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Australia, China and this Asian century: speech to the Australia-China Business Council, Melbourne.



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NO.020

AUSTRALIA, CHINA AND THIS ASIAN CENTURY

SPEECH TO THE AUSTRALIA-CHINA BUSINESS COUNCIL, MELBOURNE

4 JULY 2008

Thanks for that introduction, Lyall, and for the warm welcome.

Consul General Liang.

Ladies and gentlemen.

Thank you for asking me to address you today about Australia's deepening relationship with China.

Today I want to say something about the magnificent opportunities China's extraordinary growth presents to Australia.

I also want to focus on the challenges it presents.

The challenge it poses to Australia to improve our competitiveness, to sustain our prosperity, to find our place, as the Asia Pacific region of which we are part becomes the new centre of the global economy in this Asian Century.

The challenge it poses to all of us in the region to build a framework of cooperation and trade which will support stability and growth as this region's responsibilities become more imposing.

The challenge it presents to China itself, to maintain the impetus of reform, to deal with climate change, to contribute to regional and global leadership.

I've been to China many times, but my visit there a few weeks ago was, for me, unique.

It was my first visit as the Australian Treasurer.

I was able to meet with a number of economic and political leaders in China, and I will say a bit more about that visit a little later.

I addressed the China-Australia Chamber of Commerce in Beijing during that visit, and I now feel I am completing the circle by addressing the Australia-China Business Council in Melbourne.

Driving between my meetings in Beijing I was struck again, as I have been struck so many times before in my visits to China, at how fast the place is changing and how fast it is

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growing.

This time around, I noticed how quickly new architectural landmarks have sprung up. There is the new Beijing Arts Centre, the CCTV tower, the Olympic stadium - and of course the Australian designed 'Watercube'.

China's Rise, and the World

The changing skyline of Beijing symbolises China's rapid expansion over the last few decades, which has made it the world's second biggest economy.

So big has China's economy become, and so rapid has been its expansion, that in the past five years China's growth has accounted for nearly one quarter of the total growth in global output.

It is a fair chance that, within a few more decades, China's will be the largest economy in the world.

More broadly, within a decade or so, more than half of the world's output will be produced in an economic community stretching from India to Japan.

This is truly the Asian century.

China's economic expansion is not only changing the lives of more than a billion Chinese, but all of our lives - and especially the lives of us in this region.

It is changing what we do, the opportunities we have, the challenges we face.

It is changing how we think about our future.

China's growth, together with the growth of India's economy, the growth of Korea, Taiwan and South East Asia, and the continuing importance of Japan mean that the weight of the global economy is shifting into our time zone.

Over 70 per cent of our goods exports are now sold within this region.

For 200 years Australians saw themselves on the periphery of the global economy.

But now, with the development of this immense Asian economic community, and the rise of China, Australia finds itself not on the periphery of the global economy, but close to its centre.

Meeting Chinese Demand

I am sure we can all agree that China's rise presents an opportunity for Australia, today and for decades to come.

But it also throws up very important challenges - and I want to spend some time focusing on them here today.

The first is how China's rise and the rise of the region impacts on global demand for oil.

This is an international demand and supply problem, but it flows through to put real pressure on the budgets of pensioners and families here at home.

This is something that has struck me in my first seven months in this job - how so many of

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our national economic challenges, and those faced by Australians in their everyday lives, can be traced back to global economic turbulence, and the skyrocketing global cost of oil and other commodities.

Another wider challenge is to meet the new demands China's expansion is placing upon us.

So far we haven't done nearly as well as we could have or should have.

There are clearly shortcomings in our export infrastructure that the previous government neglected, and that this Government is now addressing.

Our May Budget is designed to ease short term inflationary pressures, while positioning the Australian economy to sustain prosperity by lifting productivity, expanding participation and investing in infrastructure.

For the first time in Australian history we have created a very large fund to modernise our infrastructure of ports, roads, rail and communications.

Through this investment we will be better placed to meet the rising demands for our commodity exports from China.

We also have a migrant intake at record levels and tax cuts targeted at expanding labour supply.

These together will help improve Australia's export performance and help us to meet the growing global demand for commodities.

But this is only one aspect of the challenge which the increasing weight of the Asia Pacific economic community presents.

It also challenges us to remain globally competitive, by increasing our investment in education, in skills training, and in research and technology.

It challenges us to reform our tax system to enhance work incentives and investment.

It challenges us to press forward with our own deepening integration into the global economy, through trade and investment.

It challenges us to break down conflicting rules on occupational recognition and transport regulation, by state based energy and water markets.

It challenges us not only to help break down barriers abroad, but to break them down here - to create a seamless national economy, and yesterday's COAG decisions advanced this important agenda.

All these areas are also priorities for the Rudd Government, focused as we are on investing in the nation's future.

Our resources and non-resources sectors

We can already see plenty of evidence here that the China boom is changing the Australian economy.

It is evident in the somewhat faster growth rates of Queensland and Western Australia, compared to New South Wales and Victoria.

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It is evident in the higher rate of growth of wages in mining, compared to other industries.

It is evident in the boom in business investment, which has accounted for almost half of the increase in our GDP in recent years.

There is another challenge here.

In my view China's expansion will continue for decades, and prices for our key commodities will remain high for some considerable time to come.

In coming years I think we will see a higher rate of production of metals, minerals and energy, as well as higher values.

For example, if industry plans succeed, our iron ore production will have doubled by 2015.

We need to manage that change.

We need to sustain the growing diversity of our economy, with exports of rural products, services, and manufactures as well as resources.

We need to build on and expand our skill base, not just to meet the growing demands of the north and the west of Australia, but the south east as well.

It's a very good thing to see mining output expand, but even so mining accounts for only 7 per cent of our GDP.

It is notable that despite the commodity boom the rate of growth in the volume of both our manufactured exports and our services exports this decade has exceeded the rate of growth in the volume of resources exports.

We are indeed in an investment upswing, and mining is a very important part of it - but it is not all of it.

About one third of business investment is in mining, and much of the rest reflects the widespread upgrading you would expect after 16 years of uninterrupted economic expansion.

Australian Trade with China

Since our election, the Government has made considerable progress towards deepening our economic and institutional engagement with China.

We are continuing the proud record of Labor governments in engaging with the region, and understanding China's strategic importance to it.

It was 37 years ago this month that Gough Whitlam, met then Premier Zhou En-lai in the Great Hall of the People to discuss the terms on which Australia and China could establish diplomatic relations.

The ALP initiated that visit, at the urging of our then party secretary - Mick Young - for whom I had the privilege of working early in my political career.

That visit began a close and fruitful relationship, which has assumed much greater economic importance due to the extraordinary growth of China's economy in the last three decades.

On my visit to China a few weeks ago, I met with the Chinese Vice Premier, Li Ke Qiang, the

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Chairman of the National Development and Reform Commission, Zhang Ping, and the Ministers for Finance and Commerce.

I addressed 200 future Chinese leaders at the Central Party School of the Communist Party. The Party School, I might add, appears to have a growing affinity for the Queensland Right of the ALP. Their most recent guest before me was the Prime Minister.

I was impressed by the range of questions they asked and their interest in the relationship between China and Australia.

I came away more than ever convinced that the rapid development of China's economy has transformed Australia's economic circumstances in ways that are important now, and will be more important in coming decades.

The most direct and obvious evidence of that is the dramatic expansion of our exports to China.

Over the past decade, our goods exports to China increased six fold.

We now export three times as much to China as to the UK, twice as much to China as to the US, and more to China than to the entire European Union.

In just the last three years our exports to China have more than doubled, and China has become our second largest export market.

All of the very considerable growth in the volume of Australian iron ore exports this decade is accounted for by increased iron ore exports to China, just as most of the growth in global steel production this decade is accounted for by the growth in China's steel production.

As the Chinese economy has grown, our trade relationship with China has also become more diverse.

Our biggest exports to China are iron ore, wool, other minerals, and natural gas, but Australia's economic engagement with China is not only about commodities - important as they are.

Last year we exported nearly $1.4 billion in elaborately transformed manufactures to China - a 16 per cent increase on the previous year.

We make fare machines for Beijing's subways, synthetic turf for its sports fields, and solar heating systems for China's remote areas.

We sell cosmetics, integrated circuits, water treatment systems, piston engines and mining software to China.

We design sports stadiums, office buildings and factories in China.

We have around 90,000 students from China studying in our schools and colleges in Australia.

Partly because of China's demand, Australia's teachers now contribute as much to our exports as meat, wheat and wool put together.

Partly because of China's demand, the volume of our education exports have increased this decade at four times the rate of growth of manufactures exports, and five times the rate of growth of resource exports.

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But as broadly-based as our economic relationship with China is, we are still in the early stages of its development, and it can expand rapidly in complexity, range and interest.

Free Trade Talks

That is why one of the Prime Minister's priorities in his April visit to China was to restart the stalled negotiations for a free trade agreement between Australia and China.

Since the meeting between the Prime Minister and Premier Wen, negotiations have resumed across all areas, including agriculture, manufactures, investment, services and intellectual property.

I've no doubt that these will be very difficult negotiations, if we are to reach agreement, given the sensitivities on both sides.

But we are encouraged that negotiations in June were useful and that we have now agreed to two additional rounds of negotiations this year.

We are also discussing possible early outcomes to help build confidence on both sides.

We have raised our interest in overcoming impediments in financial and education services.

For its part China has raised quarantine and investment.

Australia has a big, diversified and internationally competitive finance industry.

We can supply the full spectrum of financial services.

But there are still substantial entry barriers in the Chinese market for foreign services providers.

Australian banks continue to be hampered by restrictions on foreign ownership in Chinese banks, such as a 20 per cent cap and the two-bank rule imposed on foreign investors.

It was encouraging that during my June visit to Beijing the Chair of China's Banking Regulatory Commission and I were able to announce that Australia has been accepted by the CBRC as an approved investment destination under the Qualified Domestic Institutional Investor scheme.

This announcement will enable investment in Australia by Chinese banks.

Direct Investment

This brings me, ladies and gentlemen, to the issue of foreign investment, which I know is on the minds of so many of you here today.

Let me start with an obvious but very important point.

Australia is an open, liberal nation that makes its living through trade with the rest of the world, and we do it well.

It follows that we have an open and welcoming approach to foreign investment.

This is not only evident in our words, it is evident in our deeds: Australia has one of the highest levels of foreign ownership of our companies - including our resource companies - in the world.

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Like China, and like many other nations, we also apply a national interest test to foreign investment in our country. It too is consistent with an open approach to foreign investment: since 1995, the Australian Government has approved over 5,000 foreign business investment proposals. Furthermore, those approvals have been unconditional, except in a small number of transactions involving high-profile Australian companies, which have been approved subject to special conditions.

This is a record of remarkable openness, and also testament to the non-discriminatory nature of our screening process.

That process has been in the news lately, generally associated with the significant growth in Chinese investment.

In the fiscal years 2005/06 and 2006/07 combined, Australia approved less than $10 billion in proposed investment from mainland China.

Since the election, the value of applications for proposed investment from mainland China has almost reached $30 billion.

That growth has brought with it its fair share of public debate.

Lately, it has also brought with it some misperceptions I would like to take some time to clear up today.

First let me say this:

Misperceptions will arise in this debate when participants tend to seize on individual cases as being somehow emblematic of a broader policy approach.

But all of us in this room know that each investment proposal tends to have its unique circumstances.

It's why, despite invitations to go into the specifics of each case before me, I have instead focused on communicating the principles governing our consideration of the national interest.

And it's why, in February, I set out our guidelines for assessing investment proposals which involve foreign governments or their associated entities.

These guidelines were those used by the previous government; they are what we use too.

They are not new, and they are blind to the source country of any investment.

You will have heard, as I have, a couple of arguments about our approach to Chinese investment - broadly, that we have changed our policy to a more restrictive stance, and furthermore, are slowing down the processing of Chinese applications.

I don't think either of these stand up when considered against the facts.

I have approved a Chinese investment proposal on average once every nine days since coming into office.

This is certainly not a slowing pace.

Under our legislation we have a general approval time of 30 days but a formal mechanism exists to extend the time if necessary to adequately assess a proposal. This is commonly

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required in large or complex cases.

It is certainly true that some Chinese proposals have needed a more detailed examination though obviously I won't go into the specifics of each case.

But for commercial reasons, most proponents prefer to withdraw and resubmit, rather than having their bid become known publicly through the gazettal of a formal interim order.

In view of the complexity and substantially increased volume of Chinese investment proposals, the approval timelines have been very reasonable.

I would add that there are also very strong reasons not to rush these approval processes.

Firstly, we are acutely aware of the need to provide procedural fairness to all applicants. This means taking appropriate time to consider proposals. It is true that applicants want speedy decisions on their proposals; they also rightly want rigorous procedural fairness, which we as government must be sure to provide.

Secondly, the Australian people rightly insist we consider the national interest carefully, and under this government - as under our predecessors - we will take the right amount of time to get these decisions right. We don't make any apologies for that.

I mentioned earlier the principles we publicised back in February for screening investments associated with foreign governments.

In brief, they are:

1. Whether an investor's operations are independent from the relevant foreign government. 2. Whether an investor is subject to and adheres to the law and observes common standards of business behaviour. 3. Whether an investment may hinder competition or lead to undue concentration or

control in the industry or sectors concerned. 4. Whether an investment may impact on Australian Government revenue or other policies. 5. Whether an investment may impact on Australia's national security. 6. Whether an investment may impact on the operations and directions of an Australian

business, as well as its contribution to the Australian economy and broader community.

Proposals are still examined on a case-by-case basis and the principles are not a check list.

Many of the issues are common to all proposals and are a fundamental part of the screening regime.

The key differences for investments associated with foreign governments concern independence, commerciality, and corporate governance and business behaviour.

The OECD and IMF have both emphasised the importance of transparency and commerciality in current work on sovereign wealth funds.

We extend these principles to state owned enterprises as well as sovereign wealth funds.

The key is that investments are consistent with Australia's aim of maintaining a market-based system in which companies are responsive to shareholders and in which investment and sales decisions are driven by market forces rather than external strategic or political

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considerations.

In particular, Australian governments - now as in the past - are particularly attentive when the proposed investor in an Australian resource is also the buyer of that resource or linked with the buyer of the resource.

Our predisposition is to more carefully consider proposals by consumers to control existing producing firms.

We usually welcome and encourage some participation by the buyer, because that offers the buyer some security of supply and the seller some stability in the market.

But we need to ensure that investment is consistent with Australia's aim of ensuring that decisions continue to be driven by commercial considerations and that Australia remains a reliable supplier in the future to all current and potential trading partners.

This, too, is nothing new. Previous governments faced the same issues of resource consumers investing in resource producers in the 1970s and 1980s.

Back then, they responded with formal foreign investment rules. This government does not follow that approach, preferring to maintain a case-by-case consideration of proposals.

But it follows that as the proposed participation by a consumer of the resource increases to the point of control over pricing and production, and especially where the resource in question is already developed and forms a major part of the total resource, or where the market disciplines applying to public companies are absent, I will look more carefully at whether the proposal is in Australia's national interest.

During my recent visit, I emphasised to Chinese leaders that Australia is open to investment.

I also took the opportunity to explain our national interest approach, just as I have outlined it here today. If I had to sum it up in one phrase, I would call it "open, in the national interest". We operate an open and liberal foreign investment regime, because it is in our national interest to do so. We also apply our national interest test, which takes into account our responsibilities to be a reliable supplier to many different customers, and ensure the maximum development of our resource base, and a fair return for the Australian people.

China and Climate Change

Ladies and gentlemen, the next challenge I want to touch on briefly is climate change - a timely topic given the release Professor Garnaut is releasing his report, as we speak.

The Garnaut report is an important reminder of the economic costs of not acting on climate change.

It is an important contribution that the Government will consider, along with Treasury modelling and intensive consultation with the business community, including many of you here today.

I want to assure you that we will implement the Emissions Trading Scheme in the most responsible, measured, careful and consultative way possible.

This reflects the seriousness of the task, and our view that climate change represents a serious test of responsible economic leadership that we are determined to pass.

Climate change is a test for China, as well.

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China may within a few decades catch up with the US in economic weight, but well before then it will have caught up to the US in the volume of greenhouse gases it emits.

On some measures, it has already caught up.

If the global community is to manage climate change, the United States must be part of the solution, and China must be part of the solution.

With the Garnaut report being published today, the Australian Government will be publishing a Green Paper later this month setting out the options for the Australian response to our own greenhouse gas emissions.

None of the options is easy, but we have no choice but to begin to act now.

In the UN Framework Convention on Climate Change, Australia is helping develop a post-2012 framework where all countries can contribute to addressing climate change.

But we know we cannot urge China, the United States and the rest of the world to act on climate change if we are not willing to do so ourselves.

In April this year, China and Australia issued a Joint Statement on Closer Cooperation on Climate Change including elevation of our annual dialogue to ministerial level - Minister Penny Wong and NDRC Chairman, Zhang Ping.

As part of a cooperative partnership, some 20 projects are underway with Australian and Chinese partners from industry, science and government.

We are both major users of coal fired electricity, and we are now cooperating to develop low emission technologies for that industry.

We must recognise within this region that our growing prosperity must also be consistent with the future of the planet.

Conclusion

No doubt all of these matters will be raised in the discussion. So let me finish my prepared remarks by saying thank you again, for inviting me today to discuss:

z The challenges and opportunities of the rise of China;

z Our policy responses;

z Our foreign investment principles; and, more broadly

z The role I see for a more modern Australian economy, in this Asian century.

I look forward to your questions.

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