China’s short march to prosperity

All of Australia’s ambassadors to China since 1985 have hailed from Western Australia. With China emerging as an economic powerhouse, Alison Birrane and Jim Hawtin examine China’s recent history and the State’s place in it though the eyes of the men who helped forge that relationship.

Australia's current ambassador to China, Dr Alan Thomas, first visited China on his honeymoon in 1973.

His new bride had recently returned from a two-year stint as one of Australia’s first exchange students to the mainland after China had opened its borders, and she had wanted to show him a country she had fallen in love with.

When he took up his diplomatic posting 30 years later, Dr Thomas was impressed at the rate of change that had propelled the once “iron rice bowl” – fed by monolithic State-run enterprises – into its current status as the economic powerhouse of South Asia.

This is a sentiment echoed by the previous six Australian ambassadors to China, all of whom, including Dr Thomas, were raised and educated in Western Australia.

WA has also played a crucial part in China’s development through the secure supply of traditional commodities such as iron ore, energy, non-ferrous metals, wool and grain.

Speaking at a recent WA Business News Meet the Ambassadors Breakfast, Dr Thomas said the rapid industrialisation of the Chinese economy has occurred in only decades, whereas in Europe the same transformation took hundreds of years.

To describe China as a burgeoning economy is to understate one of the most remarkable economic developments of modern times.

Dr Thomas believes China’s new leadership under the watch of President Hu Jintao and Premier Wen Jiabao marks a new era in China’s trade and economic relations.

More open borders, increased dialogue on regional trade and economic issues, a commitment to economic and social reform and an emerging middle class hungry for travel and with a voracious appetite for conspicuous consumption, are all hallmarks of China’s new economy.

These are also drivers of new markets and opportunities for Australian business in China.

While more than half of Australia’s trade with China is in traditional commodities, opportunities in services, banking, education and tourism are there to be had for those companies willing to take the time, according to Dr Thomas.

Further, he said China’s rise had occurred at a much faster rate than expected.

“China’s GDP last year was about $US1.42 billion, which means that it is the 7th largest economy in the world,” Dr Thomas said.

“If you take purchasing power parity figures, as economists tend to like these days, China is probably the second largest economy.

“It is the world’s largest recipient of direct foreign investment and its contribution to world economic growth is second only to the US.

“China’s rise is driving world demand for energy, minerals and agriculture products.

“It is also rapidly moving up the ranks of the world’s largest trading nation.

“Its share of world trading is currently about 7 per cent, which is three times what it was only 10 years ago.

“If China’s reform is to stay on track, and we hope it certainly will, then its economy will be about the size of Germany’s by 2010 and will rival Japan’s by 2030.

“We think that China is capable of maintaining growth of between 7 and 9 per cent,” Dr Thomas said

Such dramatic change is not without costs, however.

As China’s economy grows, so too does the divide between rich and poor, with whole towns of unemployed peasant farmers living in the so-called ‘rust belt’ of north-eastern China.

Many farmers and workers of now-defunct State-run enterprises are without work and flocking to the cities in search of employment.

“This is a potential social time bomb for the government that needs to be managed,” Dr Thomas said.

China’s growth was recognised early in WA, with good Australia-China political relations forming the basis of several significant trade deals, particularly iron ore and LNG.

This year BHP Billiton signed a $9 billion deal to supply four Chinese mills with 12 million tonnes of iron ore each year for the next 25 years. The Chinese mills also took a 40 per cent stake in one of BHP’s iron ore leases.

BHPB and Rio Tinto also secured one of the biggest increases in iron ore prices this year as China struggles to feed its steel mills.

“Our political relationship is extremely important in terms of the whole of our economic and trading relationship with China,” Dr Thomas said.

“More so than any other country, the government is very much involved in deals in China, whether they are small undertakings or even those very large deals like the $25 billion ALNG deal.”

This close involvement manifests in high-level reciprocal political visits.

China’s importance to Australia and the world was identified early – both the Whitlam and Fraser governments invested significant resources into fostering a relationship with China following Australia’s official recognition of that nation in 1972, and its subsequent commitment to becoming a market-based economy.

But it was not until the Hawke era that the Australia-China relationship flourished.

According to Professor Ross Garnaut, ambassador to China from 1985 to 1988, Mr Hawke, following discussions with then Chinese premier Zhao Ziyang, formed a view that it was enormously important to Australia that the economic reform and internationalisation of China was successful.

“He saw that if China was successful in that it would become a huge trading partner for Australia and that would be good economically,” Professor Garnaut said.

“But also it would make China a more stable and prosperous country and that would make China a better partner for Australia in securing peace and good relations in the Asia Pacific region.”

Professsor Garnaut’s brief as ambassador to China was to “especially encourage the economic reforms and link Australia in closely”.

The Chinese, who were developing economic reforms, were interested in discussing China’s new policies and saw Australia as an important partner, particularly due to the security of supply, he said.

“I think the fact that Australia and WA were seen as secure and stable sources of major commodities, including iron ore, minerals and metal, wool and grain at a crucial time, made Chinese leaders more confident in relying on international markets,” Professor Garnaut said.

One of the first key deals – one that still forms the basis of many deals the Chinese make today – was the joint venture in Hamersly Iron’s Mt Channar mine, came to fruition in during Professor Garnaut’s tenure.

China took a 40 per cent equity in the mine and contracted to take all production, which was initially 10 million tonnes annually. But this grew to a much larger amount.

To do this China had to introduce new policies and regulations in many areas.

Despite this, the Chinese leadership was deeply committed to the process and once the policies had been adopted they stuck and were repeated in many other areas and with many other countries, according to Professor Garnaut.

The flow-on benefits of this approach are evident 15 years later with the $30 billion contract to supply North-West Shelf LNG to the China National Offshore Oil Company.

Not that the relationship between the two countries has been all smooth sailing, however.

Among the setbacks and strains to the relationship have been disagreements over human rights issues, and the status of Taiwan and Hong Kong, among other things.

The 1987 stock market crash was a particular weakness in WA’s Chinese investment plans, and Professor Garnaut suggests some local companies “were among the over-extended Australians to disappoint their Chinese partners”.

But the biggest test in the relationship came in 1989 and the Tiananmen Square massacre.

The event, in which it is estimated between 800 and 3,000 protestors were killed by the Chinese army, not only resulted in most countries applying sanctions against China, but threatened to set back more than a decade of economic reform.

The incident was also a major blow to the growing foreign business confidence in China.

China’s huge growth rate – up to 75 per cent each in some cities – contributed to the Tiananmen massacre according to Australia’s ambassador at the time, David Sadleir.

Mr Sadleir said huge wealth divides suddenly formed in the cities.

After the massacre it took a number of years to restore foreign business confidence, as well as the trust of an international community which continued to apply sanctions against China.

Up until then, Australia’s relationship with China had remained on even footing, however in the aftermath of Tiananmen it was approached at “arm’s length”.

“It was a tough period but we came back, we were even the first country to start a dialogue for human rights with China,” Mr Sadleir said.

He said some of the communist conservatives even tried to seize on the massacre to return to the communist system.

But the reforms could not be reversed.

“They were systemic now the system depended on them,” he said.

Despite the setback Australia remained firm in its outlook for China and this seemed to spark a second round of Australian business interest, led by major Australian companies such as BHP and ANZ.

A number of smaller manufacturing concerns also undertook Chinese joint ventures.

This was encouraged by the Chinese government’s formal decision in 1992 to move to a socialist market economy.

It became policy that market forces were not incompatible with a socialist country, and that China should commit to high economic growth.

Richard Campbell Smith said that during his tenure as Australian ambassador to China between 1996 and 2000, the markers of a consumer-driven society became visible, with many Western multinationals establishing a presence in China.

McDonald’s, Starbucks, IKEA, LG and companies of that ilk were all posturing for a slice of a consumer market estimated in the billions of dollars.

China’s entry into the World Trade Organisation has also provided a much-needed push to expedite economic and regulatory reform, and an increasingly overseas-educated Chinese workforce has brought international business practices to the mainland.

This has also created new markets in education and tourism, according to David Irvine, who was Australia’s ambassador to China from 2000 and 2003.