framework for capturing opportunities and managing...

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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PartnershiP for Change

• 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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CHAPtER 6: Framework for capturing opportunities and managing risks

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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This text is taken from Partnership for Change: Australia–China Joint Economic Report, by East Asian Bureau of Economic Research and China

Center for International Economic Exchanges, published 2016 by ANU Press, The Australian National University, Canberra, Australia.

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