Economic Ties that Bind

Labor leader Wayne Swan has his finger on the pulse of the Australian economy as the nation’s deputy prime minister and treasurer, which means he’s well-equipped to explain factors defining the increasingly robust relationship between China and Australia.

The period since diplomatic relations between the two countries were established in 1972 has been marked by an astonishing increase in the scope of interaction, as China’s need for natural resources such as iron ore and coal has made it Australia’s largest trading partner.

Treasurer since 2007, Swan has served in the Kevin Rudd and Julia Gillard administrations.

William West—AFP/Getty Images
Australian Treasurer and Labor leader Wayne Swan in March.

He made swift changes to fiscal policies during the 2008 global economic turbulence. Swan started his term with AU$11 billion in spending cuts to combat inflation, but soon announced an “economic security strategy” worth AU$10.4 billion in the face of the financial crisis and global downturn. He unleashed another stimulus package, worth AU$42 billion, the same year, providing government-sponsored jobs to keep Australia on a high-growth track. Euromoney magazine named him the World’s Best Finance Minister in 2011.

In an interview with Caixin before visiting China for five days starting July 10, Swan discussed the nuances of this economic relationship and key recent Australian policy changes, including those included in a report to be published by his government entitled “Asian Century White Paper” on the future of Sino-Australian relations, and the effects of the newly passed Minerals Resource Rent Tax and Carbon Mechanism that took effect in July.

Swan is Australia’s second-in-command and the government’s main budget officer. Excerpts from the interview follow:

Caixin: What are the major topics that you plan to discuss with your counterpart in China during your trip? What are your expectations for achievements?

Swan: This will be my seventh visit to China since being appointed treasurer. My visit will build further on our links and I look forward to discussions on a range of issues of mutual interest—including yuan internationalization and investment—as well as outlining some thoughts about the soon-to-be-released “Asian Century White Paper.”

China is now Australia’s largest, two-way trading partner and the investment links between our two countries are increasing. When we established diplomatic relations in 1972, our two-way trade was worth around AU$113 million. Last year, merchandise trade alone was worth AU$114 billion. China is now our largest two-way trading partner in goods and services; our largest merchandise export destination; and our largest source of merchandise imports. And China has been ranked in the top three sources of proposed investment (behind the U.S. and U.K.) for the past three consecutive years.

In addition to our trade relationship, people-to-people and cultural links are developing strongly. Over half a million Chinese tourists visited Australia in 2011, and China is Australia’s largest source of overseas students. According to our last census in 2011, Mandarin was the second most widely spoken language in Australia after English.

There’s no doubt that this century is the Asian Century. The global economy is rapidly gravitating toward our region and China is a very big part of this story. And as we continue our journey together through this transformative period, our official, cultural, and economic ties will become stronger still.

Caixin: As Australia’s No. 1 trade partner, how will China’s current economic slowdown impact Australia?

Swan: I believe there are good reasons to be optimistic about China’s prospects.

First, as it proved during the global financial crisis, China has the policy flexibility to fire up its domestic engines of growth if external demand falls sharply. Second, infrastructure, manufacturing, and property investments are increasingly driving China’s growth, rather than exports. And third, rising living standards are creating new ranks of middle-class consumers right across Asia, which will demand more goods and services, including from countries like Australia.

Of course, I am not saying it will be all smooth sailing from here, as there will inevitably be bumps along the road. That is a reality of the global economy we now live in, which reinforces the importance of both ensuring economic flexibility at home and promoting necessary development and reform abroad, including through the G20.

That is why our government has commissioned a white paper looking at Australia’s engagement with Asia. It is why we are implementing the Minerals Resource Rent Tax (MRRT) to ensure that the Australian community gets a better return on our biggest and most profitable mineral commodities—coal and iron ore. It is also why we are taking steps to build savings steadily over the forward estimates, to ensure Australia’s public finances and economy remain strong, and to underpin confidence at a time of heightened global instability.

Caixin: Both the MRRT and carbon tax came into effect early this month. How will these new policies affect Australia’s ability to attract future foreign investment?

Swan: The MRRT and Carbon Pricing Mechanism are both critical measures that improve the future sustainability of the Australian economy. The MRRT ensures that all Australians get a fair return from the nation’s non-renewable resources and putting a price on carbon is the most environmentally effective and cheapest way to cut pollution and build a clean energy economy for the future—a vital economic reform because unchecked climate change will inflict massive damage on our economy and our environment.

The ongoing health of the resources sector is important to the Australian economy. The government wants to see investment in the sector remain strong. It is for this reason that the MRRT and the Carbon Pricing Mechanism have been carefully designed to ensure investments continue to prosper.

Australia has continued to see record levels of investment in the resources sector following the announcement of these taxes, which demonstrates that the outlook for investment (both domestic and foreign) is positive. Total capital expenditure is expected to increase from a staggering AU$158 billion this financial year to a record AU$173 billion next financial year. In mining alone, businesses are planning to spend an expected AU$119 billion in 2012-13. This is 13 times the level of investment before the first phase of the boom. And there’s more of this to come, with the total pipeline of mining investment now at an all-time high of half a trillion dollars—and over half of this at an advanced stage.

Australia is a welcoming environment for foreign investment and a globally competitive location to do business.

Caixin: Along with the implementation of MRRT and carbon tax, Australia is taking the opportunity to accelerate the development of “green energy” projects, while China is trying to develop a “green economy.” How can these two countries cooperate and in what areas?

Swan: In addition to the Carbon Pricing Mechanism, the Australian government is providing significant support to drive investment in clean energy technologies. Treasury modeling suggests that Australia’s Clean Energy Future Package, which includes a carbon price, will drive approximately AU$100 billion of investment in clean energy over the period to 2050. Australia welcomes international investment in renewable energy generation projects. Renewable energy is a crucial feature of Australia’s pathway to reduce emissions by 80 percent compared with 2000 levels by 2050.

There is strong potential for collaboration between Australia and China on climate change. The Australia-China Climate Change Partnership was established in 2003, and is currently underpinned by a 2009 memorandum of understanding. The MOU provides for annual Ministerial Dialogues on Climate Change “to deepen mutual understanding and guide bilateral cooperation on climate change” as the centerpiece of the partnership. It identifies areas for cooperation, including: policy dialogue; science and adaptation; energy efficiency; technology cooperation and transfer; capacity building and public awareness; agriculture, land use, land use change, and forestry.

There is now a high-level of interaction between Australia and China on climate change issues, including emissions trading, and two-way exchanges on policy formulation and design are set to intensify over the coming year.

Caixin: In addition to the mineral industry, Chinese investors are also interested in agriculture. But foreigners purchasing land is still a sensitive topic in Australia. Is it possible for the Australian government to ease the policy?

Swan: Foreign investment plays an important role in maximizing food production, supporting Australian jobs and supporting Australia’s position as a major net exporter of agricultural produce, by financing investment and delivering productivity gains and technological innovations. Australia’s foreign investment screening arrangements have not changed. These arrangements balance the need to protect Australia’s national interest while ensuring we do not impose an unnecessary regulatory burden on foreign investors.

The government is taking steps to ensure that its policy regarding foreign ownership of rural land and agricultural food production is well understood. In January 2012, the government released a policy statement on foreign investment in agriculture to provide more guidance on the issues considered when assessing foreign investment applications.

Caixin: It’s been reported that China is in talks with Australia about setting up an offshore yuan market in Sydney. What would that mean for the Australian and Chinese currencies?

Swan: With a booming trade relationship and burgeoning two-way investment flows, the internationalization of the yuan is of key interest to Australia.

Over the next decade, yuan internationalization is likely to lead to the yuan being used extensively in the Asia-Pacific region. Already, all trade transactions between mainland China and the rest of the world can be settled in yuan. Almost 10 percent of China’s total trade was settled in yuan in 2011, from virtually zero only two years ago. Forecasts suggest that the yuan could become one of the world’s top three trade currencies by around the middle of this decade.

China allowed the direct trading of the Australian dollar against its currency on its foreign exchange market last year. Also, the Reserve Bank of Australia and the People’s Bank of China recently announced an AU$30 billion currency swap deal, making Australia among the first developed countries to do so. This is a very positive step and it’s good to see the moves in the private sector already well under way to take advantage of the opportunities opening up in this market.

I’ll be building further on these efforts by co-hosting a forum on yuan internationalization in Hong Kong next week which will bring together key private sector parties and policymakers and help promote and broaden this existing market.

Caixin: China and Australia finished an 18th round of negotiations on a Free Trade Agreement (FTA) in March. In what area has there been progress, and what are the biggest disagreements?

Swan: The Australian government continues to pursue a Free Trade Agreement with China which would further strengthen our bilateral commercial relationship. FTA negotiations have been lengthy due to the range of interests and sensitivities on both sides. Australia hosted the last negotiating round in Canberra in March 2012. Australia’s trade minister, Dr. Craig Emerson, has met regularly this year with his Chinese counterpart, Commerce Minister Chen Deming, to discuss ways to accelerate the negotiations.

China is already Australia’s largest trading partner, with total annual trade valued at approximately AU$120 billion in 2011. At the same time, Australia ranked fifth amongst China’s sources of imports and Australia is an important and growing destination for Chinese tourists and students. Australia maintains a welcoming stance towards Chinese investment, and consistently ranks as one of the leading destinations for China’s overseas investment.

Zhao Jianfei is a Caixin staff reporter.