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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

11 June 2008

NO.019

A Modern Relationship with China

Central Party School, Communist Party of China

11 June 2008

Thank you for that warm and generous welcome.

I want to take this opportunity to tell you something about my country, something about our relationship with China, and something about our shared interests in the Asia Pacific region and in the global economy.

Australia and China are good friends. On behalf of all Australians, I offer my deepest sympathy for the ongoing loss and suffering caused by the Sichuan earthquake. Australians have been deeply saddened by this event. The Australian Government stands side by side with you - and we were pleased to offer emergency assistance, including rescue and recovery equipment.

I also wish you every success in hosting the Olympics later this year. The Games will provide a wonderful opportunity to showcase the dynamic and vibrant nature of modern China. It will be part of China's story - including your economic miracle.

China's output of goods and services has increased two and half times since the beginning of this decade. On the World Bank's purchasing power measures, China is already the second biggest economy in the world and now produces half as much as the United States. So big has your economy become, and so rapid your growth, that in the last five years China's growth has accounted for one quarter of the growth of the entire global economy. I'm confident that urbanisation and industrialisation, the energies and intellect of your people, and the determination of your leaders, will continue to drive China's growth for many years to come.

China has been blessed down the centuries with a great tradition of public service, and I know it is one the Central Party School sees itself as carrying on.

As I meet with my Chinese counterparts these days, I see people of my generation in their 40s ands 50s. As I look around me here today, I see a generation younger than that. Immediately, it leads us to think of the challenges you will face in leading this country in the future.

This school's work in training the next generation of leaders could rarely have been more important than today. By the time many of you here today have reached the top jobs in the economy, in government, in military affairs, in foreign policy, China's will highly likely be the biggest economy in the world. Your generation of China's leadership will therefore have responsibilities to the rest of the world, responsibilities to help manage the global economy, that no other generation of Chinese leaders before yours has had to accept. It is an awesome challenge for you. It will be both a global responsibility and also a regional responsibility.

China's growth is one of the most important forces driving another great change, which is the continuing transfer of the weight of the global economy to the Asian region - to the time zone we share with you. By the middle of this century this region will account for more than half of global output, and decisions made by China's leaders will have immense consequences for all of us who live in this region.

I will say something more in a moment about our region.

First I want to tell you a bit about Australia. It was 37 years ago next month that the then leader of the Australian Labor Party, Gough Whitlam, met your great Premier Zhou En-lai in the Great Hall of the People here in Beijing to discuss the terms on which Australia and China would establish diplomatic relations.

The Australian Labor Party initiated that visit, at the urging of our Party secretary at the time - Mick Young. My party had advocated recognition of China since 1955, and Mr Young himself had spent three months here in 1957. So the interest in, and affection for, China in our Party goes back a long way. I had the great privilege of working for Mr Young early in my political career, and learning from him first hand of that visit. It was Mr Young who inspired my own deep and continuing interest in China and in our relationship with you. He is one of the reasons I have visited as often as I have.

Mr Whitlam didn't know it when he came in 1971, but Henry Kissinger was in Beijing at the same time in his now famous secret mission, negotiating for President Nixon's first visit to China in February 1972. When Mr Whitlam became Prime Minister in 1972, Australia and China promptly established diplomatic relations and exchanged ambassadors. That visit began a close relationship, which in recent years has assumed much greater economic importance because of the extraordinary growth of China's economy in the last three decades.

As China's economy has grown, our trade relationship with you has increased in significance. Even a decade ago Australia exported considerably more goods to the UK than to China. We exported twice as much to the United States, and three times as much to the European Union as we did to China. In the years since our goods exports to China have increased six-fold. We now export three times as much to China as the UK, twice as much to China as the US, and more to China than the entire European Union. Even so, I might add, Australia still imports more from China than it exports to it, and the gap has grown over the last decade.

Of course our relationship with China is not only economic. Australia is a country where Chinese people can feel at home. We have the same belief in education as you do, the same commitment to family as you do, the same sensible, practical and commercial approach in our business dealings. After English, Chinese is the most widely spoken language in Australia. There are nearly three quarter of a million Australians who claim Chinese ancestry. Each year we welcome well over 300,000 of your compatriots, visiting us as tourists.

Evolving Relationship

Friends, China has changed a lot over the last couple of decades, and so have we. We are now in the 17th year of an uninterrupted economic expansion which has spanned three different governments, and had its genesis in the far-sighted reforms of the 1980s and early 1990s.

Since 1991 Australia's output has increased by four-fifths and real incomes per head have increased half as much again.

We have like you become a much more open economy. Our trade share, for example, has increased to over 40 per cent of GDP.

As our export share has increased, it has become more diverse.

We have iron ore and coal of course, but for all our iron ore exports and all our coal exports these account for less than 20 per cent of our total exports. In fact all of our mining output, important as it is, accounts for just seven per cent of our GDP - much the same share it accounted for 20 years ago. All of our farm production, as important as it is, accounts for just three per cent of our total output.

These days, as important as exports of wheat and meat and wool and so forth remain to Australia, our exports of elaborately transformed manufactures and of services are each bigger than our rural exports.

Our openness is evident also in the globalisation of Australian business. Australia has always welcomed foreign direct investment, but in recent years we have also become a major offshore investor ourselves. Today the stock of Australian direct investment abroad is roughly equal to the stock of foreign direct investment in Australia.

Some of the changes in Australia are reflected in our relationship with China. Our biggest exports here are of course iron ore, wool, other minerals, and natural gas, but Australia's economic engagement with China is not only about commodities, important as they are.

We also make fare machines for Beijing's subways, we make synthetic turf for your sports fields, we make solar heating systems for your remote areas. We sell you cosmetics, integrated circuits, water treatment systems, piston engines and mining software. An Australian company, BlueScope Steel, makes top quality specialist steels and makes them here in China and competes with local businesses.

We have more than a hundred thousand students from China in our schools and colleges in Australia, and they have helped us make education one of our biggest export industries. That indicates to you how broadly based our economic relationship is.

These are just a few examples of the increasing range and complexity of our economic engagement with China.

Big as that engagement has become, I think we are still in the early stages of its development, and that it can continue to rapidly expand in complexity, range and interest. That is why Australia's new Labor Government, with Kevin Rudd as Prime Minister, is committed to pursuing a free trade agreement with China to help us take our mutual economic engagement to new levels. It will provide an important framework for closer economic ties into the future.

Domestic Priorities

As I say, there have been big changes in Australia, and by and large we have done well in the last 17 years. But in recent years we have become more and more aware that Australia needs to embark on a program of serious modernisation of our economy, if we are to sustain prosperity into the future.

In the last five years for example our labour productivity has on average grown around half the rate we managed to achieve through most of the previous decade.

The rate of growth of our export volumes slipped over the last eight years to less than half of the average rate of growth of the previous two decades. There is no doubt our export performance has been constrained by shortcomings on our roads, and our railways and ports.

There's no doubt we need more skills and more workers. That is evident enough in the fact that we now have far and away the biggest immigration intake in our history, and yet employers still tell me they have more jobs than they can find workers to fill them.

Tightening capacity constraints are also apparent in the trend increase in inflation over the last three years.

The conclusion we have come to in Australia is that if we are to continue to expand in the way we have in the past, we need to invest a lot more in our future.

That was the argument we put to the Australian people in the federal election late last year, it was the platform on which the Rudd Government was elected, and it's the policy program that we have been implementing at a cracking pace over the last six months. It is the strategy behind the first Rudd Government Budget, which I introduced into Parliament last month.

One of our goals is to help bring inflation back under control as soon as possible. The Government has been highly disciplined in spending, with new spending on election commitments and other priorities more than offset by savings.

But we are also investing in our future, and on a big scale. For the first time in Australian history we have created a very large fund we can use specifically to modernise our infrastructure of ports, roads, rail and communications. Through this investment and the efforts of our private sector we will be better placed to meet the rising demands for our commodity exports from China. We created another big fund to enhance our education system and our skills training.

In addition to the programs I have mentioned, it also includes programs to address our needs in health, water, energy, early childhood education, and a range of other areas too long neglected.

By putting in place 21st century infrastructure and world class education the Government can help build Australia's future productivity and sustain prosperity, while bearing down on inflation.

Trade and Investment

I mentioned earlier that those of you here today will have the awesome responsibility of directing the future policies and plans of the world's biggest economy. This will be particularly apparent in international trade and investment, and in climate change.

One example of the influence of policy on trade is the negotiation of an ambitious and comprehensive bilateral Free Trade Agreement between China and Australia. As a result of recent meetings between the Chinese Premier and the Australian Prime Minister, and between our Trade Ministers, China and Australia have agreed to give new urgency and attention to the FTA discussions. As a result, the 11th round of negotiations will be held here in Beijing in a few days' time.

For us, services and investment are a key priority. We think there is great scope for both of us in financial, professional and education services, and investment in the mining sector.

In financial services, the FTA negotiations present an opportunity to promote cooperation and enhance the interaction between our financial systems.

In education services, Australia has one of the finest education systems in the world.

Coverage of investment flows between our two countries is also critical.

Such commitments would improve the business environment for Australian and Chinese businesses and financial service suppliers. It would also signal the continuing goodwill between our two countries.

Ladies and Gentlemen, it's important we include investment in our proposed free trade agreement, just as it is included in our free trade agreement with the United States. Australia and China have a rapidly growing trade relationship, but our investment relationship has not kept pace with the increase in trade.

Australia is an open economy, which welcomes foreign investment. We welcome foreign investment not just as additional capital for Australian growth, but also as a source of additional competition, of new technologies, management and marketing techniques, and of skills development. Foreign investment has played a particularly important role in the development of Australia's resources and energy sector.

China has been until recently a relatively small source of foreign investment. At the end of 2006, the stock of Chinese investment in Australia was only $3.4 billion, and accounted for one fifth of one per cent of foreign investment in Australia. And for our part, Australian direct investment in China accounts for less than half of one per cent of Australia's total overseas investment.

But China is also growing in importance as a source of foreign investment in Australia's resources and energy sector. Since the Rudd Government came to office, Chinese investment proposals have been approved at the rate of one per fortnight. In 2005-06 and 2006-07 combined, Australia approved around A$10 billion in proposed investment from the Chinese mainland. In 2007-08, the value of approved investments could rise to more than A$30 billion.

Like China, Australia screens foreign investment. We do it through our Foreign Investment Review Board. We want to ensure that foreign investment is consistent with Australia's national interest. And we also want to ensure that investment is consistent with our aim of maintaining a system in which investment and sales decisions are driven by market forces rather than external strategic or political considerations.

As you know, China's success in the global economy has in large part depended on trade, so you of course have a profound interest in a successful outcome from the current Doha Round of negotiations in the World Trade Organisation.

As you become more important in the world economy, China's responsibilities to ensure it works well are steadily increasing.

As global citizens, we are confronted with the challenges of financial turmoil, of climate change, and of significant global inflationary pressures. These global economic challenges need global economic solutions.

That is why Australia supports the IMF and the Financial Stability Forum (FSF) working closer together to act as an early warning system for the global economy.

That is why Australia is engaging in meetings of the UN Framework Convention on Climate Change, to develop a post-2012 framework where all countries can contribute to addressing climate change.

And that is why Australia has contributed A$30 million to the UN World Food Programme's appeal for emergency funds to alleviate food shortages in developing economies.

Australia and China need to work together in regional forums and to articulate a future vision for the regions architecture.

Of course with the pressing immediate challenges the world now faces we also need to get the most out of existing regional forums. These include ASEAN, ASEAN+3, and the East Asia Summit. These forums are important not just to ensure stability in the region but also to ensure the ordered emergence of East Asia, and to coordinate regional responses to issues of strategic regional importance. For example, these forums have been useful in developing finance cooperation initiatives in recent years, which help to promote greater financial stability.

Prime Minister Rudd has also recently called for a new vision for an Asia-Pacific Community. A vision that embraces the entire Asia-Pacific, including the United States, Japan, China, India, Indonesia and the other states of the region. A vision that includes a regional institution able to engage in discussion, cooperation and action on economic and political matters and future challenges related to security.

As Mr Rudd has said one of the things which needs to be advanced is a free trade agreement which covers the Asia Pacific region. This is a very ambitious proposal, but also one that promises immense benefits. We know that a free trade agreement between China and Australia can make both parties better off. We know that a free trade agreement between Australia and the United States can make both parties better off. But we also know that a free trade agreement which includes all of us in the region, which includes China and Japan and the United States as well as Korea and Australia and South East Asia, would bring benefits on a vastly bigger scale for all of us than agreements between any two of us. Ambitious it may be, but the advantages are so great it is surely worth beginning to lay the groundwork and look at the possibilities, as Australia now proposes.

Conclusion

These are tough times in the global economy. The United States and Europe has experienced a serious and year long episode of financial turbulence which is not yet finished.

I met last week in London with a roomful of investment bankers, and while things are a bit better then they were six months ago, they were still a very gloomy bunch.

Employment has been falling in the US for five months, and consumer and business confidence are both low.

At the same time higher oil and food prices are adding to global inflation.

Australia has coped reasonably well with the financial crisis. We have seen no significant increase in bad debt, our banks are well capitalised and their balance sheets are expanding. This is, I think, the first episode in our economic history in which our engagement in the East Asian regional economy has helped to shield us from a downturn in the US and European economies.

For two hundred years Australians were bothered by a tyranny of distance, the long journey to the markets and cities of Europe. But we are now discovering that the weight of the global economy has moved into own region, and we are closer to the emerging centre of the global economy than is Europe.

It has made us more conscious of the increasing importance of that regional economy to our future. More conscious of the importance of our relationships in the region - including with China. More conscious of the need to underpin our region's continuing success with a more enduring, deeper, more comprehensive and ambitious regional framework. It is a framework which you here today, who have listened to me so politely and patiently, will play such a large part on constructing. I thank you, and I wish you well.