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National Interests Demand Business Voice On China

11 August 2016

Australian business community, we need to talk about China.

Since the Permanent Court of Arbitration handed down its judgement on the case brought by the Philippines against China's activities in the South China Sea (SCS) on 12 July 2016, the overwhelming focus in Australia has been on the security and geo-political implications of the decision. Little has been said about the potential economic consequences of an escalation in tensions.
 
The SCS, and the current deliberations over the Ausgrid sale, present us with case studies in the changing strategic picture for Australia and its relations with China both on the economic and security fronts. It provides a trigger for all interested parties - including Australian business - to talk about the risks and the opportunities for Australia’s relationship with China.
 
Whilst not downplaying the priority of security, Australian economic interests should also factor prominently in our strategic deliberations vis-à-vis China.
 
China’s economy is already the second largest in the world, with a GDP of $US11 trillion, behind the US at $US17 trillion. And whilst economic growth is slowing as China makes a difficult economic transition, even growing at 6.5% China is on track to add more than $US700bn to its GDP this year.
 
Our economic relationship with China has flourished. Two-way trade with China reached $155 billion in 2015 making China by far our leading trading partner – the next largest is the US at $70 billion. China is our fifth largest supplier of capital with a stock of foreign direct investment of $35 billion, most accumulated in the last decade.
 
The nature of our economic relationship is changing. The World Bank has estimated that China’s middle class consumers will reach a staggering 850 million by 2030. As China’s services sector and consumption grows, our trade relationship will become less transactional in nature and more reliant on people to people contact and our “brand”.
 
Weaker commodity prices have seen the total value of our exports to China decline in each of the past two years. Whilst our total goods exports have declined, our services exports have increased from $7.1 billion in 2013 to $9.8 billion in 2015. And consider this: our services exports to China exceed the value of our iron ore exports to Japan and Korea combined.
 
International education and tourism are our third and fifth largest exports respectively. Together they generated export revenues from all countries of $35 billion in 2015. These sectors employ over half a million Australians. Future growth for both sectors is significantly tied to our relationship with China as the fast growing Chinese middle class buy “brand Australia”.
 
With an estimated 141,000 Chinese students in Australia in all sectors, China is by far the largest source of foreign students and well more than double the next largest group from India. Some states are particularly welcoming to Chinese students in the higher education sector: in the ACT for example, more than half of all foreign students are from China. In Victoria that number is 37% and in South Australia reaches 42%. Australia is the third most popular destination for Chinese students behind the US and Japan.
 
China is also expected to become our largest source of tourist arrivals eclipsing New Zealand in 2017/18. Already our largest market if measured by total expenditure, Chinese visitors in
Australia will account for 43% of the growth in arrivals and 60% of the growth in visitor expenditure over the next decade, according to Austrade.
 
And China has made it clear in a number of ways that "friendship" has economic benefits, but conversely, there are economic costs associated with actions that are seen as "unfriendly".
 
By almost any measure our relationship with China matters enormously. Whether it continues to prosper or falls victim to its shortcomings, China will have a truly strategic impact on Australia’s fortunes.
But our economic relationship has been largely separated from our security and geo-political relationships in the region. Business gets on with doing business and our elected representatives and public servants in Canberra deal with issues of national security and geo-political matters. Business needs to do more to articulate the economic story.
 
The stakes are high and we must get this right. We can no longer separate our economic and security interests – they go hand in hand in this new world.
 
China is changing and so is our relationship with it. We face new circumstances, new challenges and new demands. This requires a new way of thinking and a wider strategic conversation.
 
The business community—traditionally at arm’s length from our strategic and security decision making—urgently needs to be heard in explaining our strategic economic interests to the Australian public and government leaders.
 
There might be times when our policy makers have to make a tough call, but they should not have to go it alone. The national debate should be as fully informed as possible given the critical importance of our economic relationship with China to Australia’s long-term national interests.
 
Andrew Parker is a Partner and the Asia Practice Leader at PwC. Dr Bates Gill is a Professor of Asia-Pacific Strategic Studies in the Strategic and Defence Studies Centre at the Coral Bell School of Asia and Pacific Affairs at the Australian National University. Both are Directors of China Matters.