Minister for Financial Services & Superannuation
14 September 2010 - 1 July 2013
Oceania China Future Forum
University of NSW
7 December 2010
Mr Frank Tudor, Mr Cheng Siwei, Hon Dame Jenny Shipley, and Mr Xiang Bing, and other distinguished guests.
Thank you for the opportunity to speak to you.
The China – Australia economic relationship is not just one that has substantially defined our last decade, but promises to be a great definer of the next half century at least.
So I am honoured today to be here, as I feel like I am speaking to the future.
And having been a traveller to China on several occasions since backpacking through in 1992, I do want to take this opportunity to talk a little about respect – and how important respect is to our relationship.
When Victor Chang was killed and I thought back over his miracle-working life, it became plain to me, and quickly plain, that his background was no accident. It was fundamental to a life of achievement in Australia.
It is no accident that a Chinese-Australian teenager is always in the top three or four in so many schools HSC, VCE or equivalent leaving certificate.
It is no accident that among our doctors, academics, computer programmers, working economists, architects and future thinkers, Chinese Australians stand tall.
Some say it's a work ethic that explains it. I think it's more than that.
The ability of a child to master not just two languages but two alphabets, two sorts of reading, puts in more brain connections, surely, more interlinkages of the mind, than a monolingual education.
On top of that, though, is a stability of family life. A respect for the old, a capacity for familial feasting, a love of children, a love of scholarship, a readiness for the testing task, that puts Australian Chinese among our premier citizens.
Chinese-Australians are not easy to fool, not easy to sideline, not wise to insult.
Chinese-Australians are a positive part of our civic life, and they have been for the last 160 years, that is, enriching and stimulating, and contributive as few others.
And though China is worth looking to as examples of excellence, and watchful customers and merchants and contestants, in the world economy. They are not so much contestants, I think. And not so much customers I think , as rather our complementary economy.
We are linked together almost inextricably now, and the question is, how will it be, and how will it go, in the next fifty years?
And in our excitement for the future we do not, of course, need to lose any of our enthusiasm for the past. So I'm proud to remind that it was a Labor Prime Minister, Gough Whitlam, who officially recognised China in 1972.
I am told that it remains much to Gough Whitlam's delight that some in Beijing still describe him as "the man who dug the well".
Mr Whitlam's engagement was the diplomatic product of what he called "the intelligent anticipation of change". This intelligent anticipation was something that subsequent Australian Prime Ministers – from Fraser, to Hawke, Keating, and beyond– all proved to appreciate. On any measure ours is a dynamic international relationship.
So in honouring the great tradition set by Whitlam, let us today commit to focus not just on where we have been in this bilateral journey but where we are going. And what interesting times we can look forward to up ahead.
Australia's strong economic outlook
So where are we today? 84 days into the job as the country's Assistant Treasurer, I am pleased to report that prospects for Australia's economy remain strong, with next year's forecast one of solid growth, low unemployment, moderate inflation and a surge in business investment.
Our economy is expected to grow strongly in the times ahead, by 3¼ percent over 2010-11 and 3¾ percent the following year.
Meanwhile (and not to dismiss global uncertainties) Australia's major trading partners, like China, are expected to grow at their fastest pace in 20 years. This is boosting global demand for non-rural commodities and driving Australia's terms of trade to record highs.
A huge pipeline of business investment is flowing. The most recent capital expenditure report detailed a big increase in investment during the 2010-11 financial year.
The survey states that businesses are planning to invest around $124 billion on capital expenditure in 2010-11 - this is about 20 percent more than the corresponding estimate for last year.
Mining companies are planning to invest a staggering 5 times more than they were in the years preceding the first mining boom.
This capital expenditure will lift future productivity and future export capacity with the investment surge to underpin an increase of around $80 billion in the actual value of non-rural commodity exports over the next 5 years.
The Gillard Government is also addressing capacity constraints by investing in skills, training and education, as well as investments in transport infrastructure to expand the capacity of roads, rails and ports.
We are determined to do what we can to ensure that the growing Aussie economy does not hit its head on the ceiling – in grocery terms we need to build a bigger market hall to fit bigger market stalls.
Australia today has been gifted a positive post-crisis outlook. It's a gift of different generations.
We need to honour the late 19th Century pioneers of the West and North, who discovered our natural resources and toiled hard in exhausting conditions to reveal to Australia her wealth in trading resources.
We should respect the economic reforms of the Hawke & Keating Governments, who floated the dollar and deregulated our markets. These moves today ensure we can trade with our global partners freely and cushion the inflationary impact of strong terms of trade.
And as a new Minister in a three year old Government, I can with a touch of objective attachment (but not much) recognise and applaud the excellent work of the Rudd & Gillard Governments in steering Australia through the Global Financial Crisis. And I'd especially like to recognise here the efforts of Treasurer Wayne Swan.
These varied efforts – some recent and many some time ago – all coalesce to present Australia with a welcome road ahead into 2011.
Global economic outlook more volatile
The global economy has recovered from the GFC induced recession faster and better than expected.
However, this recovery remains patchy and uneven. Growth in advanced economies continues to lag well behind that of emerging economies, particularly emerging Asia.
Not only is the 'two-speed' global economy likely to persist for some time, uncertainty continues to cloud the global outlook.
Currently, the most prominent risk is euro area sovereign debt problems spilling over to the rest of Europe, thus spilling over into the global financial system and then global growth prospects taking on water.
Fiscal consolidation (or budget tightening) efforts in 2011 may prove challenging for some advanced economies whose recoveries to date have been reliant on temporary factors such as fiscal stimulus.
In addition, the capacity of the advanced economies to respond to any substantial slowing in growth is constrained by high fiscal deficits and debt, and near-zero monetary policy rates.
In other words, for many governments, to spend more is very difficult and to cut rates is almost impossible.
Chinese economic outlook is also strong
Through all of the ebbs, flows and challenges - China has recovered well from the global downturn, with mostforecasters expecting that it will comfortably exceed Beijing's growth target of 8 percent this year.
We know China's economy is moderating as expected, as infrastructure stimulus winds down and the Government's credit tightening policies take effect. Nonetheless, concerns about the global recovery mean authorities will likely maintain a "flexible" policy approach.
It's important for us to bear in mind that while the world now has three economic superpowers – the US, the European Union and China – the first two are simply not as deeply integrated into the trading world economy as China is today. Trade accounts for more than twice as much of China's economy as it does for the US or Europe.
To state the obvious – China needs a less volatile global recovery; and if the rest of the world's economy is to get healthier, quicker - then it too needs China to have its fundamentals right.
A key risk to the outlook in China is the rapid growth in loans, which is generating inflationary pressures.
While a snapshot of the Chinese economy does present some different colours in the economic forecast, a wider angle picture of Chinese progress is penetratingly black and white – over the past 30 years growth has averaged 10 percent.
Importance of Chinese economy to Australian economic growth
In 2009, China was Australia's largest export destination (overtaking Japan) and Australia's largest source of imports (overtaking the US).
China is of course a key customer for Australia's mineral exports, particularly iron ore and metallurgical coal – the key ingredients in steel making.
Last year China purchased more than two-thirds of Australia's iron ore exports and nearly one-fifth of our metallurgical coal exports.
Overall last year, China purchased approximately one quarter of Australia's total non-rural commodity exports.
With further expansions in mining capacity expected in the period ahead — driven by expectations of ongoing increases in commodity demand in emerging Asia, Australia's commodity exports are expected to increase further.
And given that China's path of urbanisation and industrialisation is expected to continue quickly, China's demand for Australia's commodity exports are also expected to continue.
Since Federal Labor's election in November 2007 our Government has approved around A$60 billion in Chinese investment (including business and real estate investments). We are supportive of foreign investment and convinced of the rewards that flow from an open, competitive economy.
Despite what may have been written about Australian attitudes to Chinese investment by some of the populist press, in this initial 3 years in office, more than 200 proposals have been approved with only a very small number of these having conditions attached. Most of these investment proposals received little, if any, press coverage and raised no national interest concerns.
Like many countries, including China, Australia reviews foreign investment proposals to ensure they are consistent with Australia's national interest. It is important to stress that our consideration of foreign investment proposals is on a case-by-case basis.
We prefer this flexible approach to hard and uneconomic rules. Economically irrational laws that prohibit an entire class of investments too often also stop valuable investments. The case-by-case approach maximises investment flows, while protecting Australia's interests.
In June 2010, Australia released an easy-to-read version of our foreign investment review framework on 30 June 2010. This policy statement, which details the factors we consider, will soon be made available in other languages including Chinese, Japanese and Bahasa Indonesian.
How our trade and investment has changed over time
Now we all know bilateral trade between Australia and China has increased markedly.
In the last year of last century the value of total two-way trade between Australia and China was $12 billion. Over the following 10 years this had increased by around 600 percent - to $85 billion in 2009.
And by the turn of the century the pace was quickening - the value of two way goods trade to China now is 32 times what it was 20 years ago
China comprised only 2 percent of Australia's total goods trade in 1989, yet now it accounts for 20 percent of our total goods trade.
The level of foreign investment by China in Australia has also increased strongly over the past decade – rising by around 430 percent since 2001.
In 2009, the level of foreign investment by China in Australia stood at around $17 billion.
The level of foreign investment by Australia in China has also increased over the past decade – rising by around 240 percent since 2001.
In 2009, the level of foreign investment by Australia in China stood at around $6 billion.
It's perhaps not adequately recognised that China is the largest foreign buyer of Australian education services. In 2009 there were about 165,000 Chinese students enrolled in Australian education courses (high school through to vocational and higher education). That's approx 27 percent of the education exports market, or more than $6 billion.
Australia is also the third largest destination for Chinese students studying abroad (behind the US and UK). We punch well above our weight in terms of international students – and that includes China.
Tourism is another vital area of our economic relationship. China was the second largest market for Australia in terms of what the economic experts call total inbound economic value (TIEV) - worth $2.8 billion of in 2009 – or 11.2 per cent of total. Only the UK is higher.
And in terms of tourism growth over the past decade – China is the highest of any of Australia's largest markets sitting today at more than 20 percent. Meanwhile China is the sixth largest destination for Australian outbound tourists.
Australia's financial services sector: a new frontier of trade
While the trading relationship today is still a story dominated by the resources, construction and manufacturing headlines – I do want to speak with you about Australia's growth as a financial services market.
Australia has a sophisticated and advanced financial sector. It contributes over 10 percent of GDP to the Australian economy; this is more than mining. It's more than manufacturing.
- We have some advantages over financial services hub competitors:
- We're an educated and mobile workforce;
- We have political stability;
- There's the proven success of Australia's macroeconomic policy framework;
- A sound legal and regulatory framework; and
- A strong corporate governance culture.
Australia's financial system continued to function well throughout the Global Financial Crisis.
Overall, Australia's institutions remained profitable and well-capitalised, and this allowed them to continue to lend throughout the crisis.
Only 9 of the hundred largest banking groups in the world are rated AA or above – and four of those are Australian.
Even at the height of the crisis, no Australian bank, building society or credit union required an injection of government funds
And last month the Australian financial services heavy hitter AXA Asia Pacific was granted "local status" by the Chinese authorities - so instead of being allowed access to just 5 percent of the China market, AXA Asia Pacific can have access to 100 percent of this enormous market in partnership with China's biggest bank.
As renowned Australian economics commentator Robert Gottliebsen noted just this week, this is the biggest services industry deal Australia has ever undertaken and its timing happens to be just as the size of China's middle class is exploding.
We intend to build on these achievements. For example this year the Gillard Government has made further moves to increase the competitiveness of international banks in the Australian domestic market by confirming plans to phase down the interest withholding tax on foreign banks.
As a number of major international based financial institutions have pointed out in response to this move – reducing IWT - will help funnel billions of extra dollars into the domestic mortgage lending market.
Superannuation, our compulsory privately managed retirement savings pool, ensures we have the fourth biggest pool of funds under management in the world and the fastest growing of the top five.
But we would dearly like to make it a bigger and grander feature - and that is why the Gillard Government is passionately committed to taking compulsory superannuation contributions to 12 percent.
I cannot be expansive enough about the mutual opportunities that can arise from Australia's well developed financial services industry. We have institutions to meet Australian's requirements right through their life cycle.
From the first basic savings or transactions account, through to business and home lending, managing retirement savings, life insurance and health care.
With our regulatory framework that has made our system safe and efficient – this I believe is relevant to Chinese citizens who become becoming more prosperous will want the same kinds of choices.
Australia's regulatory framework (twin peaks model)
There are also some interesting possibilities for the Australia-China relationship when examining areas of public policy rather than private enterprise.
Australia's strong performance through the GFC was in large part due to the strength of its regulatory framework.
The framework is based on the 'twin peaks model in which there are two financial sector regulators with clearly defined roles
The Australian Prudential Regulation Authority, is responsible for prudential regulation, including overseeing banking, insurance and the superannuation industry.
The Australian Securities and Investments Commission, is responsible for the integrity of financial markets, market conduct and investor protection.
And of course the Reserve Bank has overarching responsibility for financial stability, monetary policy and overseeing the payments system.
The three agencies and Treasury come together in the Council of Financial Regulators to contribute to the efficiency and effectiveness of financial regulation by providing a high-level forum for co-operation and collaboration among its members.
The Government has worked closely with the regulators in this framework, and made a number of effective interventions to ensure the ongoing viability of Australia's financial system during the GFC.
We directed the Australian Office of Financial Management to invest up to $16 billion residential mortgage-backed securities to promote the securitisation market and support competition in the mortgage lending market.
We established the Guarantee Scheme and the Financial Claims Scheme to protect depositors and Australian financial institutions. The guarantees have restored confidence and addressed the wholesale funding disadvantage that Australian banks faced as a result of the policy interventions of other countries. Consequently, Australian institutions were able to continue lending throughout the crisis.
As we take on the years ahead, I have little doubt that Australia's regulators can offer to international contemporaries some compelling and helpful insights into what we have done and how to address challenges that Beijing might face ahead.
Asia Funds Management Passport
Something that would be of great interest to fund managers is the concept of an Asia Region Funds Management Passport.
This idea comes from a recent report commissioned by the Government specifically examining how we can become a stronger financial services hub.
The Passport would be similar in concept to the UCITS (pronounced You-sits) arrangement that exists in the European Union.
It would provide a multilaterally agreed arrangement for allowing the cross border marketing of funds across participating countries. And it would obviously also help develop jobs, skills, capital flows and better regional control of funds management regulations that do cross borders. It should also help lower fees in the industry – thereby doing the right thing by consumers.
We have a strong economic base and a strong outlook common to both countries. We need to properly understand and earnestly discuss this to ensure we neither take our complimentary circumstances for granted nor misunderstand why we have the strong platform we now do.
And as I emphasised at the beginning, we should continue to base our dialogue on the story of respect.
That Chinese visitors are our fourth largest source of tourism (some 366,000 in 2009) is a story of respect.
That the last census showed that Chinese born Australian citizens or residents numbered 203,000 – the fourth largest of our foreign borns after the UK, New Zealand and Italy – this is a story of respect.
That nearly 4 percent of our residents nominated having a Chinese ancestry in 2006. After English, Cantonese is the third most common spoken in our country after Italian and Greek – this also is a story of respect.
These are all facts about our Australia. But they are chapters of a story titled respect.
Australia and China, at all levels of interaction – citizen, academic, business, diplomatic – we must remain committed to ideas and citing opportunities to secure the next chapter of a good economic relationship.
There will be opportunities for Australia to export more manufactured goods as China's domestic consumption gets hungrier not just for raw resources but for more elaborately transformed manufactured parts and goods.
There is a real emerging opportunity for Australia to exploit the advantages of hosting a world leading education system and research and development base – a skills and ideas factory in essence – and help China and many developing economies find the renewable energy and green collar workforce solutions that the world is asking for.
And there is genuine opportunity for Australia to get increasingly comfortable with our cultural and political integration and relationship with China, even if some aspects of this are non-negotiable for us.
We are a country with a minimum wage, compulsory retirement savings, robust work safety laws & practices, a strong public health system, a tradition of, and future commitment to, environmental protection.
These things are not up for negotiation or reduction irrespective of how much Australia grows and despite how much robust competition a global economy throws our way.
Nevertheless as China rises and as China and Australia grow closer - there may be, indeed there will be, some excellent opportunities for Australia to talk more with our Chinese friends about how some of these Aussie institutions deepen social citizenship and in turn we can appreciate the benefits of a rising China.
Thank you for your time and best wishes for your discussions here.