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Treasurer's Economic Note: 15 July 2012



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Four decades ago, China was a very different place. There were no skyscrapers on the city skylines, only a handful of

cars on the country’s roads and the nation’s middle class was virtually non-existent. China’s economy and society were

still largely closed to the outside world. Despite its isolation, Prime Minister Gough Whitlam knew Australia couldn’t

ignore a country of such size and potential. He reached out to China, establishing diplomatic ties in 1972. It was a

decision of remarkable foresight. Back then, even someone like Gough would have struggled to envisage the

extraordinary relationship that was to flourish over the next 40 years. The value of trade between Australia and China

has skyrocketed 1000-fold from around $110 million in 1972 to more than $110 billion today. Similarly, a growing

middle class has seen the number of Chinese tourists visiting Australia each year go from less than 500 in 1972 to more

than 500,000 today. And Australian resources now help make many of the skyscrapers and cars that abound in today’s

China.

A Changing China

Visiting China during the week - my seventh trip as Treasurer - I was struck not just by the progress over the past few

decades but the progress that’s set to continue over the decades ahead. China’s remarkable growth has meant the size

of its economy has been doubling every seven to eight years. And in this decade - by 2016 - China is likely to surpass

the United States as the world's largest economy. And it’s not just China that’s changing. This story is being played out

to varying degrees across Asia - in India, in Indonesia, in Vietnam. The proportion of global GDP within 10,000

kilometres of Australia’s shores has doubled in the last 50 years to around one third. And that share is forecast to

double again to almost two-thirds by 2050. What this means is that the changes we’ve seen so far are by no means

complete. While there will be bumps along the road, Asia’s development still has a long way to run.

For Australia, the implications of all this are truly enormous. Many will view this transformation exclusively through the

prism of the mining boom. That’s understandable when you consider the gathering pace of investment in the resources

sector, with a half a trillion dollars’ worth of projects underway or in the pipeline. But the demand for resources is just

the first taste of the economic transformation that's underway. Rising incomes mean Asia’s middle class is growing by

around 110 million people every year. In less than eight years from now, there'll be more consumers on our doorstep in

Asia than in the rest of the world combined, with China as the single biggest consumer market in dollar terms. That

means hot on the heels of the mining boom, a consumer boom is gathering momentum.

A Consumer Boom

You get a sense of this by looking at the rapid increase in the ownership of consumer goods in China. Between 2000 and

2011, the number of cars per 100 urban households is estimated to have risen from less than one to 18; computers from

eight to 80; and the number of mobile phones from 16 to over 200. As the Prime Minister said last year when

announcing the White Paper on Australia in the Asian Century, when a person first gets a car, a computer and a mobile

phone, it changes their life. When hundreds of millions of people first get these things, it changes the world.

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Australia's tourism operators, education industry and other service providers, as well as manufacturers of high-end

goods and makers of fine wine and food all stand to gain from the growing ranks of Asia’s middle class. In fact, many

businesses are already seeing the benefits. Everyone knows sales of iron ore and coal have surged over the past decade.

What's less appreciated is the fact that the exports of services to China are increasing quickly as well - at an annual rate

of 17 per cent over the past decade. In fact, Australia earned more from providing tourism, education and other services

to China last year than it did from selling coal. And while the conventional wisdom is that Australian manufacturing can’t

compete with China, you may be surprised to learn that our exports of manufactured goods to China have increased at

an average rate of more than 10 per cent each year over the past decade thanks to Australian innovation and design.

Meeting New Opportunities

Despite our success so far, we don’t have a free pass into Chinese or Asian markets. The opportunities of the Asian

Century won’t just fall into our laps. When Prime Minister Whitlam established diplomatic ties with China 40 years ago,

he was part of the proud history of reform that has helped make Australia what it is today. This tradition continued

during the 80s and 90s, when Bob Hawke and Paul Keating floated the dollar, opened up our economy and put in place

reforms such as national superannuation. If it weren’t for visionaries like Whitlam, Hawke and Keating, we would have

missed the start of the Asian Century. And if we don’t keep up the hard work of economic reform now, we will miss the

next chapter.

That’s why we’re making huge investments in education and training to ensure our economy has the skilled workers it

needs. That’s why we’re building new and better infrastructure, including the National Broadband Network, to take our

goods and services faster and more efficiently to markets across the region. That’s why we’ve introduced tax reforms

that encourage firms to re-invest, re-tool, and adapt to the changing economy and seize new opportunities. That’s why

we’ve put a price on carbon pollution to ensure we take advantage of the clean energy industries of tomorrow. And

anybody who’s been to China knows how obvious it is that clean energy and sustainable development will be utterly

imperative in the decades ahead.

Australia’s success so far has not been an accident of geography or geology. It’s been a result of hard work and tough

decisions - decisions by the Whitlam Government to engage with China, decisions by the Hawke and Keating

Governments to open our economy and reorient it towards our region, and decisions by the Rudd and Gillard

Governments to prepare for the Asian Century. Of course there is no one policy, no one business strategy or no one

government that can guarantee success. We need to focus now on what will be a long period of transition for our entire

region. It’s with this in mind that we approach the task of the White Paper. It will not only serve as a long-term guide

for government policy, but also for the business and community sectors - because we all have a role to play in making

the most of this remarkable journey in the Asian Century.

Wayne Swan

Deputy Prime Minister and Treasurer

Sunday 15 July 2012

www.treasurer.gov.au

twitter.com/SwannyDPM