Ladies and gentlemen, thank you for inviting me to speak to you today.
I would also like to thank Professor Ian Chubb and the Australian National University for hosting the China Update Conference once again. And I would particularly like to welcome those of you who have been able to make the journey from China to attend this conference in Canberra. I hope you enjoy your time in Australia.
One of Professor Chubb's predecessors, Sir John Crawford, took a deep interest in the relationship between Australia and its neighbours in Asia and the Pacific. The school that bears his name today does a wonderful job of honouring and building on his legacy, and this annual conference on China is an important part of that.
Before I get into matters economic, I would like to address the current matter of the detention of Mr Stern Hu in China, as I know it will be on the minds of everyone in this room. As is proper, I will leave detailed comment on this issue to the Minister for Foreign Affairs, but I would like to re-affirm that the Australian Government will be taking a responsible and methodical approach to this case. We will make appropriate-level representations, at the appropriate time, in support of Mr Hu, who is of course an Australian citizen. As the Foreign Minister has made clear, we may well be in for the long haul in regard to this case. Australian officials will continue to press Chinese authorities for further detail on the reasons for Mr Hu's detention and reiterate Australia's view that his case should be handled expeditiously. I know the Foreign Minister will be having more to say on this case, so it wouldn't be appropriate for me to comment further on it at this time.
If I reflect on the time since the Rudd Government came to office and I became Treasurer, it seems that global economic developments have been moving at an extraordinary pace. We have gone from a situation where the world economy was booming and there seemed to be an almost insatiable demand for Australia's mineral, energy and agricultural exports, to one of global recession and declining trade.
As a government, we have instituted a number of extraordinary measures to cushion the Australian economy from the worst effects of a deteriorating world economy – measures to ensure the continued functioning of credit markets and provide direct stimulus to the economy as appropriate.
When I think back on it, it surprises me that all of this has happened in a period of less than two years. It seems like it should have been much longer.
It amazes me, then, to think that China has been going through continuous and profound changes for decades: changes that Sir John Crawford witnessed in his lifetime; changes that we have seen in the 25 years since; changes that are still going on today. And these changes have occurred in a country that occupies more than a twentieth of the world's land area and today contains the better part of 1½ billion people.
Political scientists and economists have struggled over the years to find a term to categorise countries like China — a term to capture both the low per capita incomes that characterised its economic situation in the middle of last century, along with the economic dynamism that brought it to where it is today. The good news for the people who invent awkward terms like 'newly industrialised country' is that China seems determined to close the differences in per capita income and other measures of development at a pace that will soon make such a distinction irrelevant. And it seems quite possible that, within my lifetime, it will be largely successful in meeting this aim.
I would like to talk in more detail about the growth of China's economy, because it has been such an important determinant of developments in our own economy in recent years.
Of course, until very recently China was growing very strongly and demanding increasing volumes of commodities, particularly iron ore and coal. Combined with pretty strong growth elsewhere in the world, prices for mineral and energy commodities were also up substantially.
For a commodity-exporting country like Australia, the benefits of these events were multiplied through the economy. First, our export volumes were increasing. Second, the prices that we received for those exports were higher. These two factors led to stunning growth in Australia's national income. And this induced further rounds of increasing spending, particularly through higher rates of business investment in the commodity sectors of the economy.
The effect of this growth in national income on the federal Budget would almost have been enough to make any Treasurer smile. Almost. Because much of the higher government revenue from the commodities boom was directed straight back into the economy through higher government spending. This made the good times feel even better but, unfortunately, that feeling was temporary.
In 2007, the world began to notice what seemed to be a fairly isolated disruption in the US market for sub prime mortgages. Northern Rock, a UK mortgage lender, collapsed in the second half of 2007.
By 2008, it became clear that the problems had systemic ramifications. The collapse of Bear Stearns in March and Lehman Brothers in September stand out most clearly. Growth in the advanced economies began to slow sharply.
For some time, it seemed possible that China's vast potential for internally generated growth and lower exposure to world capital markets would be sufficient to insulate it from the global financial crisis. But its huge trade exposure meant that this was not to be. China's growth has more than halved over the past 18 months. And its export sector has contracted, with flow-on effects to its industrial base.
On the silver lining side of things, China is still expected to be the fastest growing major economy this year, notwithstanding that its growth has slowed. And this is one of the factors that helped the Australian economy to grow in the March quarter of this year, when almost every other advanced economy went backwards.
Let me put some numbers around this. In the six months to the March quarter, Australian export volumes increased by 1.8 per cent. In contrast, exports from the UK, France, Canada and the US have all fallen by more than 10 per cent over the same period.
A common factor behind Australia and China's resilience to the impact of the global recession has been our macroeconomic policy responses. Both countries implemented large stimulus packages at crucial times to support growth. And infrastructure investment has been a key feature in both of our fiscal stimulus packages. We have both provided economic stimulus that will support growth now and build capacity for the future.
Starting last year, the Australian Government has responded with a three stage stimulus package. The first phase took the form of temporary and targeted income support to the most cash-constrained people in the country. The second phase is aimed at infrastructure investments, with a focus on upgrading our schools, homes and communities. And the third phase of the stimulus package is targeted at larger and longer term nation building infrastructure. These investments in roads, rail, ports, universities and hospitals will support jobs during this period of weakness when they are most needed.
China's stimulus package, equivalent to around 13 per cent of GDP, also has a large emphasis on infrastructure investment. Around three-quarters of China's package is devoted to infrastructure projects, earthquake reconstruction and housing.
While monetary policy will remain the demand management tool of choice in normal situations, one of the advantages of using fiscal policy to respond during a synchronised downturn is that there are positive spillovers to other countries. This is definitely what we are seeing with China's substantial stimulus package. It has helped to improve the prospects for global commodity markets.
I think the decisive Chinese response in implementing their stimulus package shows a country that clearly understands the importance of its economy in the world and the desirability of coordinated international action in meeting the challenges of a global recession.
I have spent some time emphasising the factors that help to strengthen China and Australia in the face of the global recession. Can I now add a note of caution, particularly for the Australians in the room.
The International Monetary Fund just last week upgraded its outlook for the world economy. But we need to remember that they still expect the world's advanced economies to contract by a massive 3.8 per cent in 2009.
As the Prime Minister and I have said repeatedly, Australia is not immune from these events in the rest of the world. It is true that Australia's retail and housing sectors are looking much stronger than in any other advanced economy. But the global recession still has a way to run, and it will take time for its full effects to become evident, particularly in the labour market.
Even though Australia's export volumes have remained surprisingly resilient during the global recession, it is inevitable that the prices we receive for many exports will fall sharply – a point highlighted by UBS Investment Research last Friday under the heading "Let's not forget the nominal economy" and in turn drawing on some work by Dr David Gruen of my own department.
The terms of trade effect alone is expected to cut about 3 per cent from national income over 2009/10. And this effect does not stop there – it cycles into weaker business profits and hence into weaker investment and employment outcomes. It also shows up in weaker government revenue.
This is why we had to make some difficult decisions in this year's Budget to make room for our spending commitments. And this is why budget decisions are going to remain difficult for the next few years at least.
It is also why we should be very cautious of those already seeking to write the first draft of history in relation to how Australia has come through this crisis. Simply put, there is much more news – bad as well as good – to come on the economy. Inevitably, with few facts to go on, early drafts of history will tend to be based more on the policy preferences of the writer than on Australia's observed economic progress.
I can confidently predict, for example, that if Australia continues to come through the crisis better than expected, there will already be opinion out there to the effect that the Government spent too much on stimulus and that it wasn't necessary anyway. Of course, this fails to take account of the economic counterfactual (the damage to growth and employment absent the stimulus generally) or the critics' counterfactual (what they would have said about us had growth tanked and we had done nothing). So I'd like to issue one polite request – let's wait a while to see how the growth picture pans out before we start jumping to final conclusions about where we'll finish up.
It is nevertheless certainly true that, as the Prime Minister has said, authorities will have to give careful consideration to the timing and pace of the unwinding of stimulus, as this will be a key determinant of the recovery path.
The financial crisis has emphasised the importance of well-functioning and well regulated financial markets. China will need to continue to manage its integration into world capital markets. We acknowledge that financial sector reform will need to take place at a pace that is consistent with stability and growth.
China has also recognised that it needs to undertake significant reforms to rebalance growth towards domestic consumption. Financial sector reforms will be important for this. Expanded social security and health systems are also needed to help support domestic consumption. A notable step forward by the Chinese Government is the planned expenditure of RMB 850 billion (equivalent to around US$120 billion) over the next three years to provide basic health care for at least 90 per cent of the population by 2011.
China's efforts in confronting these policy objectives will be instrumental in shaping the future direction of global economic growth.
Australia is in a good position to support China in reforming its financial sector. We have a freely floating exchange rate, significant financial sector reform experience, a resilient financial sector, and clear and effective regulation.
As you would all know, discussions are continuing with regard to a possible Free Trade Agreement or FTA with China.
The conclusion of a meaningful trade agreement could help underpin the further expansion of the dynamic Australia-China commercial relationship and it could also help underpin a stronger strategic partnership between Australia and China.
Australian Government Ministers, including myself and the Prime Minister, have been working with key Chinese Ministers to find common ground to resolve a number of contentious and sensitive issues between us.
Certainly, from Australia's point of view, we remain keen to see the elimination of tariffs and reduced quotas on selected agricultural products; commercially-focused outcomes on services and investment; and a framework to underpin stronger bilateral economic engagement over time.
But as remarkable as the Australia-China trade story has been during this global recession, the bilateral investment relationship has attracted even more attention, as a consequence – of course – of increased investment applications from China and the high profile of some of them.
Now I hate to disappoint any media in attendance, but I don't have any new foreign investment policy to announce today. What I would like to do is spend a few minutes describing what has been – amidst much speculation written around specific transactions – a very consistent approach from this Government in relation to foreign investment since coming to power.
Australia welcomes foreign investment. We have long been and will continue to be a capital importer. Foreign investment is a necessary part of harnessing the investment opportunities that exist in Australia.
Foreign investment not only provides additional capital for Australian growth, it is also a source of additional competition, of new technologies, management and marketing techniques, and of skills development.
In February 2008 I released a set of guidelines used in screening proposed foreign government related investments. The guidelines were intended to promote transparency, ensuring that investors are aware of factors evaluated in considering Australia's national interest.
The guidelines were and are non-discriminatory. They apply equally to all investments by foreign governments and related entities. They arose in response to genuine public interest in how the Government intended to handle an increased number of investment proposals from what you might call sovereign institutions – certainly including Chinese state-owned enterprises, but also the proliferation of sovereign wealth funds and other government-related investors.
We have been working closely with foreign government investors to explain the application and purpose of the guidelines and to assist understanding about their role in Australia's investment screening regime. And our experience has been very positive.
In July last year I provided further clarification of the approach the Government would take in respect of foreign government related investment in Australia's resources sector. As I said back then, Australia's aim is to maintain a market-based system where investment and sales decisions are driven by market forces. The Government is particularly attentive to, and considers carefully, any case in which a proposed investor in a resource is also a buyer of the resource. Certainly this has been the case with some recent Chinese investment proposals, but it is by no means an issue unique to Chinese investors.
The Government has consistently emphasised to all foreign investors our insistence that Australia must remain a reliable supplier in the future to all current and potential trading partners. Again, as I said in July last year, where the proposed ownership by a resources consumer increases to the point of potential control over pricing and production we will look more carefully at whether the proposal is contrary to Australia's national interest.
Coming back to the specific issue of China, we in the Australian Government recognise that China has an interest in ensuring that we are able to supply the resources that it requires to fuel its continued economic growth. Australia has an interest in expanding its capacity to supply these resources, and we have a strong record of welcoming foreign investment – Chinese or otherwise – in doing so.
In this context, Australia's investment screening arrangements ensure Australia and China maintain a complementary and strategic investment relationship which delivers significant win-win benefits for both countries.
And I think that has been amply demonstrated by the bilateral investment outcomes. While there has been much speculation about the Rudd Government seeking to tighten our foreign investment screening regime, in fact, since the Rudd Government came to office, China-sourced investment proposals have been approved at the rate of more than one per week. Many of these investment proposals received little if any press coverage and raised no issues for Australia's national interest.
On a purchasing power parity basis, China is now the second largest economy in the world and within a few decades will likely be the biggest economy in the world. In the past five years, China's growth has accounted for around one-quarter of the total growth in global output.
While economic times are difficult, the Australian and Chinese economies are doing better than most. Both China and Australia have bright economic futures, which will reinforce each other as our trade and economic relationship develops.
As our second-largest trading partner in 2008, China is of particular importance to the Australian economy. Through developing our relationship with China, Australia will be better placed to meet the rising demands of the Chinese economy as China assumes an increasingly greater role in the global community.
Thank you, and I wish you a very productive conference.