinnovation.
Toliftproductivity,asforeshadowedunderthe13thFiveYearPlan,Chinamustimprovetheefficiencyofinvestment,inpartthroughpushingaheadwithfinancialmarketreforms.Greaterprivatesectorinvolvementinanumberofindustriesstilldominatedbystate-ownedenterprises—suchasbanking,utilitiesandtransport—couldunlockproductivitygainsinthesesectors.ForAustralia,therelativedeclineinitsproductivityperformanceoverthepastdecadecanbeaddressedthroughdomestic-ledinitiatives,suchasimprovinglabourmarketregulation,strengtheningandextendingnationalcompetitionpolicy,andfacilitatingtheefficientallocationandmanagementofinvestmentinsocialandphysicalinfrastructure.
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China’stransformationanddeeperfinancialintegrationwiththeworldwillhaveaprofoundimpactontheinternationaleconomy,includingAustralia.
China’slargeandgrowingmiddleclasswilldemandanincreasinglybroadrangeofgoodsandservices,providingvastopportunitiesforexportersinareasfromfinancialservicestofood,whileamoreopencapitalaccountcouldfundamentallyreshapetheglobalinvestmentlandscape.Chinesespendingoneducation,medicalservices,culturalactivitiesandtourismwillgrowsteeply.Overallretailsalesareexpectedtoincreasebytwo-thirdsbetweennowand2020.WhileAustraliabenefitedmorethanmostfromChina’scommodity-intensivegrowthofthelastdecade,Australiawillneedarenewedfocusonproductivityenhancingreformstocapturetheseemergingexportmarketsandmaintainprosperity.ParticularlygiventhesechangesoccurringinChina,Australiamustalsoadjustitspolicystrategiestohelpfacilitateinnovationandsupporttheup-takeofnewproductiontechnologiesandconsumerservices.Increasingcompetitioninshelteredindustrieswillbecrucialindrivingproductivityandinnovation,aswillremainingopentoforeigninvestmentandskills.
• Tosupporttheeconomictransformationunderwayineacheconomywillrequireacontinuingcommitmenttomarketreformstothosepartsoftheeconomythatremainshelteredfromcompetition,overly-regulatedorwherethedegreeofpublicsectorinvolvementisunwarranted.TheAustralia–ChinaComprehensiveStrategicPartnershipforChangeshouldbeshapedandevolveasacloseworkingpartnershipthatadvancesthereformagendasinbothcountriestopromoteeconomictransformation.
• TheinnovationinbilateralarchitecturethatisproposedcanbealignedundertheAustraliangovernment’sNationalInnovationandScienceAgendaandwiththeChinesegovernment’sprioritisationofinnovationinits13thFiveYearPlan.Thiswouldseetheprioritisationofbilateralcooperationinfutureopportunitiessuchasresearchanddevelopment,capitalsourcing,STEMcollaboration,researchcommercialisation,techlandingpads,thedigitaleconomy,andpeople-to-peopleentrepreneurialexchanges.
Transforming trade and investment
AustraliaandChinahaveastrong,establishedtradeandinvestmentrelationship,builtonthedeepcomplementaritybetweentheireconomiesandtheircloseness,whichisinpartalegacyfromthehigh-levelcommitmenttotherelationshiponbothsides.ThatrelationshipisbasedgenerallyontheexchangeofAustralianrawmaterialsforChinesemanufacturedgoods.AustraliawillcontinuetobeakeyandreliablesourceofrawmaterialstoChina,supplyingmorethanhalfofChina’sironoreneedsandamajorproportionofothermineralsandenergyproducts.Resourcesecurityisprovidedthroughthefunctioningofglobalcommoditymarketstowhichbothcountriesarecommitted.
InlessthanthreedecadesthegeographicalorientationoftheChineseeconomyhaschangedfundamentally,frombeingcontinentallyself-containedtobeingthelargestmaritimeeconomyintheworld.Resourcedependencehasgrownascommoditypriceshavefallenandhigh-costdomesticsuppliershavebecomelessattractivesourcesofindustrialinputs.ThisdevelopmenthasnaturallyandsteadilydrawnChinaintothemaritimeeconomy,includingtheconstructionofhugeseafreightcapacities,interestinmaritimesafety,andconcernaboutsecuringinternationalsupplies.Asoneoftheworld’slargestmaritimeresourcesuppliers,Australiafullyreciprocatestheseinterests.
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ThinkingabouttheimplicationsofChina’smaritimeeconomyhaslaggedbehindthepaceofthischange.ThemajoreffortnowunderwayinChinatoredressthisdeficiencywouldbeassistedbycollaborationbetweenAustraliaandChinaregardingtheimplicationsofgrowingresourcedependencyforresourcesecurity;maritimeresourcedevelopmentandprotection;maritimescientificandweatherresearch;andAustralianparticipationintheMaritimeSilkRoadinitiative.
Theshifttowardsconsumption-ledgrowthinChinaisnowforginganeweconomicrelationshipbetweenAustraliaandChinathatrequiresnewstrategiesandinstitutionalarrangementstosupportclosercommercialengagementinawholerangeofnewmerchandiseandservicestradesaswellascloserinvestmentandfinancialmarketties.Energy,agricultureandfoodproductsprovidesignificantopportunitiesbothtodevelopregionalAustraliaandtomeetnewpatternsofdemandbymiddle-incomeChineseconsumers.DevelopmentgoalsinAustraliaprovidenewopportunitiesforupgradingChina’stradestructureandinvestmentinAustralia’seconomicfuture.
Tosupportthecontinuedeconomicadjustmentinbotheconomies,andtohelpbothsidesweatherthechangestakingplaceintheglobaleconomy,itisnecessarytogobeyondamerelytrade-focusedapproachtoacomprehensiveeconomicpartnership.
• ThisrequirestheelevationoftheAustralia–ChinaComprehensiveStrategicPartnershipintoanAustralia–ChinaComprehensiveStrategicPartnershipforChange(seeabove)andcommitmentoverthenextdecadetoputinplaceatreaty-levelcommitmentcoveringbothcountriesmutualinterestsinopenmarkets,resourceandenergysecurity;sustainableagriculturaldevelopmentandfoodsecurity;andreliableaccessforforeigninvestmentinbothcountries.Itshouldalsoacknowledgetheglobalmarketcontextoftheadjustmentsthataretakingplaceinmaterials-basedmanufacturing(suchassteelproduction)andcommoditymarkets(suchasironore).
• ThisPartnershipcanonlybebuiltonmoreextensivetop-levelexchangesbetweenthetwocountries.AustraliaandChinashouldconcludeaformalagreementtosetupanAustralia–China(Ao–Zhong)Commissiontopromotedeeperexchangesbetweenthetwocountriesassoonasispracticable.
• ChAFTAprovidesafoundationforadvancingtheopeningofnewmarketsandthetransformationofthebilateraltraderelationship.Ahigh-leveljointworkingpartyconsistingofrepresentativesfromgovernmentandbusinesscansupporttheworkoftheAustralia–ChinaStrategicEconomicDialogueinadvancingtheimplementationofChAFTAand,beyondChAFTA,thedevelopmentofreliableinvestmentarrangementsandfinancialandservicemarketopeninginitiatives.
• Deliveringreliabletradeinhigh-qualityfoodproductsandinternationallycompetitivetourismandeducationservicesrequiresadeepunderstandingofeachcountry’sconsumers,andatailoredapproachtotradeandinvestmentincountryandmarketknowledge.Bothcountriesshouldsupportprogramsofpublicandcommercialtrainingandengagementatthenationalandlocallevelsthatwillcontributetotheexpansionofnewmarketopportunities.
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• InvestmentflowsfromChinatoAustraliaandfromAustraliatoChinawillplayacriticalroleinthedevelopmentoftheneweconomicrelationship.Bothcountriesshouldcommittoa‘negativelist’approachtoforeigninvestment,inwhichforeigninvestmentiswelcomedexceptinspecificallydesignatedsectorsoftheeconomy.AnewbilateralinvestmentagreementbetweenAustraliaandChinacanbeconcludedaheadofChineseagreementswiththeEuropeanUnionandtheUnitedStates,andcouldserveasthenucleusofbroaderregionalgovernancearrangementsforbilateralinvestmentflows.
• AustraliashouldprovidereliableaccesstoChineseinvestmentthroughstandardisingthethresholdforscreeninginvestmentsacrossallsources,includingthosefromChina,offeringequaltreatmenttomarket-conformingstate-ownedenterpriseinvestments,andmovingfroman‘applicationandreview’toa‘notificationandcompliance’systemundertheForeignInvestmentReviewBoard(FIRB).ChinashouldprovidereliableaccessforAustralianinvestorsbyestablishingmechanismstoensurethat,aftertheirestablishment,AustralianinvestmentsaresubjecttonationaltreatmentaswellasconsistentandequitableregulatorytreatmentintheChinesemarket.
• Thepartnershipmustbeenabledonbothsidesbytheprovisionofsupportingfinancialinfrastructure(includingaccesstoeachother’sfinancialservicesmarkets),theabilitytomakeinvestmentsthatsupportfurthertradeandservicedelivery,andcontinuedandeasierflowofpeoplebetweenthetwocountries.
• Thefreermovementofpeoplebetweenthetwocountriesforcommerce,business,educationandtourismisimportanttodevelopmentoftheoverallrelationship.Thetwocountriesshouldestablishajointtaskforcewhosemandateistoestablishmost-favoured-nationtreatmentinvisaandothermattersaffectingsojournineachcountry,includingtheexpansionofworkingholidayvisasforyoungpeoplebothways,andopportunitiesforAustralianstoaccessloansforstudyintopChineseuniversities.ThisisaclearareaofmutualbenefitandcouldbeanearlyreformsuccessstoryinthenewAustralia–Chinapartnershipforchange.
• CooperationbetweenAustralianstatesandChineseprovinces,sistercitiesandNGOs,andbilateralcommunityorganisationssuchastheAustralia–ChinaYouthAssociation(ACYA),shouldbeincorporatedintonationalpolicydevelopmentthroughtheexpansionandformalisationoftheroleoftheAustralia–ChinaState/ProvincialLeaders’ForumintoanAustralia–ChinaLeaders’Forum,toidentifyfurtherpracticalareasforcooperation,aswellastobuildtheunderstandingandtrustthatisthebasisofatruepartnership.
• Peakbusinessbodiesinbothcountriesshouldbeencouragedtomakeanongoinginputintothedevelopmentoftherelationshipthroughtheestablishmentoftheirownjointworkingpartiesandtaskforcesaswellastheirparticipationinthoseestablishedbybothgovernments.
• Effective,independentresearchandanalysisandthefosteringofthecapacitiestoundertakeitarecriticaltoeffectiveunderstandingoflonger-termdevelopmentsintheeconomicrelationship.TheChinaEconomyProgramshouldbeencouragedtofulfilitsnationalresponsibilityinbuildingeconomicresearchcapacitieswithinstitutionsacrossAustraliaandpromotingresearchcollaborationwithChinesethinktankssothatthereiseffectiveindependentadviceonlonger-termdevelopmentsintherelationshipavailabletobothgovernments.
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• ThecollaborationestablishedbetweentheChinaCenterforInternationalEconomicExchanges(CCIEE)andtheEastAsianBureauofEconomicResearch(EABER)atTheAustralianNationalUniversityandtheirgovernmentandnon-governmentpartnersinbothcountriesthroughthisstudyprovidesanaturalfoundationforcontinuingtheimplementationoftheinitiativesrecommendedhere,especiallythedevelopmentofcloserresearchandofficialrelationshipsbetweenbothcountriesandthecommitmentstosecondmentofofficialstoanongoingprogramofworkoverthecomingyears.
Financial integration
Chinaisatacriticalpointofitseconomictransition,committedtocontinuedfinancialreformandcapitalaccountliberalisationwhilesimultaneouslymanagingassociateddomesticandexternalchallenges.TheextenttowhichChinacansuccessfullyliberaliseitsfinancialsectortobetterchannelcapitaltothemostproductivesectorsofitseconomywilllargelydeterminewhetheritwillstagnateatmiddlelevelsofincomepercapitaorwhetheritcan,likeitsneighboursinNortheastAsia,rapidlyattainhigh-incomestatus.Australia,Chinaandtheworldatlargehaveeveryinterestinthesuccessofthisendeavour.Similarly,capitalaccountliberalisationinChinawillunlockavastpoolofsavingsandunleashfinancialflowsthatwillprofoundlychangethefinancialstructureoftheregionalandglobaleconomies.Handledintelligentlyanddeftly,thischangewillconstituteapowerfulforceforprosperityintheregion.
ThelessonsofthepastthreedecadesofAsianfinancialhistoryarethatfinancialsectorliberalisationandcapitalaccountopeningmustbemanagedwithcarebypolicymakers,withparticularattentionpaidtothecorrectsequenceofreforms.Chinesepolicymakersareawareoftheneedtoproceedwithprudence.Australiaoffersthepossibilityofa‘testingbed’fortheopeningupofChinesefinancetotheoutsideworld.Australia,meanwhile,mustbecarefulnottosquanderthehistoricopportunitiesinherentinthisfundamentalreshapingofthefinancialgeographyoftheregionandtheglobe.SeizingthepotentialbenefitswillrequireactiveengagementonAustralia’spartwithChinaonthelatter’sfinancialopeningratherthanreactivepolicymaking,or,worse,aturntowardsprotectiveeconomicnationalism.
ThesereformprocessesclearlyhaveparticularimplicationsforthefutureoftheAustralia–Chinarelationshipacrossitseconomic,politicalandsocialdimensions.ButifthegovernmentsandprivatesectorsofAustraliaandChinapositionthemselvesstrategically,thesereformsofferaonce-in-a-lifetimeopportunitytodeepentherelationshipinfinancialservicesandfinancialflows,whicharestillnascentcomparedtotherelationshipinmerchandisetrade.
FinancialservicesarethelargestsinglecomponentoftheAustralianeconomy.WithA$6.4trillioninassets,thefourth-largestsuperannuationsystemintheworld,arobustregulatoryframeworkandoneoftheleastrestrictiveindustriesintheregion,Australiahasaclearcomparativeadvantageinexportingfinancialservicesintotheregion.InvestingindeeperlinksandgreaterengagementwithgrowingChinesemarketsoffersanimmenseopportunitytotheAustralianfinancialservicesindustry.ItisaninvestmentinfuturegrowththatwillbekeytosupportingtheAustralianeconomy’stransitiontowardsservicesfollowingtheminingboom.
ForChina,AustraliaofferstheopportunityofatestinggroundforreformsthatwillsupportChina’scontinuedopeningandfinancialintegration,bothregionallyandglobally.AustraliacansupportChinaacrossthemanyreformsitisundertaking,includingexpandingaccess
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toinsurance,promotinginclusivefinance,raisingtheproportionofdirectfinancialintermediation,liberalisinginterestrates,promotingtheinternationalisationoftheRMB,andhelpingstrengthenfinancialandprudentialregulationandtheinstitutionsthatunderpinit.
Butbuildingthisrelationshipwillnothappenonitsown.Itisanambitionthatwillnotbeachievedquickly.Itwillrequiredeterminationandcommitmentfromthehighestpoliticallevelsandwillbemorechallengingthanwasthecaseinbuildingtherelationshipinmerchandisetrade.AustralianandChinesegovernmentsandprivatefirmsshouldstrategicallypositionthemselvesandbuildtheinfrastructurenecessarytofosterthisrelationshipthroughthefollowingmeasures:
• TheAustralianandChinesegovernmentsshouldengagewiththebusinesssectorsofbothcountrieswhiledevelopingaformalprogramonfinancialservices,developmentandreform.ItwouldcomplementtheStrategicEconomicDialogueandengageministers,officials,regulatorsandfirmsinaworkprogramtodeepenbilateralfinancialintegrationthatwouldbefocusedon:
– pilotingtheselectreleaseofregulatoryandlicensingrestrictionsonAustralianfirmsinChinaasaphase-inforregionalliberalisation,throughexpandingthefinancialservicescomponentsofChAFTA;
– developingaregulardialogueandamutualrecognitionframeworkbetweenfinancialregulators,andsupportingthedevelopmentofRMB-denominatedassetsandsecuritieslistingsinAustralia;
– pursuingmutualreformsofmacroprudentialregulationsanddividendimputationschemestoensurethatAustralianandChineseentitiesarebetterabletoengagewithone-anotherintheregion;
– promotingthebilateralandregionalopportunitiesarisingfromfintechanddigitalfinance;and
– commissioningresearchbetweenAustralianandChineseinstitutionsonfinancialservicestradeandcross-borderinvestment.
Therearealsoopportunitiesforpartnershipinregionalfinancialcooperation:
• BothcountriesshouldworktobuildabilateralfinancialinfrastructurefocusintoregionalinitiativessuchasOneBelt,OneRoad,theAsianInfrastructureInvestmentBankandtheAsianDevelopmentBanktoimprovepaymentsystems,creditinformationbureaus,collateralregistriesandfinancialintermediariesandinstitutionsthroughouttheAsiaPacific.
• Chinashouldsignonto,andAustraliaimplement,APEC’sAsiaRegionFundsPassportandbothcountriesshouldadvocateitsgreateruseintheregion.
Framework for capturing opportunities and managing risks
ThereareuntappedopportunitiesintheAustralia–Chinarelationshiptoincreasetwo-waybilateraltrade,investment,financeandcooperationonregionalandglobalissues.Successwillbeimportantforthelong-termeconomicperformanceandsecurityofbothcountries.Therearethreemajortypesofrisksthatneedtobemanagedinrealisingtheopportunities:
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commercialrisks,macroeconomicrisksandsystemdifferencerisks.Commercialrisksaretheprovinceofnormalbusinessstrategies.Macroeconomicrisksarecommontoalleconomicpartnershipsandcanbeavoidedortheircostsmitigatedthroughappropriatepolicysettings,strategiesandinvestinginpolicycapabilities.Systemdifferencerisks—whichareaconsequenceofsovereigntyandarealsonormalinallmajorbilateralrelationships,evenbetweencountriesthathaverelativelysimilarinstitutionalandpoliticalsystems—arestructuralandthereforemorecomplexincharacter.However,therearebilateral,regionalandinternationalinstitutionalframeworksfordealingwiththemanydimensionsofsystemdifferenceriskthatcanbedeployedtoalleviatingthoserisksparticulartotherelationshipbetweenAustralia,Chinaandtheworld.
TheopportunitiesintheAustralia–Chinarelationshipwillbebestachieved,andtherisksbestdealtwith,throughhigh-levelpoliticalleadershipandcommitmenttoinstitutionalarrangementsthatpromotecommonunderstandingsandnormsofbehaviour,andmobilisebi-nationalandplurilateralworkprogramstoadvancepriorityinterestsintherelationship.
AustraliaandChinahaveabilaterallegacyfromthe1980sofa‘modelrelationship’thatwasinitiatedbetweenthetwocountriesasaneffectivemeanstopropeltheirrespectivedomesticreformagendas.ThishistorycanbedrawnuponinforginganewStrategicComprehensivePartnershipforChangethatwouldbothcapturethenewopportunitiesintherelationshipandamelioratetheimpactofsystemdifferencerisks.Thispartnershiprequiresentrenchingacultureofcooperationwithintherelationshipacrossgovernment,businessandbothcommunitiesthroughregularworkingengagements,jointlytargetedpolicyinitiativesandthroughinculcatinginChinaandAustraliaadeepunderstandingoftheothercountry’ssociety,cultureandeconomy,aswellasclosepersonalconnections.High-levelpoliticalcommitmentandaunitingvisionarekeytocommandingtheattentionandfocusingofficialresourcestoaddresssystemrisks,andkeytoprovidingtheconfidenceandleadershipthatencouragesprivateinitiativestoflourish.
• TheAustralia–ChinaComprehensiveStrategicPartnershipforChangewouldprovideanoverarchingframeworkforlong-term,high-levelengagementthatcreatesacultureofcooperationandtrustbetweenthetwocountries’differentsystemsthatadvancestheirrespectiveeconomictransformations.
• TheAustralia–Chinarelationshipshouldbeamodelofhowcountrieswithdifferentsocialsystemsandatdifferentlevelsofeconomicdevelopmentcancollaboratetoenhancedomesticaswellasmutualbilateral,regionalandmultilateralobjectives.
• TheessenceofanupgradedpartnershipwillbeAustraliaandChina’sworkingtogetherinastrategicfashionwithinbilateralcollaborationsthatdeliverspecificobjectivesofcommonpriorityandfocusonsharedambitionsforreformandchange.
• Thetop-levelleadershipsofbothcountriesshouldestablisha‘workinggrouponbilateralreform’thatwillstructurethefuturebilateralpoliticalrelationshiptoachieve:increaseddepthandscopeofpoliticaldialogue;strategicforwardagendasforleaders’meetings;jointworkinggroupsonreformbetweengovernmentagencies;andjointprotocolsforworkingtogetherandmanagingdifferences.
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• ThenewAustralia–China(Ao–Zhong)Commission(seeabove)shouldenablethetwonationalgovernmentstopooltheirresourceswiththosefromprivateandothersourcestonurturetherelationshipthroughcreatinganindependentlygovernedpublicinstitutionforprogramsofexchangeanddevelopmentsponsoredbysubnationalgovernments,corporatebusinesses,academicinstitutions,culturalfoundations,communityorganisationsandindividuals.Theheadsofgovernmentofbothcountrieswillserveasdualpatrons.
• TheCommissionwillfosterhigh-qualityresearchandacademicexchangetoincreasethepoolofAustralia-andChina-literatehumancapitalacrossAustralianandChinesesociety.Thiswillinclude:scientificresearch;thepromotionoflanguageandculturaleducationatalllevels;publicandprivatelysponsoredpostgraduate,postdoctoral,early-careerresearcherandsenioracademicexchanges;andlong-termpartnershipsforinnovationandentrepreneurialcommercialisation.
• TheCommissioncanassisttofosterpolicyexchangestoproducefuturecohortsofpoliticalandgovernmentleadersinbothcountrieswhoarefamiliarwiththepolicymakingdynamicsoftheothercountryandhavedeeppersonalnetworkswiththeirbilateralcounterparts.Deeperpolicylinkageswillbeachievedthroughanintensificationofjointworkonpolicyinitiativesandagreedobjectives,professionalsecondments,researchfellowships,andtrainingforAustralianandChineseofficialsinbothcountries.TheCommissionwillleverageexistingpartnershipsbetweentheAustralianTreasuryandChina’sNationalDevelopmentandReformCommission(NDRC),theReserveBankofAustraliaandthePeople’sBankofChina,betweentheANUandtheCentralPartySchool,andbetweenANZSOGandChina’sOrganisationDepartment,aswellastheNationalParliamentaryFellowshipsProgramproposedbetweentheAustralianParliamentandtheNationalPeople’sCongress.
• TheCommissionwillfosterbusinessandeconomicexchangetopropelstrategiccollaborationoneconomicreformprioritiesthatwillhelpAustraliaandChinatomanagetheirrespectivetransformations.ThiswillbesupportedbytheforwardworkagendafromthisReportonAustraliaandChina’seconomicpolicymakingstructuresandhowAustraliaandChinacanrelateeffectivelytoeachotheracrossgovernment,businessandsociety.
• TheAustralia–ChinaCEORoundtablecanbeupgradedwithasecretariatstructurethatsustainseffectivecollaborationsonenhancingthebusinessrelationship,includingthroughstrategicengagementandtherecommendationoffuturepolicyprograms.
• Theprocessofplanning,launchingandimplementingtheAustralia–China(Ao–Zhong)CommissionandtheComprehensiveStrategicPartnershipforChangewouldlaythegroundworkforAustraliaandChinainthelong-termtoupgradetheir‘model’relationshipintoabilateraltreatyframework.ThistreatyframeworkwouldhelpenshrinetheprinciplesoutlinedinthisReportandprovideanumbrellaforfuturebilateralagreements.Suchaframeworkisagoaltobeworkedtowardsoveraperiodofmanyyears,butthisprocesswillcementpoliticalcommitmenttotherelationship,institutionalisebilateralcooperationandperpetuatebothcountries’economicreformpartnerships.
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Regional initiatives
AustraliaandChinahavebothenjoyedeconomicprosperityasaconsequenceoftheirdomesticeconomicreformsandtheirintegrationintotheinternationalandregionaleconomy.Openness,withinthebroadercontextofamoreintegratedregionaleconomicorder,hasbeenanimportantdimensionoftheireconomicsuccess.TherearelargechangesunderwayinAsiaduetothescaleandpaceofeconomicgrowthandAsia’sgrowthhascreatedamorecomplexandmultipolarregionalandglobalorder.TheexistingregionalinstitutionsandarrangementsinEastAsiaandacrossthePacificwerenotdesignedtodealwithallthechallengesthathavecomewiththechangingstructureofregionalandglobaleconomicpower,andtherearegapsintheirmembershipandissuecoverageofeconomicandpoliticalcooperationinstitutions.
NeitherAustralianorChinawouldhaveprosperedwithouttheconfidenceandstabilityofferedbytheregionalcooperationandgovernanceframeworksthathaveunderpinnedAsiangrowth.Neithercountrywouldbebenefitedweretheseprocessesandinstitutionstofallintodisrepairorirrelevancebecausetheydidnotevolvetorespondtothenewchallengesfacedbytheregion.
• AustraliaandChinashareacommoninterestinworkingtogethertoforgeanewconsensusaroundtheprinciplesthatwillguidefutureAsianregionalcooperation.Tothatend,theyshouldworkwithpartnersinAsiaandthePacifictostrengthenandbetterconnectexistingregionalinstitutionsandarrangements,suchasAPEC,theASEANPlusSixarrangementsandtheEastAsiaSummit,andtoinitiatehigh-levelpoliticaldialogueonimportant,cross-cuttingissuessuchasenergyandenvironmentaltransformationandregionalinfrastructuralfundingandinvestment.
• AustraliaandChinashouldalsoworktomobiliseacoalitiontohelpdefinethepathforwardinmakingtheTrans-PacificPartnership(TPP)andRegionalComprehensiveEconomicPartnership(RCEP)inclusiveandcomplementary,andintransformingtheTPPandRCEPintoaFreeTradeAreaoftheAsiaPacificthatstrengthenstheWTOandtheglobaleconomicsystem(seeGlobalGoalsbelow).
• Asia’sfutureeconomicgrowthandintegrationisincreasinglydependentoninvestmentincriticalinfrastructure,andAustraliaandChinashouldseektocreateacommonframeworkforregionalinfrastructureinvestmentandfundingthatdrawstogetherkeyactorsintheregionincludingAIIB,theADB,theWorldBank,nationaldevelopmentfundinginstitutions,andrecipientregionalgroupingssuchasASEAN.AustraliaandChinacanuseambitiousbilateralinitiativesdevelopedthroughChAFTAasamodeltoadvanceprogressinregionalandglobalarrangements,especiallybydrivingregionalinvestmentandservicessectorliberalisationthroughRCEP.
Bothcountriesshouldcontinuetobuildtheirgrowingbilateralmilitary-to-militaryrelationshipasanimportantsteptowardscreatingeffectiveworkingrelationshipsonsecurityissuesintheregion,andinstrengtheningthefoundationsofpoliticalconfidenceonwhichregionaleconomicprosperitycancontinuetogrow.
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global goals
ThejointinterestsofAustraliaandChinainregionalcooperation,andthepotentialtousethebilateralrelationshiptoprosecutethesesharedinterests,isjustasvalidonthegloballevel.AustraliaandChinabothbenefitfromstrongglobalinstitutions,thatareinclusive,rules-based,andpromoteopenandefficientinternationalmarkets.Manyoftheinstitutionsthatunderpintheinternationaleconomicsystemwerecreatedmanydecadesagoanddonotaccuratelyreflecttherelativesizeandimportanceofmanycountrieswithintheglobaleconomy.
TheG20hasemergedastheworld’sprimaryvehicleforreformingglobalgovernanceandsteeringtheprioritiesoftheinstitutions,forumsandorganisationsthatunderpinit.Itistheonlymajorforumwhereadvancedandemergingeconomies,andtheworld’smajorborrowersandlenders,cooperateonanequalfooting.MaintainingtheG20’sstatusasthe‘globalsteeringcommittee’andthepreeminentforumforeconomiccooperationisinbothAustralia’sandChina’sinterests.WithouttheG20,therewouldbeaparticularriskforAustraliagivenitismuchmorelikelytobeexcludedfromsmallergroupings.ButChinawouldalsobedisadvantagedinasmallerforumdominatedbyadvancedeconomies,withlessinfluenceoverglobalrulesetting.
AustraliaandChinaalsoneedtoensuretheadequacyoftheglobalfinancialsafetynet.Theneedsoftheregionarenotbeingmetbyglobalinstitutions,leadingtogreaterrelianceonmorecostlyandlessefficientregionalandbilateralarrangementsandtheaccumulationofforeignexchangereserves.ThehugepotentialforChinesefinancialsectorreformandcapitalaccountliberalisationtotransformthestructureoftheregion’sfinancialintegrationmeansthatitisimperativethattheglobalsafetynetissufficienttorespondtoinstability.
AustraliaandChinabenefitthemostfromtradeliberalisationwhenitismultilateralratherthanbilateralorplurilateral.AustraliaandChinashouldworktosupportthecohesivenessoftheglobaltradingsystembyencouragingtheG20torefocusonthemultilateraltradingsystemratherthanregionalandbilateralalternatives.
Theglobalgovernancearchitecturefacesadditionalchallengesintermsofitsrepresentativeness,effectivenessandlegitimacy,andneedstobereformed.ThesechallengesimpactonAustralia,ChinaandtheAsiaPacificregioninparticular.Australia,Chinaandtheirpartnerscaneffectincrementalchangeinaddressingtheseissues,andthethreeareassetoutabovedeservespecialpriority:
• AustraliaandChinahavepowerfulinterestsinentrenchingtheG20asthepreeminentforumforglobaleconomicgovernance.TheyshouldactivelyuseandpromotetheG20,ensureitsagendaisinclusiveandtargetedandensurecontinuityacrossG20presidenciesbyprioritisingitsmulti-yeargrowthagendaanddeepeningitsagendaonglobalgovernancereform.
• Inthenearterm,ChinashouldworktobuilduptheanalyticalcapacityoftheASEANPlusThreeMacroeconomicResearchOfficeandstrengtheninstitutionalcollaborationandinformationanddatasharingbetweentheChiangMaiInitiativeMultilateralization,theBRICScurrencyreservepoolandregionaldevelopmentbankswiththeIMF.
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• Withaviewtothelongerterm,AustraliaandChinashouldencourageG20discussionsonthenextstageofIMFquotareform,assumealeadingroleinrenegotiatingbilateralloansbetweenG20countriesandtheIMF,andfocustheG20growthagendaonstrengtheningdomesticmacroeconomicframeworkstoimprovefinancialresilience.
• AustraliaandChinashouldleadagreaterG20focusonthemultilateraltradingsystem.AustraliaandChinashouldinitiateapragmatic,incrementalprocessaroundWTOreformanddefineapathwayforRCEPandregionalarrangementslikeTPPtobothraisethestandardofregionalagreementsandstrengthentheWTO.TheyshouldencouragetheuseoftheG20growthstrategiestoachieveambitiouscommitmentsundertheTradeFacilitationAgreementandencouragetheG20toconsolidateexistingworkprogramstoinitiateastep-by-stepprocesstowardsamultilateralframeworkforinvestment.OtherimportantareasforcollaborationareonglobalenergygovernanceandthereformofthemembershipandstructureoftheInternationalEnergyAgency,developingtheirpartnershipintheglobalresponsetoclimatechangeandpromotingbettercoordinationofglobalfinancingforinfrastructureinvestment.IneachoftheseareasthereisscopeforAustraliaandChinatocollaborateandusetheirparticipationinglobalandregionalforumstosupportandsteerpragmatic,incrementalstepsintheinterestsofbothcountries.
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