China’s Economic Transition: Risks and Rewards for Australia
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It is a great honour to be invited to here tonight to make the China Oration. This is an oration, not a friendly after-dinner speech but a discussion about some of the key issues associated with our relationship with China and the important issues which underpin our growing and strengthening relationship with this important trading partner.
So I congratulate you on your achievement. I have had the privilege of visiting China on a number of occasions. Each time, I am free trade account australia china disadvantages impressed. You cannot visit that country without being staggered, over recent times, about free trade account australia china disadvantages enormous growth and prosperity.
Australia has had the privilege of playing a role in that growth over the years. You know, in years gone by, people could make excuses for Australian business and industry because we were a long way away from the fastest-growth and most important economies of the world. You know the time — when that was Europe and the United States.
They are a long way away physically. Australian industry and exporters always had a disadvantage with other countries because of the freight cost of dealing with countries so far away. But now, the strongest economies of the world are in our own region — close by. And so, instead of being at a disadvantage, Australia is able to participate in the growth and progress of our region. China has been at the heart of that over recent times.
I want to ask, in other words, what are the risks and rewards for Australia in this enormous growth and development? But Black Jack McEwen argued hard to expand trade. He believed Australia should trade with any country that wanted to buy our goods.
He was, of course, the one who signed the economic agreement with Japan less than a decade after the end of World War II. It must have been an extraordinarily heroic and difficult thing for an Australian to sign an agreement with the vivid memories of prisoners of war and others who had such bitterness and anxiety about dealing with Japan.
Incidentally, the 50 th anniversary of that agreement is next year so it free trade account australia china disadvantages particular significance that we are talking about a Free Trade Agreement with Japan to modernise an economic agreement that has lasted five decades. So indeed, Black Jack McEwen was prepared to take on the tough issues because he knew that trade was important to make Australia grow.
In those days, we were a vast country, with substantial resources with a small population and therefore, if we were going to have world-class industry we needed to sell our goods to other parts of the world. He also, argued, in the context of trade with China that if we free trade account australia china disadvantages not sell to China then other countries would. But opening up trade with China at that time was one of the few battles he actually lost. What McEwen saw very clearly and early was that there were rewards from engaging China.
While Australia - and other countries - eventually started trading with China what probably mattered most of all was that China decided to engage with the world. This has had a stunning effect. A visitor to Shanghai a decade ago would not recognise the city today.
And luxury cars jostle with taxis and buses in a scene that looks a lot like a free trade account australia china disadvantages day in a western metropolis. Just remember that this is the first generation of Chinese to own motor vehicles. This remarkable growth has free trade account australia china disadvantages living standards for hundreds of millions of Chinese people; incomes per person have doubled in the past five years, in what is probably the largest reduction in poverty in world history.
China sews more clothing and produces more TVs, mobile phones and DVDs for the rest of the world than any other country. And the nation consumes energy at a rate second only to the United States. Indeed, economic history may well record that Free trade account australia china disadvantages is simply going through the same kind of growth that lifted the economies of Japan and the Asian tigers in the mid to late 20 th Century.
Between andJapan grew at an average real rate of nearly eight per cent—more than twice the pace of industrialised countries over the same period. All impressive growth rates. And Thailand and Malaysia were not far behind. All that suggests is that what is happening in China is not without precedent. But more importantly, it is also sustainable and that countries can move on and get economically strong and stable even after their spectacular growth period may expire.
The reality, however, is less colourful. There is plenty of precedent. This has led to a couple of surprising findings. One is that Asian productivity has historically been fairly average - not much free trade account australia china disadvantages than for developed countries.
The other is that almost all of Asia's growth performance can be attributed to its massive rates of capital investment. And the reason that Asia invested more money is that it saved more. But many credible economists believe that a high domestic savings rate is the main factor linking the fast-growing Asian economies together. As I said earlier, economic growth has doubled per capita incomes in the past five years; an example, perhaps, of the idea that a rising tide lifts all ships.
But as impressive as this growth is, we need to keep it in some kind of relativity. So China has still plenty of growing to free trade account australia china disadvantages. The first is sustaining the trade reforms.
According to the World Economic Forum, China still retains significant trade and investment barriers that undermine its overall competitiveness. I appreciate that maintaining momentum on reform is hard and obstacles often lie in the way. Political imperatives and local pressures can hamper reform. In reality, when you have an industry being built on low-cost labour and the reforms appearing in the industrial sector, why is it necessary to have million people engaged in producing food when in some instances, it is barely sustaining a population of 1.
The reality is that the whole Chinese economy would benefit from being opened up to access to food and fibre from the best producers in the world. We have benefited from exports from across the world. We cannot expect, despite our pride in our country, to be the best in everything. We do some things very well. We sell things effectively to the world but in other areas, we rely on the ingenuity, the imagination, the inventiveness and the scale of other parts of the world to ensure that we have access to the best-available products from the rest of the world.
One thing that I find remarkable about international trade is its endless dynamism. For instance, even China is now facing competition in low value-added manufacturing from even lower-cost emerging markets.
Remember Japan, South Korea and Taiwan built their industry on the basis of their low-labour costs. In fact, industry moved to those countries because labour was cheap. Industry has moved massively to China because labour was low but there free trade account australia china disadvantages lots of low-labour cost countries that can do what China can do, and in time, perhaps even better.
China cannot exclusively rely on its low-labour costs to guarantee its economic future. It will need to diversify its economy in the same way that Japan has diversified its economy as other countries did to secure its growth and progress to stop labour free trade account australia china disadvantages moving to other places.
For instance, China will have to face the challenge to rebalance its growth by encouraging private spending — by building a much-stronger consumer and services economy. While there is even rising evidence of skilled labour shortages in the cities. Yet the agriculture sector remains weak and farm wages very low. China still has a vast pool of rural labour to deploy to more productive sectors of the economy. I understand the World Bank recently found evidence that rural incomes actually fell during the latest boom years.
So I appreciate that managing the income gap between rural and urban groups and overseeing the steady transition of the economy will be very difficult.
I believe that one of the ways to secure continued growth is through further structural reforms. In the broadest free trade account australia china disadvantages, it is about having free trade account australia china disadvantages in market dynamics. There have been some announcements in recent days, as you are aware, about banking reform and those announcements are welcome, although I suspect the ANZ and other Australian banks interested in involvement in China will regard them as not having gone far enough and have provided limited opportunities for banks on a scale of Australian business.
The third area that I would like to talk about that I think offers a substantial challenge for China in the years ahead is the environment. For ordinary Chinese households, businesses and the economy as a whole, serious water shortages are not a theoretical problem.
The 43 million people of the cities of Beijing, Tianjin and Shanghai each have access to less water per person than the people in Yemen, Jordan or Israel.
Water scarcity and pollution holds back industrial and agricultural output. Chinese authorities recognise these problems and are working hard improve water capacity. The effect of these efforts on business is that you are likely to see large investments in water infrastructure and tougher restrictions on waste water. A real issue for China is also the level of air pollution. Those who visit China are always amazed at the greyness of the skies. The World Bank says that 16 of the 20 most-polluted cities on earth free trade account australia china disadvantages in China.
In recent months, China has been focusing on controlling sulphur-dioxide emissions which cause free trade account australia china disadvantages rain. InChina discharged Quite simply, China must do more to clean up its environment.
As you are aware, no obligations were placed on China in the Kyoto Accord. When Kyoto expires and negotiations are in place for a new agreement, and Australia is leading in those negotiations, it is incomprehensible that the major growing emitters such as India, Indonesia and China can be excluded from the arrangements. But I wanted to highlight them because I see them as challenges.
The Chinese authorities are aware of these problems. As people travel around the world and see the skies in cities can be blue and that other countries prize their pristine environments highly, consumers in China and the ordinary people in China are also going to demand environmental standards for their industry.
A Chinese proverb says: Australia and Australian business have a real stake in how well China manages these risks. We have done pretty well so far. The faith and confidence between our two countries has certainly added to the trust of the business relationship and helped us to rely on confidence in one free trade account australia china disadvantages. The increased supply of goods from China and other low-cost economies has led to lower import prices in countries like Australia and been a significant contributor to the low inflation rate at a time of economic growth.
As a result, our terms of trade are at record highs and inflation pressures have been contained. And we can take comfort from the complementary nature of our trade.