Australia: China, Australia And Asean - New Dynamic For Future Growth

CEO & Partner John W.H. Denton was a key speaker at the 4th World Chinese Economic Forum held in Melbourne.

John took part in a discussion on China, Australia and ASEAN – A New Dynamic for Future Growth moderated by Mr Ian Buchanan, Chairman of the ANU-Crawford School of Economics & Government Advisory Council. The other discussion participants were:

• Mr Alan Oxley, Chairman, Australia APEC Study Centre, RMIT University
• Mr Michael Johnson, Chairman, Australia-China Forum
• Mr Jusuf Wanandi, Founder and Vice Chairman, Centre for Strategic & International Studies, Jakarta
• Ambassador Delia D. Albert, Former Foreign Secretary of the Philippines
• Professor Anthony Milner, Basham Professor of Asian History, ANU College of Asia and the Pacific
• Dato' Jebasingam Issace John, Chief Executive Officer, East Coast Economic Region Development Council (ECERDC)
• Mr Xu Ningning, Executive Secretary-General of China-ASEAN Business Council China Secretariat.

The World Chinese Economic Forum brings together government, business and thought leaders on an annual basis to discuss the rise of China and China's economic linkages with its neighbours in Southeast Asia, India, Australia and the Middle East.

Click "text version" to read John's speech.

China, Australia and ASEAN – A new dynamic for future growth

Good morning. Thanks for having me here today — it's a privilege to share the stage with so many outstanding minds.

We are speaking about a possible new dynamic for future growth between China, Australia and ASEAN.

Any new dynamic uses old foundations — in this case three

1. existing regional supply chain arrangements;
2. existing regional capital flows; and infrastructure requirements;
3. existing relationships.

These foundations of the old dynamic are changing as they interact in new ways, mostly due to the impact of China's economic development on our region. And we can use them to develop 'a new dynamic' for our region — including Australia.

The old dynamic has been very successful. APEC member economies contribute more than 50% of global real GDP growth, and they've grown at an average of 6.6% per year for the last 20 years, despite two economic crises during this period.

It's been pretty good for trading relationships as well. APEC member economies have traded strongly with each other — trade within the region has grown at an average of 7.5%, well above the global average of around 6%. And tariffs within APEC member countries have fallen to 6.6%, well ahead of the voluntary targets set at the Bogor round.

A tough performance to beat for any new dynamic. But we can do more. Successful regional economic agreements have generally been outward-looking, rather than defensive. With this is mind, I'd like to outline some areas we can use to make new agreements.

Firstly, better connectivity. I'm delighted that the ASEAN connectivity plan has been released. This ambitious project has been a long-term goal of many countries, and China has been central, committing vast sums of money and supporting the plan strongly in regional fora.

China recognises the possible rewards. It already has a strong trade relationship with ASEAN, especially following the signing of the ASEAN-China trade deal. Last year ASEAN became China's third largest trading partner, helped by a boon in exports following the conclusion of the ASEAN-China Free Trade Agreement. And China is ASEAN's largest trading partner, accounting for 11.3% of ASEAN's total trade.

This trade relationship will strengthen as regional connectivity grows. A good location, infrastructure and business frameworks will boost any country's trade relationships, as Singapore's mix of commercial and geographic success shows. Estimates suggest around 70 per cent of all intra-ASEAN trade is now with, or through, Singapore.

China has studied this Singaporean model of regional connectivity. Lee Kuan Yew's regular visits to Chinese provinces spark extensive media coverage suggesting China can use the Singaporean experience to improve its own relations with ASEAN neighbours.

Support for China adopting similarly high levels of integration comes at the highest levels. Before taking up his new position, presumptive Chinese President Xi Jinping, called for China and ASEAN to 'work more vigorously to advance connectivity' to deepen trade and economic cooperation and personnel exchanges.

And China is putting its money where its mouth is. Xi's important but under reported speech in Ningbo in September this year promised that China was 'ready to set up an investment and financing platform for connectivity, step up land connectivity with ASEAN countries, build maritime connectivity networks and expand cooperation in such areas as ports, maritime logistics and port industries.' In addition to the US$30bn China has already committed to boost regional connectivity.

This large and rapid boost in connectivity will deepen our already-intricate regional production networks. As a region, we've already done well from these networks, which have brought increased flows of intermediate goods between regional partners as they have developed, prompting a powerful regional advantage in open global markets, particularly in manufacturing.

Obviously, China has been a big winner. While manufacturing accounts for only around 30% of China's GDP, it accounts for more than half of China's energy use, and it has fuelled much of the growth in the Pearl River Delta and costal regions of China.

But China isn't unique in making the most of supply chain integration — long, cross-border 'value chains' have been central to the rise of many of the North Asia powers as they have transferred labour-intensive production to less developed countries in favour of higher skilled activity.

What happens now, as China itself moves up the value chain? The relative labor costs argument is a heated one, and I'll leave discussions of whether or not China has reached a 'Lewisian' turning point to the many economic experts here today. But I think we can all agree that at some point China will lose some of its labour cost advantage, and labour-intensive operations will shift again – indeed evidence of this is already emerging.

However, we don't know yet the size of the shift within the region. Further integrating ASEAN countries into these long supply chains would be an enormous boon for development, so we need to think of how to bring China and ASEAN together to make this happen within the region.

So in my view, any 'new dynamic' will be based on four processes:

1. Greater Chinese investment;
2. More capital flows throughout the region;
3. Better regional ability to handle our infrastructure challenges; and
4. Maintaining open global and regional trading systems.

OPPORTUNITIES

China's relative investment in SE Asia is lower than it could be. According to the Heritage Foundation's investment tracker, Chinese investment in all of East Asia roughly equals Chinese Investment in the United States, and is less than its investments in Australia alone. China has invested more in Nigeria, Brazil and Canada than it has in Indonesia, its biggest investment destination in South East Asia.

China understands that it needs to invest more overseas if it wants to move up the value chain. The Ministry of Commerce in Beijing announced aim is to have Chinese investors making a little under US$400bn in overseas direct investments in the next five years — more than double the current total stock of Chinese ODI globally.

It would be logical that a good chunk of this investment goes to its near-neighbours. China already has strong trade relationships with most ASEAN nations. But as I indicated earlier, its relative size and weight, it has much weaker investment relationships with its ASEAN partners.

This is an area the region needs to work on in order to create a new dynamic for growth. More Chinese investment brings obvious economic benefits (and difficulties, like all investment). But any investment now will reap tangible rewards later. Small investors can become big investors, can become major trade partners and can become essential business colleagues.

But we need to encourage these small investments now. China's relatively low investment in ASEAN nations may be a sign of little inclination at senior levels of Chinese government to move labour-intensive production to other countries. At the moment perhaps and given domestic political pressures, Beijing would prefer to shift industries inland.

A lack of strong central support means nations need to engage more with lower levels of Chinese government, and with lower-level actors. Actors outside Beijing such as provincial State-Owned Enterprises (SOEs) or municipal SOEs will have greater freedom to engage on foreign direct investment. So investments are more likely to go to ASEAN countries more adept at dealing with Chinese sub-national governments.

Lowering barriers to investment forms the second and third parts of this 'new growth dynamic'. We need to work at removing barriers to the free flows of capital, goods, and people. While the region now has few internal trade barriers, major physical barriers to integration, and major barriers to free capital flows exist through the region.

The capital flow argument is difficult. We clearly already have the funds in the region. It's estimated that by 2050 Asia will account for as much as 45% of global financial assets.

And we clearly have the will to deal with this issue. The APEC Business Advisory Council, of which I am a member, has made dealing with the barriers to free capital flows a priority. We recently agreed to host a meeting here in Australia early next year, an Asia Pacific Financial Forum that will look at ways to make it easier for investors and fund managers to operate across national boundaries.

But, despite the region's impressive progress to strengthen financial systems and build regional connections, Asian financial markets remain relatively underdeveloped and are more closely linked to global markets than to each other.

This focus on linking into global markets remains a major barrier to deeper financial market integration for our region. The share of total savings in China, India and other emerging economies is likely to rise in the coming decades. But current predictions show the majority of these savings from Asian countries heading to foreign markets, such as the United States and Europe, due reportedly to the historic stability of these markets.

As a region we need to boost our confidence in our own financial markets. We need to combine greater direct investment throughout the region with a steady reform of regulatory and supervisory frameworks.

While this reform path may appear slower than 'big bang' reform, it could lead to far deeper Asian capital markets long-term. Using greater regional investment to build market confidence can also mean the Chinese desire for greater foreign investment will boost growth across the entire region, rather than in just the country receiving the investment.

I'd like to return now to our first foundation of the new growth dynamic, to maximise long supply chains. Building these will require us to deal with the physical barriers blocking integration in the region, which are considerable, and can be fixed only by building better infrastructure.

And that will require a lot of money, fast. The ADB recently estimated that the 32 ADB developing member countries will need almost US$8.2 trillion (in 2008 US$) to meet their infrastructure needs to 2020. Most of this investment (around 68 per cent) is needed for new investments in infrastructure. But ADB countries have committed to only US$330bn worth of projects, leaving a gap of around US$8 trillion.

A lot of the money will need to be raised through public-private partnerships. The shortfalls are just too great for Governments alone. So we'll need to convince the region that they should undertake good behind the border reforms to make infrastructure projects more likely to succeed. We need better regulatory frameworks for project finance and better risk management protocols.

We need to do this now. It will help Asia enjoy even more benefits from global supply chains and production networks. It will help business logistics. Domestic infrastructure spending is politically popular and has few losers, so it could offer decision makers relatively cheap political wins as well.

The challenge is how to institute these reforms, which brings me to my final point in this new growth dynamic. We need to keep pushing for regional and global economic agreements.

These issues — greater investment in the region (particularly from China); greater capital flows; and improved infrastructure — all need a coherent regional framework.

This framework needs to push for more behind the border reforms –that is, domestic reforms in the economies of member states. Behind the border reforms offer far greater gains than international trade and investment liberalisation agreements because they affect market participants equally in all countries. Behind the border reforms are essential to any new dynamic for growth.

We already have a framework to move forward with these reforms in ASEAN and APEC through their models of voluntary commitments. These aren't to everyone's taste, but I think they are effective. That's because behind the border reforms lead to vigorous political battles between winners and losers and changes have to come from domestic political processes.

Another reason for my optimism is that I believe China can help lead this, albeit slowly and by example. It has been a major force driving parts of the integration agenda. China gets that competition and integration will be the secret to any Chinese 'golden age' (shengshi).

China has a huge incentive to get this new regional dynamic right. Obviously, there are major trade advantages for China. Given its economic clout, China also appears the most obvious winner of freer regional capital flows and greater regional investment.

But China will also be a major winner in improving regional infrastructure. China's done well from overseas contracts building infrastructure. Current estimates put the flow of China's overseas contracts as more then 10 times the flow of foreign investment leaving China. And much of this work is being performed by State-Owned Enterprises.

So there's a big incentive for China to drive this new growth dynamic. And this is partly why I'm optimistic of our prospects in getting it to work. It's an ambitious vision, but a realisable one. Because improvement in any part of this new dynamic will have spillover benefits for other parts. Behind the border reforms to improve infrastructure investment will also help investor confidence in regional capital markets. Greater Chinese investment will further integrate countries in regional production networks. And all these things will give regional economic agreements more impetus.

Finally, I've deliberately left talking about Australia for last. Partly because I've talked about a new regional dynamic, and I consider Australia part of the region. The Australian government recognised this commitment recently in its 'Asian Century' white paper, described by Prime Minister Julia Gillard as 'a national blueprint for a time of national change'.

Australia's strengths are highly complementary to this new dynamic for growth. Australian business has a role to play in helping the region meet its goals in infrastructure and open capital markets. We have considerable expertise with infrastructure, particularly in our construction and financial sectors.

And we have world-class services firms. Australia has had relatively low participation in regional value chains, but we can make inroads in this area, too.

I'm excited by the prospects of this new regional dynamic for growth and bullish about Australia's ability to contribute to it. Thank you.

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