The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

12 July 2011

NO.023

Opportunities for Australia in China's Booming Middle Class

Address to the Australian National University's China Update

Australian National University, Canberra

12 July 2011

Thank you Professor Garnaut for your words of introduction. And thank you to the Crawford School at the ANU for inviting me to speak at the 2011 China Update.

The China Update provides an excellent opportunity for some of our top thinkers from Australia and China to exchange views on a topic of immense importance to us all - the global challenges and opportunities of a rising China.

The speed and scale of the changes we are witnessing in our region are unprecedented. The shift in global economic weight means big changes in the global economy, and big changes in our own economy.

China's rise is changing its role in the global economy, but it's also changing the global political landscape. It's now inconceivable that China is not at the fore of every serious policy makers' mind.

There is probably no Treasurer of Australia who has spent as much time as I have thinking about China's rise, its implications for the global economy, and the role it is playing in driving a transformation in our own economy. Nor have any of my predecessors spent as much time engaged with my Chinese counterparts to ensure the relationship continues to evolve.

Economies in Transition

China's rise is driving fundamental changes in our economy.

Of course, our nation has been through big transitions before. If I think about the Australia I grew up in, it feels like it's almost in a different universe to the one we have today.

Life was more local. We knew the community around us much more intimately than we knew about the world outside.

The jobs were different. We had a larger manufacturing and agricultural base, jobs in services were few, and we didn't really feel part of the wider world, certainly not Asia.

When I went to school, kids were more likely to be learning French or Latin, certainly not Mandarin or Indonesian.

Our economy looked inward and industry was shielded from the rest of the world.

But times have certainly changed since then. In Australia, reforming governments of the past opened us up to the world as globalisation started to take hold.

The Hawke and Keating Governments knew our future lay in being more productive and more effective at the things we do well. They floated the dollar, brought down the tariff walls, modernised the labour market, and opened our financial sector to greater competition. They embraced the region, rather than hiding from it.

These reforms transformed us into the open, vibrant, engaged and confident country we are today. And it's been to our lasting benefit.

We're a much richer economy - Australian GDP per capita today is more than two-thirds higher than its level of 30 years ago. But we're also a more innovative and nimble economy - one that sees strength in flexibility.

We've got different challenges, like spreading our prosperity to more people and leveraging the opportunities of the Asian Century to build a high-tech, highly-skilled, low-pollution economy.

Like Australia, if you look back at the China of 30 years ago, you see an unrecognisable country.

China's growth experience of recent decades is well known to all in this room. Over the past three decades, the Chinese economy has grown 10 per cent a year, on average - equivalent to a doubling in size every seven-and-a-quarter years.

Cities and towns are being transformed. Thirty years ago, Shenzhen was a small, obscure fishing village - today it is unrecognisable. Manufacturing and consumer electronics have replaced fishing. It is now a vibrant economy, an economic powerhouse in China surrounded by tall skyscrapers.

Pudong in Shanghai has also gone through a similar and dramatic transformation in the past two decades. Today it commands a famous skyline recognised around the world and has emerged as the financial hub of modern China.

In urban areas, supermarkets are replacing the wet markets as the most popular food retail channels.

But, like any country, the economic development path isn't always a smooth event and there are always challenges along the way. One of the challenges China now faces, is the task of rebalancing its economy - transitioning from the export and investment driven growth model of past decades towards one more oriented to domestic consumption.

So there will be challenges, but there's no doubting the fact that China's journey still has a long way to run.

China is a giant of the past with an extraordinary future. Even after three decades of strong growth, GDP per capita in China is still well below that of recently industrialised economies like Malaysia and South Korea. So there's still a significant amount of potential ahead.

If China can maintain its growth, it will be the world's largest economy by 2020. And even still its GDP per capita will be only around one-quarter that of the US.

This economic transition is bringing tremendous opportunities for our own country.

China's rise has cancelled out some of the ‘tyranny of distance' that dominated discussion of the Australian economy for much of our first 200 years. With the centre of the world economy shifting towards the Asia‑Pacific, we can begin enjoying the benefits of scale and proximity that were denied us while we held an Anglo‑American centric view of our economic life.

The immediate benefits are most visible in the explosion in demand for two of our key commodity exports - iron ore and coal. Our terms of trade have risen to sustained levels not seen for more than 140 years. And the level of investment that is planned in our resources sector is unprecedented in our history.

Of course, not all parts of our patchwork economy are benefiting from these developments. The high dollar that has come with our soaring terms of trade has made things harder for our non-commodity trade-exposed industries.

With the shift that's going on in the global economy, our responsibility is to manage the challenges of transition and maximise our opportunities. I've said before that this transition will impose changes in the structure of the economy as big as any we have seen before. It certainly puts the current debate we're having about the economic impacts of a carbon price into some perspective.

Just consider these facts: gross national income has risen more than 30 per cent over the past seven years, as the terms of trade have increased over 50 per cent. In contrast, putting a price on carbon pollution will mean national income is about half a percent below where it would have been in 2020.

China's Rising Middle Class

Of course, the mining boom is only one part of a much bigger and evolving story about the influence of China's rise on the world. The China story is not just a mining story; it's also a story of its dynamism and the spectacular growth we're seeing of its middle class. China's rapid growth is delivering hundreds of millions of people into a burgeoning middle class.

It's important here to distinguish between the complex and subtle process of ‘middle classing' and the simple process of ‘urbanising'. Some of China's many millions of internal migrants have achieved lifestyles that qualify as middle class, but the vast majority have not, at least not yet. It is the present and prospective shift of China's current working class and working poor into empowered consumers that will mean so much to Australia.

In 1980, the income of the average Chinese citizen was 2 per cent that of an average American. In 2010, it was 16 per cent that of the average American.

As Larry Summers has pointed out, the fact that these developments have influenced a population that accounts for one-fifth of the world's people makes China's rapid growth one of the most important economic developments in our lifetimes. By the end of this decade China could well pass the US as the world's single largest middle class consumer market.

China's growing middle class will generate new consumer markets and new opportunities for Australian businesses - in tourism, advanced education, and the myriad of other services that Australian companies successfully sell to the world today.

Education is the largest of Australia's services exports, and the number of students from China studying in Australia is now greater than from any other country.

China is also making up an increasing share of tourism in Australia - it has already overtaken traditional markets like Japan and is close to catching up with the US. Think of the potential: 57 million mainland Chinese tourists travelled overseas last year - this compares with 10 million in 2002.

Looking at a smaller niche in the services sector, there are more than 20 Australian architectural firms present in China. Australian architects are designing the innovative residential buildings that house the rising middle class and shopping malls where they spend their newly-earned wealth. The Australian designed Olympic Water Cube is now a landmark in Beijing.

Opportunities also lie in agriculture. China has less than 10 per cent of the world's land and one-fifth of its people. The north of the country is water poor. It suffers from the salinity issues so well known to us here. And its diet is changing in ways that will put extreme pressure on its agricultural sector to boost its productivity. Some of the rise in demand will inevitably spill to the rest of the world, and Australia is well placed to take advantage of this.

China's middle classing won't just generate benefits for traditional markets, but in high-end services, information and communication technology, and clean energy.

Domestic Policy must be on the Front Foot

If we are to capitalise on these opportunities, then we need to stay on the front foot. And our success will rely more than ever on having a highly-skilled, highly-mobile workforce.

That's why we're investing heavily in education, training and labour mobility programs, to help people make changes that suit the economy of the future and to make sure they've got the skills they need to succeed. And it's why we are putting in place incentives to encourage and reward work.

At the same time, we're investing heavily in infrastructure, so all of our sectors - mining included, but also manufacturing, tourism, and anyone who wants to get goods and people in, out or around Australia - can be effective.

We're building a world-class broadband network that will allow Australian businesses to compete in ways that we can still only just imagine.

We're building national savings, through lifting the compulsory superannuation rate to 12 per cent - building a bigger pool of funds that can be drawn on to develop our national economy through investment.

We're also increasing public saving relative to investment by around 4 per cent over the next two years, through our rapid fiscal consolidation.

We're reforming our tax system to increase incentives to work and ensure we remain competitive - cutting the company tax rate, reforming superannuation and reforming our personal income tax system by trebling the tax free threshold.

All of these reforms are part of our broader agenda to ensure we capitalise on the opportunities of the mining boom. We don't want to stand in the way of some of these big changes coming to our economy. I've always believed that as a nation we're at our best when we embrace change, rather than resist change.

This is exactly the point with addressing climate change. We can either choose to engage, or we can stick our heads in the sand. We can either ignore the rising threat of dangerous climate change, or begin the transition to a clean-energy future and benefit from a wave of investment in renewables, encouraged by a carbon price.

The world is moving to cleaner sources of energy to power their businesses. If we're to stay competitive in the world we cannot ignore this shift. For a first-rate, first world economy, there's no alternative.

As a member of the G20, as the developed world's largest emitter of carbon pollution per head, as a friend of the United States and China, as a useful and respected contributor to global debates, we can no longer hope to be unnoticed.

We can no longer hope to slip by saying one thing and doing another. We can no longer emit vastly more than our fair share of carbon into the atmosphere. We can no longer sit by and watch the massive opportunities in the renewable and clean-energy markets of the future pass us by.

China also recognises this reality. China is already leading the world in the uptake of renewable power - it is the biggest producer of solar panels and is installing wind turbines at the rate of one every hour. China has set the goal of reducing emissions per unit of GDP by 40 to 45 per cent by 2020 and is planning to trial emissions trading in key provinces and cities. And as part of its shift to less energy-intensive growth, China is currently shutting down high-polluting, inefficient coal power plants at the rate of one every one to two weeks.

What does this mean for the Asian Century? It means a century marked not only by a shift in economic clout to this region, but also by the rise of a more prosperous Asia, supported by cleaner economic growth.

China's Growing Influence in the World Economy

As China's weight in the global economy grows, so must its role in international economic forums, which must be recognised in its representation in these forums. Australia has been a vocal and unremitting advocate of greater representation of emerging and developing economies in international financial institutions, to reflect their growing weight in the global economy.

Unlike the G7 or G8, the G20 represents East and West, the advanced and developing economies. Through the G20, both Australia and China are working more closely than ever before to strengthen the global economy and our places in it.

As Treasurer and now as Deputy Prime Minister I have made it a priority to visit China and have done so on numerous occasions. In particular, I signed a memorandum of understanding with the NDRC Chairman in 2008, under which we undertake an annual economic policy dialogue. This is part of an unprecedented level of engagement between our two nations driven by a mutual understanding of the complementarities of our two economies.

And these links go beyond just government. There are also business links and research partnerships, such as the work on the Chinese steel industry jointly run by the ANU and the Chinese Iron and Steel Association.

This also underscores the value of building business to business links. That is why I and other Ministers look forward to leading business delegations to China in the period ahead.

Conclusion

China's transformation is changing the global landscape. It's changing how we think about the world, and bringing about a further wave of structural change in Australia.

But we cannot expect to sit back and wait to be swept up in China's wake. We have a huge job to do - to leverage the opportunities from the changing global landscape and build a highly-skilled, high-tech, low-pollution economy.

The future opportunities for our own country are vast. And it's my belief that we're on the verge of something truly special, if we're willing to get the policy settings right.

We can turn higher commodity prices into higher education and better jobs for more Australians. We can have an economy where workers and businesses are dynamic, where they can and do embrace change and take advantage of it. And we can have an economy where investments in the renewable and clean-energy technologies of the future are encouraged by a carbon price.