19 October 2016

China 10 years back and 10 years forward

To summarise the past ten years from an economic and business perspective, China has become globalised, radically restructured its economy and achieved unprecedented affluence.  Australia has benefited from China’s economic growth, first through the mining boom, and now increasingly through Chinese demand for consumer goods and services.

Looking into the future, Australia will continue to benefit from its solid business relations with China as our largest trading partner, but the populist turn in the public debate on China is putting strain on the relationship. Perceptions are important, as Chinese buyers and investors can turn to Australia’s global competitors.

An economy restructured

In the early 2000’s, China was struggling to be admitted into the international trade system. Ten years later, China dominates international trade and has become a net exporter of international investment capital. The new Silk Road (One belt one road) initiative is China’s distinct regional approach to globalisation, expanding China’s economic influence into Central Asia and Southeast Asia,  where demand for Chinese technology and capital is strong.

China’s economic restructuring started under the previous leadership during the misnamed ‘lost decade’. Widespread privatisation and private as well as state sector innovation have pushed Chinese manufacturing to the cutting edge of hi-tech manufacturing across core industries. Going forward, in anticipation of a coming manufacturing revolution, China is moving away from dependence on low-cost labour.

Changing social landscape

Affluence is palpable in China’s cities and developed rural areas. Public wealth is on display in transport infrastructure and public amenities. Many residents now own apartments, cars, electronic gadgets and are able to travel overseas, study overseas, invest overseas and get healthcare overseas. They display a level of private confidence that has not been seen in a century.

However, these achievements have come at a price. Pollution, inequality and well-being are the most visible costs Chinese people have to pay for their rising living standards. Pollution of air, water and food is seriously affecting health. The government is no longer measured only by its ability to grow the economy, but for what it is doing to save the environment and there is currently a lack of trust in the government’s institutional ability to create a liveable society any time soon.

Inequality is another cost of growth that is visible and measurable by the Gini coefficient. Policies directed at solving inequality between regions and urban and rural areas have not prevented the worsening of inequality. There is also a growing awareness of a more fundamental inequality, as China’s former socialist elite morphs into capitalist elite with leading families controlling large industrial fortunes.

The low level response to surveys about well-being and personal happiness indicate that many Chinese people are not as satisfied with their situation as could be expected from the economic achievements their country has made. Concerns about health, economic insecurity and work well being remain strong and are motivating many to seek better environments overseas through property and other investments, travelling and studying in countries such as Australia.

Australia-China business – a relationship built on trust

Australia has benefitted from the economic rise of China through the mining boom, which was in fact a China boom, and since then with the ‘dining boom’ and rising Chinese demand for services. The current populist run against China in the public media overlooks how solid Australia-Chinese relations are and how much of the mutual economic benefit has been built on trust.

Australia is a trusted supplier of essential goods and the second largest recipient of global Chinese outbound investment. The two are linked, as growing trade attracts investment and in the current situation, expansion of trade with China depends on investment that opens up new trade channels.

Australia is also a trusted partner country for the education of young Chinese. Australian universities educate hundreds of thousands of Chinese students. This trust will have long-term consequences when a generation of people who were trained in Australia return to China to take up positions of responsibility.

China respects Australia for its institutions and potential contribution to stability in the region, including multilateral regional cooperation with China. When the Asian Infrastructure Investment Bank was set up, China and regional neighbours were keen to make Australia one of the founding members because of its strong institutions.

The populist debate shows the weaknesses in Australian perceptions of China. Media reporting and general knowledge about the working of China’s government and corporate sector are weak. If economic forecasts are based on financial news analysis that reflects mature Western markets, it is easy to depict China in a permanent economic crisis.

The road ahead

Where will we be in ten years’ time? Based on current trends, we will be in a world where mineral resources play less of a role and where China will have lost much of its international advantage in manufacturing.

The resulting environment will be much more competitive than it is now. The advantage that Australia has over Chinese domestic competitors will be eroded over time when Chinese industries are catching up in markets such as health care, financial services, agribusiness and education.

As our trade becomes smarter and more service oriented, there will be more competition from the United States, Europe, Japan and Latin America. China is already channelling much more investment in services into the United States than into Australia.

Certainly our integration in global value chains will be dominated by China as a global producer and consumer market. Australia will increasingly be a provider of intermediate products and services and therefore dependent on Chinese markets.

If we manage to preserve a peaceful environment over the next decade, the likelihood is that Australia will be actively integrated in regional cooperation and dealing with a dominant China in a collective framework, rather than on purely bilateral basis.

By Hans HendrischkeProfessor of Chinese Business and Management at the University of Sydney Business School

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