Upload
others
View
0
Download
0
Embed Size (px)
Citation preview
CHAPTER2the economic transformations in china and Australia
45
Key messAges
TheAustralia–Chinaeconomicrelationshipisenteringanewphase,shapedbythebigchangesnowunderwayinbotheconomies,whichareseeingtheservicessectorandinnovationemergeaslargerdriversofgrowth.
TheChineseeconomyisinthemidstofamajortransformationafterdecadesofrapidheavyindustrialgrowth.Itisnowshiftingtowardstheservicessectorandadvancedmanufacturing,industriesthatwillbecrucialinsustainingChina’sprogressiontoahigh-incomeeconomy.Atthesametime,China’slargeandincreasinglywealthymiddleclasswilldrivemassivegrowthinconsumerspendinginthecomingyears.
• Tosupportthistransformation,Chinamustprioritisesupply-sidereformsthatallowinefficientindustriestoshrinkandmoredynamicandinnovativesectorstogrow.Thiswillrequirefinancialmarketreformstoimprovetheefficiencyofinvestment,moreprivatesectorinvolvementinanumberofstate-dominatedsectorsandsupportingthemanufacturingsectortomoveuptheglobalvaluechain.
• China’stransformationwillhaveprofoundimplicationsforAustraliaandtherestoftheworldasrisingdemandfromChina’shugemiddleclasscreatesvastnewexportmarketsinareasfromfinancialservicestofood.Likewise,China’stransitiontowardsamoreopencapitalaccountwillcontinuetoreshapetheglobalinvestmentlandscape,asChinesesaverslookforinvestmentopportunitiesabroadandforeigninvestmentexpandsintonewsectorsofChina’seconomy.
InAustralia,theendofthemininginvestmentboomandsteepcommoditypricefallshavealsonecessitatedstructuralchangetowardsbroaderdriversofgrowth,especiallygivencompetitivepressuresintheregion.ThishassharpenedthepolicyfocusonliftingAustralia’sproductivity,especiallyinthelargeservicessector,whichexperiencedarelativedeclineagainstinternationalbenchmarksoverthepastdecade.
• AbetterproductivityperformancewillbecrucialforAustraliatocaptureashareofemergingexportmarketsandsupporthigherlivingstandards.Amongotherthings,thiswillrequireremovingprotectionforlessproductivefirms,greatercompetitioninshelteredservicesindustriesandfacilitatingcost-effectiveinvestmentinnewinfrastructure,includingbyattractingfurtherChineseinvestment.
WhiletheAustralia–Chinarelationshipwillcontinuetobeunderpinnedbythetraditionalareasofcomplementarityincludingcommoditytrade,newareasfortrade,investmentandbroadercooperationareemerging.Besidesthegrowingprominenceoftheservicessectorinbotheconomies,thisalsoreflectsthebroadershifttowardsinnovation-drivengrowth,whichwillrequirehighly-skilledworkforcescapableofdevelopingandabsorbingnewtechnologies.
46
PartnershiP for Change
TheAustralia–Chinaeconomicrelationshipisenteringanewphase,shapedbytheverybigchangesthatarenowtakingplaceinbotheconomies.Whilethedynamicofthesechangesisdifficulttopredictexactly,somethingsareclear.
InChina,thestructureoftheeconomyisshiftingtowardstheservicessectorandhigher-valuemanufacturing,andthesenewdriversofgrowthwillbecrucialinsustainingChina’sprogressbeyondmiddleincome.Householdconsumptionisbecomingamoreimportantsourceofdemand,underpinnedbyrisingwagesandincomes.
China’seconomictransformationwillhavefar-reachingimplicationsfortheworld,givenChinanowaccountsforaboutone-sixthofglobaloutputandglobalincome,andhasafast-growingmiddleclassthatisprojectedtoreach630millionpeopleby2022(WorldBank2016;Barton2013).AsChineseconsumersdemandanincreasinglybroadrangeofgoodsandservices,vastnewexportmarketswillopenupinareassuchasprofessionalservices,healthandagedcare,andagriculturalproducts.
ForChina,thedevelopmentofmoreadvancedmanufacturingindustrieswillallowitsexportsectortomoveuptheglobalvaluechain,whilestrongertransportandinfrastructureconnectivitywiththeregioncansupportdemandforChina’straditionalmanufacturingexports.
Meanwhile,China’songoingfinancialsectorreformsandcapitalaccountliberalisationwillcontinuetorecasttheglobalinvestmentlandscapeoverthenextdecade.AccordingtoWorldBankprojections,China’sshareofglobalinvestmentflowscouldincreasedramaticallyoverthenexttwodecades,asChina’sdomesticratesofinvestmentmoderateanditshugepoolofdomesticsavingslooksoffshoreforbroaderinvestmentopportunities(WorldBank2013).
China’seconomictrajectoryoverthecomingdecademaynotbesmooth.AchangeofthekindtowhichChinesepolicymakershavecommittedisunprecedented,andmanagingtheeconomy’stransformationpresentsarangeofdifficultchallengesforpolicymakers.Amongotherthings,Chinamustpushaheadwithsupply-sidestructuralreformsthatfacilitateindustrialrestructuring,allowingoutdatedfirmsandindustriestoexitandencouragingnewandinnovativefirmstoflourish.Furtherfinancialmarketreformwillbecrucialtothisshift,byallowingmoreproductivebusinessesinemergingsectorstosecurefinanceforinvestment.Facilitatingmoreprivatesectorinvolvementwithinindustriescurrentlydominatedbystate-ownedenterprises(SOEs)—suchasenergy,utilities,transportandbanking—willbesimilarlyimportant.
Afterdecadesofeconomicgrowthdrivenbyincreasingthenumberofworkersandtheamountofcapital,thesesupply-sidestructuralreformswillbenecessarytopromotegreaterefficiencyandachievesustainedincreasesinmultifactorproductivity,andthereforeincomes,overthenextdecade.
Muchasinthepastdecade,theChineseeconomywillcontinuetohavealargeinfluenceonAustralia’seconomicprospectsinthecomingdecade.
AustraliacapitalisedontheChina-ledincreaseinglobalcommoditydemandinthelastdecade,thankstoanabundanceofeconomicallyprovenmineralreserves,agloballycompetitiveminingindustryandpolicysettingsthatfacilitatedalarge-scaleexpansionoftheresourcesindustry.
47
CHAPtER 2: the economic transformations in China and Australia
However,Australia’sincomegrowthhasnowslowed,partlyasaresultofChina’seconomictransformationtowardslessresource-intensivegrowth.Inthenextdecade,Australiawillneedtobroadenitsexportbasebeyondminingbytappingintothefast-growingmarketforconsumerandcommercialservicesthatiscurrentlyemerginginChinaandacrosstheregion,whilecementingitspositionasareliable,low-costsupplierofabroadrangeofenergyandindustrialcommodities.
Succeedinginthesenewmarketsforservicesintheregionwillnotbeeasy.Australiawillfacefiercecompetitionfromservicesuppliersglobally,withoutthenaturalandgeographicadvantagesitpossessesinmineralsproduction.Australiawillneedtoreinvigorateitseconomicreformagendatohelpdriveinnovationandproductivity,particularlyinAustralia’slargeservicessectorwhereproductivitylagsbehindtheglobalfrontierinmanycases.Improvingproductmarketefficiencythroughouttheservicessector,includingbystrengtheningandextendingcompetitionpolicy,willbeessentialifAustraliaistoexpanditsserviceexportsandmaintainprosperityinthenextdecade.
ForbothChinaandAustralia,drivinginternaleconomicreformwillalsorequireengagingfurtherwiththerestoftheworld.InChina’scase,thismeansallowingtheChineseeconomytobecomemorecloselyintegratedwithglobalfinancialmarketsasawayofimprovingtheallocationofcapitalinternally,andopeningupitsexpandingservicessectortogreaterforeigntrade,investmentandtechnologies.
ForAustralia,increasingcontestabilityincurrentlyshelteredserviceandinfrastructuremarketswillhelpattractawiderrangeofChineseandotherforeigninvestment.Asarelativelysmall,openeconomy,thiswillbecriticalinfinancingnewinfrastructureandAustralia’sbroaderinvestmentneeds.
InbothAustraliaandChina,theservicessectorisbecomingalargerdriverofgrowth,especiallyinprofessionalserviceareasandintheinformationeconomy,wherenewtechnologiesarefundamentallychangingthewaybusinessisbeingdoneacrosstheworld(Box2.1).
BOx 2.1: THe gLOBAL Rise OF THe innOvATiOn eCOnOmy
ChinaandAustralia,liketherestoftheworld,arelookingtowardsinnovationandtheinformationeconomyaskeydriversofinvestmentandgrowthinthecomingdecade.
Rapidlyemergingdisruptivetechnologiesarereshapingthewayconsumersandbusinessesinteract,includingthroughtheadventofthesharingeconomy,thegrowingcapacitytocollectandanalyse‘bigdata’andthroughtheshifttowardsknowledge-basedcapital(KBC).
KBCincludesinvestmentindigitalinformation(softwareanddata),innovativeproperty(patents,copyrights,trademarksanddesigns)andorganisation-specificcompetencies(brandequity,trainingandorganisationalcapital).TheOECDestimatesthatinvestmentinKBCnowrepresentsalmosthalfofallinvestmentintheUnitedStatesandotheradvancedeconomies(OECD2013b).
48
PartnershiP for Change
Bothcountriesarerightlyfocusedonfosteringaninnovativebusinessclimatethatsupportsnewanddynamicfirmstoexpandandcreateemployment.Theirleadershipsopenedanewdialogueabouttheircountries’innovationstrategiesinAprilthisyear.Aspartofthis,policymakersmustensurethatlocalworkforceshavetheskillsandcapabilitiestotapintothelatesttechnologiesandbusinesspracticesdevelopedabroad.Buttherearedeepertrendsdrivingtheglobalenvironmentinwhichinformationandbigdatabusinessesarereshapingtheworldeconomyandinternationalbusiness,andthesetrendswillneedtobeontheiragendaforcooperationoverthecomingdecade.
Althoughmerchandisetrade—includingincommodities—willremainafoundation,theChina–Australiaeconomicrelationshipwillincreasinglybedefinedbyeachcountry’stransitiontowardsmoreservices-andinnovation-basedeconomies,andthebilateralcollaborationsthatcanhelpbringthisabout.
Thiswillmeangreatertradeinservices,butalsoabroadeningofpeople-to-peopleengagementtosharetechnologies,businesspracticesandinstitutionalknow-howaseachcountrynavigatesitsreformchallenges.Theseareasforgreaterbusinessandgovernmentcollaborationarediscussedinfollowingchapters.
ThischaptersetstheeconomiccontextfortherestoftheReport.ItbeginswithasummaryofChina’sriseandimpactontheglobaleconomyoverthepastfewdecades,withthenextsectionfocusingonChina’sinfluenceoncommoditymarketsandAustralia.ItfirstexaminestheeconomictransitionthatisnowoccurringinChinaandtheimplicationsforAustraliaandtherestoftheworld.Thisincludesadiscussionofthekeyeconomicreformsthatwillberequiredinbothcountriestohelpsustaineconomicgrowthandprosperityoverthenextdecade.
KBCwillbeakeyfactorinspurringnewsourcesofgrowth,byallowingfirmsandorganisationstoprosperinacompetitiveglobaleconomyandcreatehigh-wageemployment.ThisisparticularlyrelevantforAustraliaandChinaastheylooktoreplacethetraditionalsourcesofexportgrowthoverthepastdecade.AstheOECDnotes:‘KBCallowscountriesandfirmstoupgradetheircomparativeadvantagebypositioningthemselvesinhighvalue-addedindustries,activitiesandmarketsegments’.New,innovativefirmsarealsobecomingthemaindriversofemploymentcreation,with‘high-growth’firmsaccountingforuptohalfofalljobsgrowtheventhoughtheyonlyaccountforaround5percentofallbusinesses(OECD2012).
Thatsaid,theriseofKBCiscreatingnewchallengesforpolicymakersandbusinesses,notleastthedifficultiesinvolvedinmeasuringeconomicactivityassociatedwithKBC.Forexample,theriseofKBChasmadeacountry’sintellectualpropertyregimeevenmoreimportant,apointhighlightedinAustralia’srecentReviewofCompetitionPolicy.
KBCbusinessesarealreadydrivingmassiveinnovationintheAustralia–Chinarelationshipthroughinnovativedeliveryofgoodsandfinancialservicesviae-commercethatisleapfroggingoldbarrierstoeconomicintegration.Whatweseesofarisjustthetipoftheiceberg(seeChapter3).
49
CHAPtER 2: the economic transformations in China and Australia
China’s rise and its impact on the world economy
China’seconomictransformationsince1978hasbeenremarkable.Atthecommencementofthereformperiod,China’sGDPpercapitawaslessthan5percentoftheUnitedStates’(TheConferenceBoard2015).AccordingtoWorldBankDevelopmentIndicators,since1978,China’seconomyhasgrowninsizebyanannualaveragerateofaround10percentandisnowalmost30timeslargerthanitwasin1978(WorldBank2016).Thisreflectsasubstantialincreaseinlabourproductivity,whichhasrisenfrom3percentoftheUSlevelin1978tomorethan20percentnow(TheConferenceBoard2015).
ThisperformancehasresultedinChinarapidlycatchinguptohigher-incomeeconomies,which,combinedwithahugepopulation,hasseenChina’sshareofglobaloutputandincomerisefromlessthan5percentin1990to17percenttoday(Figure2.1).
Whileuniqueinscale,China’seconomicconvergencebroadlymatchesthepreviousexperienceofotherAsianeconomiessuchasJapanandSouthKorea.Indeed,theprinciplefactorsbehindChina’ssuccessaresimilartothosethathavedriveneconomicconvergenceelsewhereinAsia.Theseincludeveryhighratesofphysicalcapitalaccumulationandmassmobilisationoflabourtowardsanexport-orientedmanufacturingsector,supportedbyongoingimprovementsinhumancapitalandtechnologicalcatch-up.
ThescaleandspeedofChina’seconomicriseoverthepastfourdecadesalsoreflectsthesizeanddemographicprofileofChina’spopulation,whichsawtheworking-agepopulationgrowsignificantlyfasterthantheoverallpopulation.Thiscoincidedwiththemassmovementofruralsurpluslabourfromthelowproductivityagriculturalsectortohigherproductivityindustrialandservicesectors.
China’sexport-orientedgrowthmodelhasunderpinnedalargeandrapidexpansioninitsinternationaltradeandintegrationwithglobalmarketssince1978.
Figure 2.1: China’s share of the global economic aggregates
0
2
4
6
8
10
12
14
16
18
20
Output Income Exports Manufacturing exports
Imports
1990 1995 2000 2005 2010 2014/15 Note:Exportsandimportsfiguresaremerchandiseonly.Source:WorldBank2016;WTO2016a.
50
PartnershiP for Change
Inthepast15yearsalone,China’sexportshaveexpandedmorethan10-fold,facilitatedbyaccessiontotheWTOin2001.HavingsurpassedboththeUnitedStatesandGermany,Chinaisnowtheworld’slargestexporterbyvalue,accountingfor12percentofglobalmerchandisetrade(Figure2.1).
GreaterinternationalopennessallowedChinatoabsorbforeigntechnologiesandknow-how,drivingimprovedproductivityacrossthebroadereconomy.Amoreopeneconomyalsoincreasedcompetitiveforcesdomestically,promotingefficiencyandinnovationintrade-exposedsectors.
Figure 2.2: investment as a share of gDP
0
10
20
30
40
50
% o
f GD
P
1962
19
70
1978
19
86
1994
20
02
2010
China Emerging and developing economies Source:WorldBank2016.
Sincethemid-1990s,China’srapideconomicconvergencehasreflectedverylargeinvestmentsinphysicalcapital.Chinacommencedthereformperiodwithrelativelylowcapitalperworker,allowingforinitiallylargelabourproductivitygainsandhighreturnsoninvestment.Growthinthecapitalstockisestimatedtohaveaveraged10percentannuallyfromthe1980s,accountingforsignificantlymorethanhalfofGDPgrowthoverthistime(Wu2014).
ThesetrendshaveresultedinChina’sinvestmentasashareofGDPreachingveryhighlevels,bothhistoricallyandevencomparedwithotheremergingeconomies(Figure2.2).
China’selevatedratesofinvestmenthavebeensupportedbygovernmentpoliciesthathaveincentivisedpropertydevelopmentandinfrastructureinvestment,andexpansionsinmanufacturingcapacity.Thisincludesthestructureofthefinancialsystem,whichhaschannelledsubsidisedcapitalfromsaverstolargeprivateandstate-ownedenterprises,andanexchangerateregimeinpreviousdecadesthatencouragedexportsoverdomesticspending.China’sveryhighratesofinvestmenthavebeensupportedbyveryhighratesofnationalsaving(Box2.2).
51
CHAPtER 2: the economic transformations in China and Australia
The impact of China’s rise on global commodity markets and Australia
ItisnotjusttherapidgrowthandtransformationoftheChineseeconomythathasaffectedopportunitiesglobally;itisalsothesheerscaleofChina’simpactthathasmatteredtotheworldeconomy.
TheunprecedentedscaleofChina’sindustrialisationhasresultedinChina’sconsumptionofmetals,otherrawmaterialsandenergyexpandingmassivelyoverrecentdecades.Chinaisnowtheworld’slargestuserofarangeofindustrialandenergycommoditiesincludingsteel,copperandcoal(Figure2.4).
BOx 2.2: CHinA’s HigH RATes OF nATiOnAL sAving
China’svaststockofsavings,togetherwithitscapitalaccountcontrols,hasplayedanimportantroleinhighratesofinvestment.SavingasashareofGDProsefromlessthan40percentinthe1980stoapeakof50percentinthelate2000s.Whilethenationalsavingratehaseasedinthepastfewyearstoaround48percent,itremainsveryhighbyhistoricalandinternationalstandards(Figure2.3).
Thehouseholdsectorhasmadeasignificantcontributiontohigherratesofnationalsaving,reflectingagrowingworking-agepopulationwithanincreasingcapacitytosave.Incompletedomesticfinancialmarketsandrestrictedaccesstoforeignfinancialassetshavealsoencouragedhighhouseholdsavingrates,ashasthelimitedstateprovisionofsocialsecurityandhealthinsurance.
CorporatesavinghasalsomadealargecontributiontoChina’shighratesofnationalsaving.AflexibledividendpolicyhasallowedSOEstoretainandthenreinvestmostoftheirprofits,ratherthandistributingdividendstothestate.Financialunderdevelopmenthasalsomadeitdifficultfortheprivatesector,especiallysmallbusinesses,toaccessintermediatedfinancing,inducinghighersavingratesinthatsector.
Plannedreformstofinancialmarkets(includinginterestrates)andtotheregulationofSOEs,aswellasthebroaderprovisionofsocialinfrastructure,shouldsupporthigherhouseholdconsumptionandcorrespondingdeclinesinhouseholdandcorporatesavingrates.Likewise,China’sageingpopulationislikelytoplayapartinreducingsavingrates,asanincreasingshareofChina’sadultpopulationmovesintoretirementageandbeginstodrawdownsavings.
52
PartnershiP for Change
Figure 2.3: national saving by sector
-10
0
10
20
30
40
50
60
1993
1998
20
03
2008
20
13
Government Corporate Household Total
% o
f GD
P
Source:ChinaNationalBureauofStatistics2015.
China’sgrowthinsteelconsumptionhasbeenparticularlydramaticoverthepasttwodecades,drivenbyrisinginvestmentinsteel-intensivebuildingsandinfrastructure,aswellaslargeexpansionsinthemanufacturingsector.Chinaisnowthelargeststeelconsumer,accountingfor45percentofglobalsteelusagein2015(WorldSteelAssociation2015).China’sincreasingsteelrequirementsnecessitatedamassiveexpansioninitssteelindustry,whichisestimatedtohaveproducedover800milliontonnesofcrudesteelin2015—morethansixtimesasmuchasitdidin2000(Figure2.5).
Figure 2.4: China’s share of global commodity consumption
0 10 20 30 40 50 60
Gas
Crude Oil
Thermal coal
Copper
Steel
1990 2014 % of global consumption
Source:WorldSteelAssociation2015;WorldBank2015;BP2016.
53
CHAPtER 2: the economic transformations in China and Australia
China’sincreasingproductionofsteelhashadflow-oneffectstoitsdemandfortherawingredientsusedinsteelmaking,namelyironoreandmetallurgicalcoal.Mostnotably,China’sshareofworldironoreconsumptionrosefrom14percentin2000toanestimated65percentin2015.
Whilehavinglargequantitiesofitsownresources,Chinahasbecomeincreasinglyreliantonimportedinputsasstrongcommoditydemandhasdrawninlower-cost,higher-qualitycommoditiesfromabroad.Tradedependencycontinuestoriseascommoditypricesfall,andtheshareofimportedindustrialinputsindomesticconsumptionisatanall-timehigh.
Figure 2.5: China’s steel production
0
10
20
30
40
50
60
0
100
200
300
400
500
600
700
800
900
1980
19
85
1990
19
95
2000
20
05
2010
20
15
%
mt
Annual output (LHS) Global share (RHS) Source:WorldSteelAssociation2015.
RespondingtothesharpriseinglobalcommoditypricesandgrowthinChina’sdemandforrawmaterials,Australia’sminingindustryinvestedheavilyinnewexportcapacityoverthepastdecade(Figure2.6).Thisinvestmentwasinitiallyconcentratedintheironoreandcoalsectors,butwasfollowedbyanevenlargerinvestmentinliquefiednaturalgas(LNG)capacity,whichwillmakeAustraliathelargestexporterofLNGwithinafewyears.Atitsheightin2013,theminingindustry’sshareofprivateinvestmentinAustraliareachedone-third,morethantriplethetypicalhistoricalshare.
Therewasalagintheresponseofinvestmentandcapacitytorisingpricesbecauseofitsgestationperiod.Butasthisnewcapacitycameonline,Australia’sexportvolumesoftheseproductsalmostdoubledcomparedtothepreviousdecade.Intheironoremarket,Australianowaccountsforalmostone-thirdofglobalproductionandone-halfofseabornetrade,significantlyhigherthanadecadeago.
AlmostallofAustralia’sadditionalironoresupplyhasbeenabsorbedbyChina,withAustraliaincreasingitsshareofChineseimportstoover60percentaslessefficientglobalsupplyhasbeendisplaced,includingwithinChinaitself.Australia’sshareofChina’scoalimportshasalsoincreased,fromaround10percentin2009toaroundone-thirdnow(Figure2.7).
By2018,theminingindustry’scapitalstockwillbealmostfourtimeslargerthanitwasin2004,amassiveinvestmentinnewcapacitythatwillunderpinAustralia’sminingexportsfordecadestocome.
54
PartnershiP for Change
Extensivereservesofironore,coalandothercommoditiesmeantthatAustraliawaswellpositionedfromtheoutsettobenefitfromChina’srisingcommoditydemand.ButthemereexistenceofthesenaturalresourcesdidnotguaranteeAustralia’ssuccess.Instead,Australiaowesitssuccesstothecompetitivenessofitsminingindustryaswellastheflexibilityofthewidereconomythatallowedresourcestobeefficientlyreallocatedtoexpandthemineralssector.
Figure 2.6: mining investment in AustraliaPanel A: By commodity type Panel B: share of total private investment
0
10
20
30
40
50
60
70
$B
illio
n
Other Coal Iron ore LNG
0
5
10
15
20
25
30
35
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
19651975
19851995
20052015
Sources:GovernmentofAustralia2014.
Australia’swell-establishedmacroeconomicpolicyframeworks,includingafloatingexchangerate,playedanimportantroleinaccommodatingtheexpansioninAustralia’sminingcapacitywithlimiteddisruptionstothebroadereconomy.Alongwithasufficientlyflexiblelabourmarket,thesesettingshelpedinflationexpectationstoremainanchoredwhenthetermsoftraderosesharply,avoidingmanyofthemacroeconomicdifficultiesthataroseinprevioustermsoftradeboomsinAustralia(Gruen2011).
Figure 2.7: Australia’s share of Chinese commodity imports
0
10
20
30
40
50
60
70
Coal Iron ore
%
2015 2008 Source:ChinaNationalBureauofStatistics2015.
55
CHAPtER 2: the economic transformations in China and Australia
China’s economic transformation to new drivers of growth
Afteralmostfourdecadesofrapidgrowth,theChineseeconomyisundergoingamajortransformation,broughtaboutbyacombinationofinternalandexternaleconomicforces.
Ontheexternalfront,substantiallyslowergrowthininternationaltradehasseenacorrespondingmoderationindemandforChina’straditional,labour-intensivemanufacturedexportsinrecentyears(Figure2.8).ThisslowdownpartlyreflectsChina’salreadysignificantmarketshareinsomeglobalmanufacturingsegments,aswellasamorefundamentalshiftinglobaltradetowardsinformationandservices,consistentwiththeriseofe-commerceglobally.
Figure 2.8: growth in global trade
-25
-20
-15
-10
-5
0
5
10
15
20
25
2000
20
03
2006
2009
20
12
2015
Merchandise trade Commercial services trade Source:WTO2016a.
Domestically,aswagesandincomesrise,householdconsumptionisemergingasamoreimportantdriverofeconomicactivity.Atthesametime,China’sgrowthdriversinrecentdecades—investmentinphysicalcapitalandlabour-intensivemanufacturedexports—areslowing.Thelowergrowthininvestmentinthesesectorsreflectsoversupplyinthepropertymarketandtheexcesscapacitythathasemergedacrosssegmentsofthemanufacturingsector,andthelowerprofitabilityinthesesectors.
DemographicforcesandlabourmarketdynamicsarealsoplayingtheirpartinChina’sshiftawayfromfactor-drivengrowthtowardsmorebalancedgrowth.Aftergrowingstronglyfornearlyfourdecades,China’sworking-agepopulationisnowshrinking,whichisdirectlyreducingChina’sgrowthpotentialvialowergrowthinthelabourforce.
China’sageingpopulationhasimplicationsthatgobeyondtheimpactonaggregateeconomicgrowth.Forexample,therewillbeanextra110millionpeopleagedover65by2030,whichwillincreasethedemandforaged-careservicesandputpressureonChina’sstilldevelopingsocialsafetynet.
Inthelabourmarket,theslowergrowthinthelabourforceandshrinkingpoolofsurplusrurallabouriscontributingtohigherwages.Higherwagescombinedwithasignificantappreciationoftherealexchangerateoverthepreviousdecadeishelpingtoshiftthecompositionof
56
PartnershiP for Change
demandfromexportsandinvestmenttowardsconsumption.Thisisbeingsupportedbyashiftineconomicresourcestowardsconsumers,illustratedbytheuptickinthewageandhouseholdsectorsharesofGDPinrecentyears(Figure2.9).
Similarly,consumptionexpenditurehasnowovertakeninvestmentspendingasthemaincontributortoeconomicgrowth.Whilethispartlyreflectsslowergrowthininvestmentinrecentyears,thecontributionfromhouseholdconsumptionalsorosein2015(Figure2.10).
Withinconsumption,theshifttowardsservices,aswellasdiscretionarygoods,isoccurringasChinesehouseholdsbecomewealthier.Thischangingpatternofdemandisgivingrisetofasteremploymentgrowthintheservicessector.Overthepasttwoyears,employmentinChina’sservicessectorhasgrownstronglyandnowaccountsforalittlemorethan40percentofemploymentacrosstheeconomy,upfrom30percentadecadeago(WTO2016).
TheappreciationofChina’srealexchangerateisalsoencouragingemploymentcreationinChina’snon-tradedservicessectors,whichultimatelywillbeattheexpenseofemploymentinChina’sexport-orientedsectors.ThisdynamicisconsistentwiththeexperienceofotheremergingeconomiessuchasJapaninthe1970sand1980swhereincreasesintherealexchangeratereinforcedashifttowardsdomesticallyorientedindustriessuchaseducation,healthandfinancialservices(Dorruccietal2013).
WhileinvestmentasashareofGDPhasfalleninrecentyears,andmayfallfurther,China’stransformationtowardsservices,higher-endmanufacturingandthedigitaleconomywillstillinvolvesubstantialnewinvestmentinthesegrowingindustries.Forexample,China’sentryintonew,higher-technologymanufacturedsegmentswillrequirelarge-scaleinvestmentinplant,equipmentandhumancapital,asillustratedbytherecentplantoestablishasemi-conductorindustryinChina.
Figure 2.9: Wages and household disposable income
40
45
50
55
60
65
70
1992
19
96
2000
20
04
2008
20
12
2016
% o
f GD
P
Household income Wages Source:ChinaNationalBureauofStatistics2015.
57
CHAPtER 2: the economic transformations in China and Australia
ThetypesofassetsattractinginvestmentarealsolikelytoevolveasChina’sindustrybecomesmoreadvanced.ThisreflectsthegreaterneedforinvestmentininnovationandinformationtechnologyasChineseindustrydevelops,inlinewiththeglobaltrendtowardsknowledge-basedcapital(OECD2013b).ForChina,thismeansagreaterproportionofinvestmentislikelytobedirectedtowardsintangibleassets,suchasdigitalinformation,computersoftwareandresearchanddevelopmenttosupportChina’sprogressionintohigher-technologymanufacturing(Box2.3).
Figure 2.10: Contributions to China’s gDP growth
-10
-5
0
5
10
15
20
25
1978
1982
19
86
1990
19
94
1998
20
02
2006
20
10
2014
%
Consumption Investment Net exports Overall GDP growth
Source:ChinaNationalBureauofStatistics2015.
ThatisnottosaythatinvestmentintraditionalformsofphysicalcapitalwillnotremainessentialinsupportingChina’scontinuedurbanisationandraisingthequalityoflifeinurbancentres.Thisincludesfurtherinvestmentinpublictransportnetworksandurbanamenities,whichinmanycitiesremainunderdeveloped.Notwithstandingthecurrentareasofoversupply,continuedurbanisationwillalsorequiresubstantialnewinvestmentinresidentialandcommercialbuildingoverthecomingdecade.
Reforms to assist China’s economic transformation
Tosustaineconomicgrowthinthenextdecade,China’spolicyenvironmentwillneedtosupporttheshiftinactivitytowardstheservicessector,higher-techmanufacturingandenergytransformationtoaddressenvironmentalchallenges.Itwillalsoneedtoalloweconomicresourcestoshifttowardsthesemoreinnovativeandfast-growingsectorsoftheeconomy.
Thisfocusonliftingmultifactorproductivityrecognisesthatthelongperiodoffactor-drivengrowthChinahasexperiencedoverthepast40yearscannolongerbesustained.Thisreflectsfallingratesofreturnandthebuild-upofexcesscapacityinsignificantpartsoftheindustrialsector,ashrinkingworking-agepopulationaswellasbroaderqualityoflifeconsiderations,includingreducingthepollution-intensityofgrowth.Inthiscontext,China’seconomicperformanceoverthecomingdecadewilldependinlargepartonwhetherChinacanimproveuponthelimitedgrowthinmultifactorproductivityachievedsince2007(Figure2.13).
58
PartnershiP for Change
BOx 2.3: CHinA’s PROgRessiOn TOWARDs HigHeR-enD AnD vALue-ADDeD mAnuFACTuRing
ThepaceandscaleofChina’sriseasamanufacturingexporterhasbeentrulyremarkable.SinceaccessiontotheWTOin2001,China’sshareofglobalmanufacturingexportshasgrownfrom5percentto18percent,makingastrongcontributiontoeconomicgrowthbothdirectlyandthroughtechnologyspilloverstothewidereconomy.
However,growthinChina’sexportsoftraditional,labour-intensivemanufacturingproductshasslowedinrecentyears,reflectingarangeoffactors—includingthatglobalmarketsmayhavereachedsaturationpointfortheseproducts.Forexample,China’sshareofinternationalclothingexportshasremainedatalmost40percentinrecentyears,havingrisencontinuouslyoverthepreviousfewdecades(WTO2016).
Inthenextdecade,Chinawillthereforeneedtobuilduponitstraditionalexportcategoriesbycontinuingtoprogressintohigher-technologymanufacturing,followinginthefootstepsofcountriessuchasJapan.Thisprocesshasbeenunderwayforsometime,withtheshareofmedium-andhigh-techmanufacturinginChina’smerchandiseexportsnowsubstantiallyhigherthanwhatitwas20yearsago(Figure2.11).
Figure 2.11: China’s export mix 1995–2015
0
10
20
30
40
50
60
70
80
90
100
1995
%
2000 2005 2010 2012 2015
High-tech Medium-tech Low-tech Resource-based Commodities
Source:OECDandUnitedNation’sComtradedatabase.
Atthesametime,China’smanufacturingsectorwillneedtocapturealargershareofthegrossvalueofitsmanufacturingexports,bymovingupthevaluechaininlinewiththeMadeinChina2025initiative,anofficialinitiativeaimedatpromotingadvancedmanufacturing.ThiswillbeessentialifChina’sexportsectoristocontinuetomakeastrongcontributiontoeconomicgrowthoverthenextdecade.Again,therearesignsthatChinaisalreadymakingprogressinthisrespect,havingcapturedalargershareintheglobalvaluechainacrossmanymanufacturingsub-categoriesoverthepasttwodecades(Figure2.12).Thisincludesparticularlylargeincreasesinthedomesticeconomy’sshareofthevalue-addedofcomputers,electricalmachineryandapplianceexports.
59
CHAPtER 2: the economic transformations in China and Australia
Figure 2.12: Domestic value-added share of China’s gross exports
20
30
40
50
60
70
80
%
Tota
l
manufactu
res
Food products
,
bevera
ges and to
bacco
Texti
les, te
xtile pro
ducts,
leath
er and fo
otwear
Wood, paper,
paper pro
ducts,
printin
g and publishing
Chemica
ls and non-m
etalli
c
minera
l pro
ducts
Basic m
etals
and
fabricate
d meta
l pro
ducts
Machinery
and
equipment, n
ec
Compute
r, electr
onic
and optical e
quipment
Electrica
l mach
inery
and apparatu
s, nec
Transp
ort equipm
ent
Manufacturin
g nec;
recy
cling
2011 1995 2005
Source:WTOandOECD2016.
WhileChina’sprogressiontoamoreadvancedandhigher-incomeeconomywillnotbestraightforward,the13thFiveYearPlanrecognisestheseeconomicimperatives,buildinguponthereformstrategiesassetoutintheThirdPlenumofthe18thPartyCongressinlate2013.Thisincludestheneedtosupportgreaterhouseholdspending,improvetheefficiencyofinvestment,encourageamoreinnovativescience-ledeconomyandexpandintohigher-technologymanufacturing(Box2.4).
Figure 2.13: Contribution to China’s gDP growth
0
2
4
6
8
10
%
12
1977-84 1984-91 1991-01 2001-07 2007-12
Capital Total factor productivity Labour GDP Source:ConferenceBoard2015;Wu2014.
Mostimportantly,thePlan’sfocusonsupply-sidestructuralreformsrecognisestheneedtoencourageanexpansioninChina’smoredynamicprivatesectorwhilelimitingfurtherinvestmentinthosepartsoftheeconomythatarenowexperiencingover-capacity.Thiswillencompassabroadrangeofreformsincludingopeningupmonopolyindustriestoprivatesectorparticipation,reducinggovernmentinvolvementinanumberofsectorsstilldominatedbySOEsandimprovingmarketexitmechanisms.
60
PartnershiP for Change
Financialmarketreformswillalsoplayaroleinallowingmoredynamicandefficientfirmstoexpandbyprovidingbetteraccesstofinanceatlowerrates.Thiswillrequirepushingaheadwithbankingsectorreforms,includingliberalisinginterestrates,aswellasencouragingagreaterrolefornon-traditionalbanking(includingthroughemergingonlinecreditproviders)anddirectequityfinancing.
BOx 2.4: CHinA’s eCOnOmiC TRAnsFORmATiOn AnD THe 13TH Five yeAR PLAn
The13thFiveYearPlan(‘thePlan’)presentsaroadmapforChina’seconomictransformationtowardsahigherincomeeconomy.ThePlanprioritisesarangeofareasincluding:improvingdevelopmentqualityandefficiency;supply-sidestructuralreforms;bettermatchingsupplyanddemand;encouragingamoreinnovativeeconomy;fosteringmorecoordinated,greenandinclusiveeconomicdevelopment;andacceleratinginstitutionalreformstosupportChina’scontinuedeconomicdevelopment.ThePlanfocusesonthethreeeconomicgoalsofliftinghouseholdconsumption,transformingindustrytowardsservicesandhighervalue-addedmanufacturing,andpromotingthedevelopmentofaninnovation-andtalent-basedeconomy.
Strengtheningconsumption-ledgrowth.Chinawillpromoteconsumptiontobecomeamoreimportantcontributortoeconomicgrowth.ThisencompassespoliciesthatpromoteanindustrystructurethatbetterreflectsdemandfromChineseconsumersforhigher-qualityproductsandencouragesanexpansioninChina’sconsumer-orientedservicesindustries,includinghealthandagedcare.Consistentwithagreaterdomesticcapacitytoproducehigher-endconsumerproducts,Chineseconsumerswillbeencouragedtoconsiderswitchingtheirspendingfromoverseastodomesticmarkets.
Encouragingtheservicessectorandhigher-endindustry.Chinawilllifttheshareoftheservicessectorintheeconomyandencouragehigher-endmanufacturing.Whileaggregatedemandwillbeadjustedappropriately,theemphasiswillbeonsupply-sidestructuralreformsthatenabletheChineseeconomytomeettheChinesepeople’sgrowingmaterial,cultural,ecologicalandenvironmentalneeds.Consistentwiththe‘MadeinChina2025’initiative,thetransitionintohigherendmanufacturingwillallowChineseindustrytocapturealargeshareofvaluechains.Tohelpacceleratethedevelopmentofamodernservicesector,thesepartsoftheeconomywillbeexposedtogreaterforeigncompetition.The‘InternetPlus’actionplanwillhelptopromotebetterandbroaderuseoftheinternet,withgreateraccesstoinformationandbetterinformationnetworksfacilitatingtheadoptionofmoreefficientproductionmethodsandorganisationalstructureswithinindustry.
Fosteringscientificandtechnologicalinnovation.Chinawillaimtoimprovemultifactorproductivity,underpinnedbyscientificandtechnologicalinnovation,investmentinhumancapitalandgreaterentrepreneurship.Marketreformswillbeundertakentoensurethatresearchandinnovationisgearedtowardsthemostvaluableareas,supportedbyclosercollaborationbetweenresearchersandindustry.Whileabsorbingandintegratingforeigninnovationwillremainimportant,thePlanprioritiseswaysofencouraginglocallygeneratedtechnologiesandnewideas,tohelpgenerateself-sustainingeconomicdevelopment.
Atthesametime,thePlanhighlightstheneedtoaddressdistortionsinpolicyandinstitutionalarrangementsandtheneedtopromotefurthercompetitionamongfirmsinsomeindustriesaspartofagenerallyopenandcontestablemarketsystem.
61
CHAPtER 2: the economic transformations in China and Australia
Capitalaccountliberalisationcanalsoassist,byprovidinganotherchannelthroughwhichChinesefirmscanaccessfinanceatmarketrates,whilealsosubjectingdomesticprovidersoffinancetoexternalcompetition.
BesideshavingthepotentialtoimproveChina’sefficiencyofinvestment,capitalaccountliberalisationcanalsosupporttheshifttohouseholdconsumption.Astheconstraintsonoutboundinvestmentareloosenedfurther,Chinesehouseholdswillbeabletoinvestinawiderrangeofassetswithhigherrisk-adjustedreturns.Thiswillbereinforcedbyestablishingmarket-determinedinterestratesandamoremarket-determinedexchangerate,helpingtoreallocateincometowardsthehouseholdsector.
AlthoughitisinChina’slonger-terminterests,thetransitiontonewdriversofgrowthwilltaketime,andthepaceofeconomicgrowthmaymoderatemorethananticipatedinthetransitionalperiod.Alternativegrowthscenariosareexaminedinlaterchapters(seeChapters3and6)toconsidertheeffectofdifferentChinesegrowthtrajectoriesandstructuresontheAustralia–Chinaeconomicrelationship.Forexample,China’sprogressionintohigher-techmanufacturing,whichisadifficulttransitioninitsownright,maynotoccurquicklyenoughtooffsettheimpactofslowergrowthintraditionalmanufacturingsegments.Likewise,China’sconcernabouttheenvironmentalimpactofheavyindustryandtheminingsectormayweighfurtheronindustrialproductionasnewpoliciesintheseareasbegintotakeeffect.
Duringthistransition,Chinamuststriketherightbalancebetweenpoliciesthatsupportnear-termgrowthandpoliciesthatpromotetheeconomy’slonger-termgrowthpotential.
Inparticular,excessivelyloosemonetarystimulustosupportshort-termgrowthwouldhavethepotentialtoencouragehigherborrowingandleverageinthecorporatesector,whichcouldcreatefragilitiesinthefinancialsystemandundercutlonger-termreformstoimprovetheefficiencyofinvestment.Chinashouldbeextremelycarefulinmanagingfinancialrisksassociatedwithhighlevelsoftotaldebt,whichreached237percentofChina’sGDPinthefirstquarterof2016,from148percentattheendof2007.Deleveragingisoneoffivetopprioritiesfortheworkofthegovernmentfor2016.DeleveragingwillhelpChinaachievemoresustainablegrowthinthelongertermbutcanputdownwardpressureintheshortterm.
implications of China’s transition
implications for the global economy
Firstandforemost,thesheersizeoftheChineseeconomymeansopportunitiestodobusinesswithChinawillcontinuetoexpandevenifaggregatesratesofeconomicgrowtharelower.TheIMFprojectsChina’sgrowthratetoremainmorethantwicetheglobalaverageinthenextfewyears,whileitscontributiontoglobalgrowthwillbemuchlargerthanitwas10yearsagogivenitisnowasignificantlylargershareoftheworldeconomy.
ButthetransformationunderwayintheChineseeconomymeansthatChina’simpactontheworldeconomywillbeverydifferentfromwhatitwasinthelastdecade.Theincreaseinpercapitaconsumption,urbanisationandtheemergenceoftheserviceseconomy,aswellasthefurtherliberalisationoffinancialmarketsinChina’seconomy,willfundamentallychangehowChinainteractswiththerestoftheworld.
62
PartnershiP for Change
Thelargerroleforconsumerspendingandtheshifttoamoreservices-basedeconomywillprovideChina’stradingpartnerswithvastexportopportunitiesinnewareasoftheChineseeconomy.China’smiddleclassisprojectedtoreach630millionpeopleby2022,providingahugeandexpandingmarketforinternationalprovidersofconsumergoodsandservices,inareasspanninghealthcare,educationandfood(Barton2013).
China’sdemandforhigh-valuefoodstuffsisexpectedtorisedramaticallyoverthecomingdecades,withtheconsumptionofbeefandothermeatsdoublingoreventriplingaccordingtosomeprojections(Hamshereetal2014).WhilethemajorityofthisincreasedfooddemandwillbemetbyexpandingChina’sdomesticproduction,therewillbesignificantunmetdemandthatinternationalfoodexporterswillbeabletoexploit.
Likewise,theopeningupofChina’sdomesticservicessectorwillpresentnewopportunitiesforforeigninvestors,inareassuchasfinance,insuranceandtheutilitiessector.
TheshareofChina’slabour-intensivemanufacturingsegmentislikelytodeclinegoingforward.However,buildinggreaterconnectivityandinfrastructureprojectswithAsianandEuropeanexportsmarketsviatheinfrastructureinvestmentprojectsassociatedwiththeOneBelt,OneRoad(OBOR)initiativecansupportdemandforChina’straditionalexportcategories.
TheOBORinitiativecanalsoassistinabsorbingChina’sconstructioncapacity(includingforinfrastructure),whilesimultaneouslysupportingeconomicandtradenetworksacrossparticipatingeconomies.
BOx 2.5: THe OuTLOOK FOR CHinA’s sTeeL DemAnD
Havinggrownstronglyoverthepreviousdecade,China’sapparentsteelconsumptionfellby3percentin2014andisestimatedtohavefallenbyanother5percentin2015.ThisraisesthequestionofwhetherChina’ssteelconsumptionhaspeakedorwhetherthisweaknessreflectsmainlycyclicalfactorsthatwillgivewaytofurtherincreasesinChina’ssteelconsumptionoverthecomingdecade.ThisquestionwillhaveimportantimplicationsforChina’slargesteelindustryaswellasironoreproducersinChinaandoverseas.
Inthepast,largerisesinChina’ssteeldemandweredrivenbyconstructioninvestmentanddemandfromthemanufacturingsector,whicharethemainusersofsteel(Table2.1).
Table 2.1: China’s steel usage by purpose (percentage of total)
2000 2010 2014
Construction 56 56 55
Machinery 15 18 19
Automobile 6 7 7
HomeAppliance 3 1 1
Rail 2 1 1
Energy 7 4 5
Shipping(a) 3 5 2
Other 8 8 11
Source:ReproducedfromHamshereetal2016.(a)Shippingisdefinedasthesumofthe‘container’and‘shipbuilding’categories.
63
CHAPtER 2: the economic transformations in China and Australia
ThelargecontributionfromtheconstructionindustryreflectsthesubstantialsteelrequirementsassociatedwithChina’surbanisation,includingforhigh-densityresidentialandcommercialbuildingsandforurbaninfrastructuresuchasrailways,highwaysandbridges.
China’sincreasedsteelconsumptionoverrecentdecadeshasbeensuppliedbyexpansionsinitsdomesticsteelindustry.Overthedecadeto2013,China’sdomesticsteelproductionincreasedalmostfour-foldtoaround820milliontonnes.Thishashadflow-oneffectstoironoreandmetallurgicalcoal—therawingredientsusedbyChina’ssteelmakers—withdemandfortheseinputsalsogrowingstrongly.Inthecaseofironore,China’sdomesticsupplies,whilesubstantial,areofrelativelypoorgradeandlocatedinlessaccessiblepartsofthecountry.ThishasmeantthatChinahasincreasinglyturnedtotheseabornemarket,includingAustraliansupply,toaccommodateitsgrowingironoreneeds(Figure2.14).
Inrecentyears,thedownswinginthehousingmarket,combinedwithweakerconditionsinChina’smanufacturingsector,havebothcontributedtolowerdemandforsteel.ThishasresultedinChina’ssteelconsumptionfallingoverthepasttwoyears.Steelproductionwasflatin2014andfellby2.3percentin2015despiteastrongincreaseinsteelexports.
Inthenearerterm,theoutlookforChina’ssteeldemandwilldependinlargepartonthestateofChina’shousingmarket,wherethereissignificantoversupplyacrossanumberofregions.Growthinrealestateinvestment,whichisanimportantdriverofoverallsteeldemand,isthereforelikelytoremainweakuntilthesepocketsofunsoldhousingareabsorbedbythemarket.
Similarly,excesscapacityinthemanufacturingsectorisweighingonproducerpricesandprofitability,andthiswillcontinuetolimitmanufacturing-relatedinvestment,andthereforesteelusageinthissector,untilthisexcesscapacityisabsorbed.
Notwithstandingcontinuedstrengthininfrastructure-relatedsteelusage,thesefactorsmeanthatChina’ssteelindustryislikelytofacecontinuedchallengingdemandconditionsincomingyears.Asaresult,China’sdemandforironoreisalsolikelytogrowatasignificantlyslowerratethaninthepreviousdecade,althoughtheremaybescopeforlow-costglobalsupplierssuchasAustraliaandBraziltoexpandtheirmarketshare.
Figure 2.14: China’s steel production and iron ore imports
2006
2008
2010
2012
2014
0 0
200
400
600
Mt
Mt
800
1000
200
400
600
800
1000
1200
2006
20
08
2010
20
12
2014
Iron ore imports Iron ore imports–Australia Steel production Steel exports
Source:Robertsetal2016.
64
PartnershiP for Change
China’seconomictransitionisalsolikelytoresultinlessresource-intensivegrowththaninthelastdecade.Already,slowergrowthinindustrialproductionandrealestateinvestmenthascoincidedwithsignificantlyslowergrowthinChina’sdemandforsteelandothercommoditiesinrecentyears.Whilesomeofthisweaknessmayprovetobecyclicalratherthanstructural,theoutlookforChina’ssteeldemandremainsacentralsourceofuncertaintyforglobalsteelandironoremarkets(Box2.5).
Beyondthenearterm,China’ssteelandbroadermetalusagewillbeunderpinnedbyanumberoflonger-termdrivers,notwithstandingtherebalancingcurrentlyunderwayintheeconomy.Theseincludefurtherurbanisation,withChina’surbanisationrateofjust55percentsuggestingthattheneedforinvestmentinnewconstructionisstillsubstantial.Likewise,China’spublicinfrastructureremainsunderdevelopedinanumberofareas,includingurbanamenitiesandnationaltransportnetworks.Withrisingincomes,Chinesehouseholdswillalsodemandagrowingnumberofdurablegoods,includingmotorvehicles(withChina’spercapitalvehicleusagestilllowbyinternationalstandards)andhomeappliances.
TherearealsodownsideforcesthatcouldaffectChina’ssteelindustryanditsdemandforironore.Thisincludesthepolicyobjectiveofconsolidatingthesteelindustrytohelpeliminateexcesscapacityandimproveenvironmentaloutcomes,whichisagrowingfocusforauthorities.ThepotentialforgreateruseofscrapsteelcouldalsosignificantlyaltertheoutlookforChina’sdemandforironore,notingthatscrapusageinChinaremainslowbyinternationalstandards.
WhiletheoutlookforChina’ssteelproductionandironoredemandishighlyuncertain,Australiahassomeofthelowest-costironoreproducersintheworldandwillthereforeremainamajorsourceofChina’sironoreimportsinthecomingdecade.
implications for the Australian economy
FortheAustralianeconomy,theslowergrowthinChina’scommoditydemandinrecentyearshascontributedtoamorechallengingglobalenvironmentjustastheinvestmentphaseoftheminingboomhasnearedcompletion.Combinedwithlargeincreasesinglobalsupplies,softerglobaldemandhasresultedinAustralia’scommodityexportpricesfallingsharplyinrecentyears.ThishasreducedAustralia’stermsoftradeandgrowthinnationalincome,withAustraliafacingtheprospectoflowergrowthinincomesoverthecomingdecadeunlessproductivitygrowthcanbeliftedabovehistoricalaverages(Figure2.15).
Whilegrowthhasbeenslowinrecentyears,establishedmacroeconomicpolicyframeworks,includingafreelyfloatingexchangerate,haveservedAustraliawellinmanagingthedownswinginglobalcommodityprices,reinforcingthepositiverolethesemechanismsplayedincushioningtheAustralianeconomyfromtheAsianfinancialcrisisinthelate1990sandtheglobalfinancialcrisisinlate2000s.Likewise,Australia’slabourmarket,whilestillover-regulatedinsomeareas,hasbeenflexibleenoughtoallowthenecessaryadjustmentsinrealwagestotakeplaceinrecentyears,helpingtosustainemploymentgrowth.
ButAustralia,likeChina,isnowsearchingfornewsourcesofgrowthastheoldonesfade,andthestructureoftheAustralianeconomyisrevertingbacktoamorenormalpatternofgrowthinwhichtheservicessectorwillagainbethemaindriverofgrowth.
65
CHAPtER 2: the economic transformations in China and Australia
Australia’sservicessector,whichaccountsforaroundthree-quartersofoutput,comprisesadiverserangeofindustries.Thisspanstraditionalareassuchasutilitiesandgoodsdistribution,servicestohouseholdssuchashealthcareandrecreation,aswellasservicesmainlydirectedtowardsotherbusinessessuchasprofessionalservices(Figure2.16).
Figure 2.15: growth in Australia’s national income
-1
0
1
2
3
1960s
%
1970s 1980s 1990s 2000–2013 2013–2025
Labour utilisation Terms of trade Labour productivity National income per person
Note:GrowthinGNIpercapitaalsoreflectsagenerallysmallcontributionfromnetforeignincome,whichisnotshown.Source:GovernmentofAustralia2014.
Figure 2.16: Australia’s industrial composition
29%
19%
53%
Administrative and support services
Distributionof goods and utilities
Services to households and businesses
Commodities, manufacturingand construction
Arts and recreation services
Other
Accommodation and food
Information media and telecommunications
Financial and insurance
Rental, hiring and real estate
Professional, scientific and technical
Public administration and safety
Education and training
Health care and social assistance
Source:ABS2015a.
Whileitisimpossibletopredictexactlywhichindustrieswillprosperinthecomingdecade,China’stransitiontowardsamoreconsumer-driveneconomywillundoubtedlyseeChina’simportstilttowardsservicesandhigher-valuefood.TheongoingliberalisationofChina’sfinancialmarkets,aswellaslatentdemandofChinesehouseholdsandfirmsforabroaderrangeofinvestmentandcreditproducts,willpresentaraftofopportunitiesforAustralia’sfinancialservicessector.TheseopportunitiesarediscussedfurtherinChapter5.
66
PartnershiP for Change
Exportopportunitiesarelikelytoextendwellbeyondfinancialservices.SupportedbyChAFTA,therewillalsobeopportunitiesforprovidersofotherservicestoaccessthegrowingChinesemarketinareassuchaseducation,tourism,healthcare,accountingandlegalservices.
However,unliketheexperienceofthelastdecade,Australiawillhavenoparticularnaturaladvantagesincapturingthesenewexportmarkets,andwillfaceformidablecompetitionfromotheradvanced,service-basedeconomies.
Infact,productivityinsomeofAustralia’sserviceindustrieslagswellbehindtheglobalfrontier,partlyreflectingarelativelypoorperformanceoverthepastdecade.ThispictureisconsistentwithmeasuresofAustralia’srelativeinternationalcompetitiveness,whichalsopointtoanunderlyingdeteriorationoverthepastdecade(Box2.6).
BOx 2.6: An AssessmenT OF AusTRALiA’s COmPeTiTiveness
TheWorldEconomicForumprovidesausefulcross-countryassessmentofcompetitivenessbasedonitsratingon12categories(or‘Pillars’)thathavebeenfoundtocorrelatewithacountry’slonger-termproductivityperformance(WorldEconomicForum2015).These12Pillarsincludeacountry’sinstitutions,infrastructureandmarketefficiency,withscoresineachofthe12categoriesaggregatedtoformanoverallglobalcompetitivenessindex(orGCI).
Australia’soverallGCIrankinghasfallenoverthepastdecade,from16thto21st.Whileslippingacrossmostcategories,Australia’sdropintheareasrelatedtomarketefficiency(inbothgoodsandlabourmarkets)hasbeenstarkest(Figure2.17).
Figure 2.17: Australia’s competitiveness ranking
19 16
9
27
36
7
21
22
27
23
1st pillar:Institutions
2nd pillar:Infrastructure
4th pillar:Health andprimary education
6th pillar:Goods marketefficiency
7th pillar:Labor marketefficiency
8th pillar:Financial marketdevelopment
9th pillar:Technologicalreadiness
10th pillar:Market size
11th pillar:Businesssophistication
12th pillar:Innovation
2015–16
2006–07
Note:Pointsfurtherfromtheorigindenoteahigher/betterranking.Source:WorldEconomicForum2015.
67
CHAPtER 2: the economic transformations in China and Australia
Intheareaofgoodsmarketefficiency,thefallinAustralia’srankingreflectslowerscoresonindicatorsofdomesticcompetition,partlyoffsetbyincreasedscoresrelatingtoforeigncompetition.Thelowerrankingonlabourmarketefficiencyreflectsincreasingcostsassociatedwithredundanciesandhiring,andlittleprogressoverthepastdecadeinstrengtheningthelinkbetweenproductivityandpayoutcomesinemploymentagreements.
Australia’srankingoninfrastructurehasalsofallen,reflectinglowerscoresforroadandairtransportinfrastructure,partlyoffsetbyincreasesinthequalityofelectricityinfrastructureandamorecomprehensivemobilephonenetwork.
WhiletheGCIisonlyonemeasureofcompetitiveness,thesemovementsinAustralia’sGCIperformancehighlightsomeareaswherereformeffortsshouldbefocused,namelyinproductandlabourmarketefficiencyaswellascertaincategoriesofinfrastructure.InthecategoriesinwhichAustralia’sscorehasimprovedmost—healthandprimaryeducation—itisimportantthatincreasedpublicspendingintheseareasisallocatedefficiently,toensurethathigherspendingtranslatestobetteroutcomes.
Tocompeteeffectivelyinemergingexportmarkets,Australiawillthereforeneedtoundertakefurtherreformstodriveproductivityperformance,particularlyintheservicessector.Thiswillrequireexposingthedomesticeconomytoincreasedinternationalcompetition,througheliminatingremainingtradebarriersandaddressingtherelativelyhighregulatoryburdenimposedonbusinessesengagingininternationaltrade,asnotedintheWorldBank’sEaseofDoingBusinessmeasureforAustralia.
Strengtheningandextendingnationalcompetitionpolicythroughoutthedomesticservicessectorwillalsobeneeded,especiallyinAustralia’slargehuman-servicessector,wherecompetitiveforcesandconsumerchoicearegenerallylacking(Box2.7).
BOx 2.7: ReFORm PRiORiTies ACROss AusTRALiA’s seRviCes seCTOR
Withthetermsoftradereturningtowardshistoricalaverages,thefocusofpolicymakersisnowonimprovingtheproductivityofAustralia’sservicessectorasawayofmaintainingeconomicgrowthandprosperity.
ThisfocusreflectsthelargeweightoftheservicessectorintheAustralianeconomy(morethan70percentofoutputand80percentofemployment)anditsunderperformanceinkeyareasrelativetoglobalproductivitybenchmarks.
Forexample,Australia’sProductivityCommissionfoundthatproductivityinAustralia’sretailindustryisalmost40percentbelowtheUnitedStates’,whileresearchersbasedattheRBAhavefoundbelow-parproductivitygrowthinthefinancialservices,educationandwholesaleindustriesoverthepastdecade.
Recognisingthisproductivitychallenge,theHarperReviewofCompetition(2015)highlightedtheneedtocultivatemorecompetitioninproductmarkets,particularlyacrosstheservicessector.TheReviewemphasisedtheneedforpolicysettingstobeflexibleinordertoallownewentrantspossessingdisruptivetechnologiesorlower-costproductsinto
68
PartnershiP for Change
theAustralianmarket,includinginthe‘sharingeconomy’andthroughonlineprovision.Aspartofthis,theReviewidentifiedintellectualpropertylawasanareawherepolicyframeworksneededtobereassessedtoensurethattheexistingregimeisnotpreventingnewideasandtechnologiesfrombeingefficientlydispersedacrosstheeconomy.
TheReviewalsoemphasisedthepotentialforefficiencyimprovementsinhumanservices,includingthoseprovidedbygovernments,suchashealth,educationandcommunityservices.Whilealreadysignificant,theageingofAustralia’spopulationmeansthathumanservicesareexpectedtobecomeanevenlargerpartoftheeconomy,underliningthebenefitsthatcouldaccrueintheseareasfromincreasedcompetitionandcontestabilityaswellasgreaterconsumerchoice.
CompetitionreformwillnotonlyhelpAustralianbusinessestocompeteinfiercelycontestedserviceexportmarkets,butwillalsobeimportantinachievingproductivitygrowthacrossthenon-tradedsegmentsoftheservicessector.BetterproductivityperformanceinAustralia’snon-tradedsectorwill,inturn,freeupresourcestocopewiththedemandsofanageingpopulationandtofurtherimprovelivingstandardsoverthenextdecade.
AsnotedinBox2.6,thereisalsoroomforAustraliatosignificantlyimproveitsinfrastructure,withfurtherinvestmentneededinareasliketransportnetworkstosupportgrowingurbanpopulations.Additionalpublicspendingintheseareasneedstobeaccompaniedbyamorerigorousapproachforselectingprojects,toavoidwastingpublicresources(InfrastructureAustralia2016).
Asarelativelysmall,capital-importingeconomy,Australiawillalsoneedtoensurethatpolicysettingsremainsupportiveofforeigninvestmentininfrastructureandotherpartsoftheeconomy.China’smovetowardscapitalaccountliberalisationwillfundamentallychangetheavailabilityoffundswithintheinternationalcapitalmarket.China’svastpoolofsavingscouldhelpunderpinAustralia’sinvestmentneedsoverthenextdecade,butonlyiftheforeigninvestmentregimeandbroaderpolicyframeworkscontinuetomakeAustraliaanattractivedestinationforbothdirectandportfoliocapitalinflows.Improvinginfrastructuredeliveryforexistingassetswillbeapriority,includingthroughmoreefficientpricingintheareasoftransportandwaterinfrastructure(InfrastructureAustralia2016).Similarly,witharelativelysmallpopulation,Australianeedstoensurethatthelocalworkforcehasthecapabilitiesandnimblenesstocapitaliseonnewandemergingtechnologies.Inpart,thismeansbuildingupontheemergingcultureofstart-upbusinessesandentrepreneurship,andencouraginggreatercommercialisationofresearchideas,consistentwithAustralia’sNationalInnovationandScienceAgenda(AustralianGovernment2016).
Partners in economic transformation
ForbothChinaandAustralia,thepastdecadesaweconomicprosperityreachnewlevels,aseacheconomysuccessfullynavigatedtheglobalfinancialcrisistoextendalreadylongperiodsofunbrokeneconomicexpansion.
69
CHAPtER 2: the economic transformations in China and Australia
Butglobaleconomiccircumstanceshavechanged,andthesourcesofgrowththatunderpinnedrisingincomesinthelastdecadewillneedtochangealso.Thechallengeinthenextdecadewillthereforebetounleashnewsourcesofgrowth,especiallyineacheconomy’sservicessectorandinotherareaswherenewtechnologiesarerapidlyemerging.
Toachievethis,bothcountrieswillneedtoextendanddeepenreforminthoseareasoftheeconomythathaveremainedprotectedfromdomesticandinternationalcompetition,whichwillbethemainrecipefordrivingproductivitygrowthandinnovation.
InChina,openingupdomesticcapitalmarketstotherestoftheworldwillbecrucialinsupportingdomesticfinancialmarketreformstoimprovetheallocationofcapitalandtounderpinfurtherincreasesinincomes.ReformstoreducetheroleofSOEs,includingthoseoperatinginthebankingsector,willalsobeneeded,aswillfurthertradeliberalisationofChina’sservicessector.Together,thesepoliciescanassistChinatorebalancetowardsmoreconsumer-orientedgrowth,andsupporttheeconomy’stransformationtowardstheservicesandhigher-technologymanufacturingsectors.
Intheeconomictransition,Chinaalsoneedstobalancetheshort-termgoalofsupportingaslowingeconomywithfiscalandmonetarypolicymeasures,whichmaycontributetotheriseoftotaldebt,andthelong-termobjectiveofachievingmorebalancedandsustainablegrowth,whichwillrequireapropermanagementoffinancialrisks.
AsChina’scapitalaccountbecomesmoreopen,itsinvestmentlinkswiththerestoftheworldarelikelytogrowdramatically,whichhasthepotentialtoprofoundlyaffectAustraliaandtherestoftheworld.
Asacountryreliantonforeigninvestment,AustralianeedstobereadytoembracetheexpansioninChineseoutboundinvestment,includingininfrastructurewhereAustraliawillneedtofinancenewprojectsinareasliketransportationtosupportgrowingurbanpopulationsandlivingstandards.
Morebroadly,Australiawillneedtoincreasecontestabilityacrossmarkets,includinginsignificantpartsoftheservicessectorthatarecurrentlyprotectedfromdomesticandinternationalcompetition.Foreignparticipationwillbeimportanttosuccessinthisendeavour.Amongotherthings,thiswillinvolveextendingreforminareassuchascompetitionpolicyandlabourmarketregulationandbreakingdownremainingbarrierstointernationaltrade.
70
PartnershiP for Change
This text is taken from Partnership for Change: Australia–China Joint Economic Report, by East Asian Bureau of Economic Research and China
Center for International Economic Exchanges, published 2016 by ANU Press, The Australian National University, Canberra, Australia.