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22/04/2020
Moderator of the panel, CEDA CEO, Melinda Cilento, emphasised the importance of the topic.
“China really was the first country obviously into this crisis and like everyone else it's been very hard hit by the crisis both in terms of health outcomes and their society, but also in terms of the really significant adverse economic impacts.
“But having been the first country in, it's now looking like China will be the first country out as well and people are now starting to consider what that economic recovery looks like, what the rebound might look like and what that means for a business.
“That of course is fundamentally important to Australia given the important relationships that we have with China, both in terms of trade but also investment.”
Professor Golley led the discussion with a reflection on China’s long-term growth trajectory.
“I've been tracking the Chinese economy for about 25 years now and you know it has been a real success story for a huge amount of that time with double-digit growth rates in the 1990s. Of course that growth slowed down in the last six or seven years or so and the Chinese government's very deliberately promoted this idea of the new normal rate of growth at around six to seven per cent.
“I think it's taken Australians quite a lot of time to even get used to those, what I'm now going to call the old normal rates of growth, because we're not going to see those again in the future. A lot of the reason behind that growth has been really rather natural. You've seen a significant slowdown in the growth of the population and the labour force in China that included getting near the exhaustion of the vast rule labour surplus that fuelled a lot of the labour-intensive development in the past.
“They very deliberately shifted or have been trying to shift towards higher value-added and greener growth, coupling that with a rebalancing of the economy towards domestic consumption to try and reduce that reliance on the global economy.
Professor Golley then considered how this growth trajectory has affected Australia and reflected on recent criticism of Australia’s trade dependence on the country.
“Australians have benefited from China's rapid growth in the past but I think what we're really seeing in the press and in political and academic circles in recent years has been this sort of continual question about whether we're excessively dependent on China, whether our reliance there is a huge problem, how we can diversify away from that economy.
“Of course that's been heightened by the fact of the rising tension between the United States and China – our number one ally and our number one trading partner coming into all sorts of conflict. That I don't think is going to disappear in the future.
“The key point I made in my short piece that I wrote was that diversification makes great sense in theory but I think it's going to prove very difficult in practice given the situation that we all find ourselves in today. I came to that point really letting the numbers speak for themselves. The essential point was that China's economy is so large and so important to us in trade and investment terms, but even if growth there slows and it clearly will in the year ahead and the years ahead, it still seems to be Australia's best bet for sustaining our own economic growth rates in the future.”
“My key point is that China might have gotten us into this crisis, but I also think it's the country that is most likely to lead us out of it.”
Mr Ferguson offered a business perspective on Australia’s relationship with China.
“I lead our Asia international business and that enables me to speak with a lot of Australian companies that are operating in Asia and exporting to the region and also helping a lot of Chinese companies that are operating in Australia having made their investments here so I come at this conversation very much from a business perspective.
“Australia is an exporting nation and we're heavily dependent on China for our revenues. The IMF expects our economy to contract 6.7 per cent in 2020 and that's worse than the US and the EU so the reality is Australian exporters are facing into a very difficult near-term future.
“I think the business community is and needs to be absolutely pragmatic and focus our efforts on carefully managing the China and Asian trade for our own survival.
“There's no denying China's vital importance to Australia. I think Jane mentioned in 2019 alone our exports to China grew 26 per cent to 153 billion, which is 33 per cent of our total exports. On top of that Chinese companies have invested over $US110 billion into Australia since 2008.
“Jane talked about diversification this is not a new concept. Most of our senior political and business leaders have been concerned about an over-dependence on China for a number of years now, that's why we've successfully completed the multilateral trade deals like the Trans-Pacific Partnership and also important bilateral FTAs with Japan, Korea, Indonesia, Latin America and with Hong Kong and we're continuing efforts with India.
“While these other markets including Japan, at $61 billion of export revenues a year, and South Korea at $27 billion and India at $23 billion are important, they frankly haven't offered the same scale or growth rate as China. Nor has frankly Hong Kong, Singapore, and Taiwan which each equate to approximately about 10 per cent of annual China exports. So it's easy to say we should diversify away but it is very hard practically and economically to do, especially during a crisis.”
Mr Ferguson cautioned against being too optimistic about China’s recovery.
“In the meantime throughout all of this China continues to buy our iron ore, LNG and food and it looks at this stage as if China is going to be the first major economy out the other side. But the risk of further outbreaks within China are real, particularly as hundreds of millions of workers go back to their factories across the country, so it would be extremely premature to assume that this crisis is over for China and it's back to normal, but recent data is encouraging in terms of low infection rates.
“Really the key challenge for China and for businesses going forward is that most of the regional supply chain has been disrupted throughout Asia and they have very sluggish domestic consumption rates. While most of the Asian region is shutting down its borders just as China is coming back online, who will China sell to and who will they trade with given this?
“So my key message to the business community is we should focus on what we can control and keep a pragmatic mindset given the very difficult set of economic realities that we face. We need to maintain a clear-eyed pragmatic view on China and our commercial relationship with China and keep working hard at it. We need to understand exactly what's going on there as much as possible and unless geopolitical circumstances materially change, we simply can't afford as an economy to attempt to rapidly decouple our trade relationship from China. The economic costs would simply be too severe for our Australian people.”
Professor Golley then offered more specific details about how COVID-19 has affected China’s economy.
“China is certainly used to dealing with difficult shocks and this one is right up there. We've seen in the official estimates for the first quarter a 6.8 per cent drop in GDP, massive declines in retail sales and industrial output declining both by over 15 per cent. The unemployment figures are up at 6.2 per cent.
“The official numbers are of course likely to be much higher than that and as Premier Li Keqiang famously and I think regrettably said many years ago, now these official numbers coming out of China are best for reference only. What we know is that the economy has taken a serious hit and I'm sure everyone listening today has been reading all about that.
“In terms of COVID-19 I did hear just yesterday that there is now only one district of 3000 zones in China, Beijing’s Chaoyang district, is the only high-risk COVID-19 zone left in the country. That’s a really good sign that they've brought the infection rate under control and what's followed from that pretty quickly is an economic recovery. It's not complete, we know that the shops and the restaurants are reopening although people have been pretty cautious and reluctant about getting back out there and we know that most companies are back operating, although not at full capacity and we also know that there is a risk of re-infections and new lockdowns taking place.
“I think it's really dangerous for anyone to make growth forecasts and especially economists we notoriously get them wrong. We’ve got the World Bank forecasting 2.3 per cent as a baseline scenario for this year, their worst-case scenario for China is a 0.1 per cent increase in output over the course of this year and I think the IMF is in roughly that same ballpark. I think that the Chinese government is very unlikely to settle for this outcome. They've got a target rate themselves of 5.6 per cent, so they've already come down from that new normal of the past. I think they're likely to reduce that to five percent and they may have a very hard time hitting that mark.”
While growth is uncertain, Professor Golley said that China’s economy is in safe hands.
“I would say that they're the masters of fiscal stimulus and they are really the masters of a whole range of government tools. I am not saying that they will make growth substantially higher, but I think they'll continue to grow this year faster than just about any other economy in the world.
“So what we need to do is get ready as I said for that new normal to become the old normal. I don't want to guess what the new normal is, but I also don't mind being wrong. I think if they get four to five per cent we will be incredibly lucky. It's likely to be lower than that.”
Building off these ideas, Mr Ferguson discussed the attitude of Australian business to the state of the Chinese economy.
“There’s lots of sources suggesting that China's manufacturing sector is getting
going in a big way. Trivium China, which is a major research institute, reckons that 95 per cent of the largest Chinese companies have resumed normal operations, or are operating at between 80 and 85 per cent. Most of the major provinces in China are now out of lockdown and people are getting back to work.
“There are obviously concerns around reliability. We attended an interesting and useful briefing hosted by AusCham (Australian Chamber of Commerce) a few weeks ago, where DFAT and Austrade representatives mentioned that there's widespread evidence of Chinese government inspectors checking factories within the larger companies to ensure that there's genuine activity given that subsidies are being paid by the government to these companies. So there's lots of checks and balances and points of data.
“What we can say is that Chinese ports are all open again. Most of the problems frankly for Chinese ports are at the overseas destinations.
The Purchasing Managers Index, a PMI which was in uncharted territory in February at 35.6, has rebounded into positive territory at 52 in March, which is good to see.
Interestingly the high-tech manufacturing sector grew by close to nine per cent in March. The output of power generation equipment has gone up 20 per cent in March. E-commerce has been booming. Online sales of physical goods expanded by about six per cent overall in quarter one, so in terms of green shoots it looks pretty good.”
Professor Golley reflected further on the Chinese government’s ability to spur growth.
“They (the Chinese government) don't have as much capacity as they did in the past with the GFC because of both the rising depths of the central and local governments and the lack of external demand coming from the rest of the global economy now in terms of consumption.
“We've already seen a few targeted measures targeting I think especially the poorest people in China and there are hundreds and hundreds of millions of them and I think they are one of the keys to coming out of this crisis. They link in to that rebalancing towards domestic consumption. If you can get those hundreds of millions spending, that's going to be a really good thing for the domestic economy and so for example by waiving social security fees, by cancelling utility bills, and by trying to channel some of that credit into small and medium enterprises and away from the big state-owned enterprise.
“In terms of business confidence the state-owned enterprise sector has really struck back. What would be fantastic for the Chinese economy and for the rest of the world as well is that they return to a renewed stress on the supply-side structural reforms that they've been talking about for years and not progressing with that quickly.”
Mr Ferguson offered his perspective on debates around ‘diversifying’ Australia’s economy away from trade with China.
I completely agree, I think we want to find growth areas in in other markets, it's just that it's not easy to do quickly. Our relationship with Japan and South Korea is incredibly important. We’ve signalled our great intent on working with Indonesia. Indonesia’s not even in our top 10 export markets at the moment but it requires a national effort to get it up and going in the next five years. India again is incredibly important for Australia's future given the young population and the opportunities there around their wealth generation.
“Diversification is always a smart thing, but it takes time. We need to keep eye on building and securing our China trade as wel.l I just don't buy into the debate about decoupling. I just don't buy It. It just doesn't make sense for Australia.
Picking up on these points, Professor Golley addressed the pros and cons of our Chinese trade relationship.
“I think there's a real need to strike a better balance than we have in the past. We’ve had two decades of focusing entirely on the economic benefits that our engagement with China could bring. Now COVID-19 has really brought to the foreground not just the traditional security risks of dealing with what we might reasonably call now a non-ally, but also encompassing these much broader human security and health risks that come with living in an extremely globalised world.
“I don't think we're going to return to the world of the past. I think the neoliberal globalised order that we've become so used to and that's been so beneficial for Australia is not going to return. But I can also start to look on the bright side of that, that the economic and security experts here in Canberra and across the country come together and have more nuanced conversations about the balance that we need to strike.”
Professor Jane Golley: Australia, China and COVID-19: dependency in a crisis
“China really was the first country obviously into this crisis and like everyone else it's been very hard hit by the crisis both in terms of health outcomes and their society, but also in terms of the really significant adverse economic impacts.
“But having been the first country in, it's now looking like China will be the first country out as well and people are now starting to consider what that economic recovery looks like, what the rebound might look like and what that means for a business.
“That of course is fundamentally important to Australia given the important relationships that we have with China, both in terms of trade but also investment.”
Professor Golley led the discussion with a reflection on China’s long-term growth trajectory.
“I've been tracking the Chinese economy for about 25 years now and you know it has been a real success story for a huge amount of that time with double-digit growth rates in the 1990s. Of course that growth slowed down in the last six or seven years or so and the Chinese government's very deliberately promoted this idea of the new normal rate of growth at around six to seven per cent.
“I think it's taken Australians quite a lot of time to even get used to those, what I'm now going to call the old normal rates of growth, because we're not going to see those again in the future. A lot of the reason behind that growth has been really rather natural. You've seen a significant slowdown in the growth of the population and the labour force in China that included getting near the exhaustion of the vast rule labour surplus that fuelled a lot of the labour-intensive development in the past.
“They very deliberately shifted or have been trying to shift towards higher value-added and greener growth, coupling that with a rebalancing of the economy towards domestic consumption to try and reduce that reliance on the global economy.
Professor Golley then considered how this growth trajectory has affected Australia and reflected on recent criticism of Australia’s trade dependence on the country.
“Australians have benefited from China's rapid growth in the past but I think what we're really seeing in the press and in political and academic circles in recent years has been this sort of continual question about whether we're excessively dependent on China, whether our reliance there is a huge problem, how we can diversify away from that economy.
“Of course that's been heightened by the fact of the rising tension between the United States and China – our number one ally and our number one trading partner coming into all sorts of conflict. That I don't think is going to disappear in the future.
“The key point I made in my short piece that I wrote was that diversification makes great sense in theory but I think it's going to prove very difficult in practice given the situation that we all find ourselves in today. I came to that point really letting the numbers speak for themselves. The essential point was that China's economy is so large and so important to us in trade and investment terms, but even if growth there slows and it clearly will in the year ahead and the years ahead, it still seems to be Australia's best bet for sustaining our own economic growth rates in the future.”
“My key point is that China might have gotten us into this crisis, but I also think it's the country that is most likely to lead us out of it.”
Mr Ferguson offered a business perspective on Australia’s relationship with China.
“I lead our Asia international business and that enables me to speak with a lot of Australian companies that are operating in Asia and exporting to the region and also helping a lot of Chinese companies that are operating in Australia having made their investments here so I come at this conversation very much from a business perspective.
“Australia is an exporting nation and we're heavily dependent on China for our revenues. The IMF expects our economy to contract 6.7 per cent in 2020 and that's worse than the US and the EU so the reality is Australian exporters are facing into a very difficult near-term future.
“I think the business community is and needs to be absolutely pragmatic and focus our efforts on carefully managing the China and Asian trade for our own survival.
“There's no denying China's vital importance to Australia. I think Jane mentioned in 2019 alone our exports to China grew 26 per cent to 153 billion, which is 33 per cent of our total exports. On top of that Chinese companies have invested over $US110 billion into Australia since 2008.
“Jane talked about diversification this is not a new concept. Most of our senior political and business leaders have been concerned about an over-dependence on China for a number of years now, that's why we've successfully completed the multilateral trade deals like the Trans-Pacific Partnership and also important bilateral FTAs with Japan, Korea, Indonesia, Latin America and with Hong Kong and we're continuing efforts with India.
“While these other markets including Japan, at $61 billion of export revenues a year, and South Korea at $27 billion and India at $23 billion are important, they frankly haven't offered the same scale or growth rate as China. Nor has frankly Hong Kong, Singapore, and Taiwan which each equate to approximately about 10 per cent of annual China exports. So it's easy to say we should diversify away but it is very hard practically and economically to do, especially during a crisis.”
Mr Ferguson cautioned against being too optimistic about China’s recovery.
“In the meantime throughout all of this China continues to buy our iron ore, LNG and food and it looks at this stage as if China is going to be the first major economy out the other side. But the risk of further outbreaks within China are real, particularly as hundreds of millions of workers go back to their factories across the country, so it would be extremely premature to assume that this crisis is over for China and it's back to normal, but recent data is encouraging in terms of low infection rates.
“Really the key challenge for China and for businesses going forward is that most of the regional supply chain has been disrupted throughout Asia and they have very sluggish domestic consumption rates. While most of the Asian region is shutting down its borders just as China is coming back online, who will China sell to and who will they trade with given this?
“So my key message to the business community is we should focus on what we can control and keep a pragmatic mindset given the very difficult set of economic realities that we face. We need to maintain a clear-eyed pragmatic view on China and our commercial relationship with China and keep working hard at it. We need to understand exactly what's going on there as much as possible and unless geopolitical circumstances materially change, we simply can't afford as an economy to attempt to rapidly decouple our trade relationship from China. The economic costs would simply be too severe for our Australian people.”
Professor Golley then offered more specific details about how COVID-19 has affected China’s economy.
“China is certainly used to dealing with difficult shocks and this one is right up there. We've seen in the official estimates for the first quarter a 6.8 per cent drop in GDP, massive declines in retail sales and industrial output declining both by over 15 per cent. The unemployment figures are up at 6.2 per cent.
“The official numbers are of course likely to be much higher than that and as Premier Li Keqiang famously and I think regrettably said many years ago, now these official numbers coming out of China are best for reference only. What we know is that the economy has taken a serious hit and I'm sure everyone listening today has been reading all about that.
“In terms of COVID-19 I did hear just yesterday that there is now only one district of 3000 zones in China, Beijing’s Chaoyang district, is the only high-risk COVID-19 zone left in the country. That’s a really good sign that they've brought the infection rate under control and what's followed from that pretty quickly is an economic recovery. It's not complete, we know that the shops and the restaurants are reopening although people have been pretty cautious and reluctant about getting back out there and we know that most companies are back operating, although not at full capacity and we also know that there is a risk of re-infections and new lockdowns taking place.
“I think it's really dangerous for anyone to make growth forecasts and especially economists we notoriously get them wrong. We’ve got the World Bank forecasting 2.3 per cent as a baseline scenario for this year, their worst-case scenario for China is a 0.1 per cent increase in output over the course of this year and I think the IMF is in roughly that same ballpark. I think that the Chinese government is very unlikely to settle for this outcome. They've got a target rate themselves of 5.6 per cent, so they've already come down from that new normal of the past. I think they're likely to reduce that to five percent and they may have a very hard time hitting that mark.”
While growth is uncertain, Professor Golley said that China’s economy is in safe hands.
“I would say that they're the masters of fiscal stimulus and they are really the masters of a whole range of government tools. I am not saying that they will make growth substantially higher, but I think they'll continue to grow this year faster than just about any other economy in the world.
“So what we need to do is get ready as I said for that new normal to become the old normal. I don't want to guess what the new normal is, but I also don't mind being wrong. I think if they get four to five per cent we will be incredibly lucky. It's likely to be lower than that.”
Building off these ideas, Mr Ferguson discussed the attitude of Australian business to the state of the Chinese economy.
“There’s lots of sources suggesting that China's manufacturing sector is getting
going in a big way. Trivium China, which is a major research institute, reckons that 95 per cent of the largest Chinese companies have resumed normal operations, or are operating at between 80 and 85 per cent. Most of the major provinces in China are now out of lockdown and people are getting back to work.
“There are obviously concerns around reliability. We attended an interesting and useful briefing hosted by AusCham (Australian Chamber of Commerce) a few weeks ago, where DFAT and Austrade representatives mentioned that there's widespread evidence of Chinese government inspectors checking factories within the larger companies to ensure that there's genuine activity given that subsidies are being paid by the government to these companies. So there's lots of checks and balances and points of data.
“What we can say is that Chinese ports are all open again. Most of the problems frankly for Chinese ports are at the overseas destinations.
The Purchasing Managers Index, a PMI which was in uncharted territory in February at 35.6, has rebounded into positive territory at 52 in March, which is good to see.
Interestingly the high-tech manufacturing sector grew by close to nine per cent in March. The output of power generation equipment has gone up 20 per cent in March. E-commerce has been booming. Online sales of physical goods expanded by about six per cent overall in quarter one, so in terms of green shoots it looks pretty good.”
Professor Golley reflected further on the Chinese government’s ability to spur growth.
“They (the Chinese government) don't have as much capacity as they did in the past with the GFC because of both the rising depths of the central and local governments and the lack of external demand coming from the rest of the global economy now in terms of consumption.
“We've already seen a few targeted measures targeting I think especially the poorest people in China and there are hundreds and hundreds of millions of them and I think they are one of the keys to coming out of this crisis. They link in to that rebalancing towards domestic consumption. If you can get those hundreds of millions spending, that's going to be a really good thing for the domestic economy and so for example by waiving social security fees, by cancelling utility bills, and by trying to channel some of that credit into small and medium enterprises and away from the big state-owned enterprise.
“In terms of business confidence the state-owned enterprise sector has really struck back. What would be fantastic for the Chinese economy and for the rest of the world as well is that they return to a renewed stress on the supply-side structural reforms that they've been talking about for years and not progressing with that quickly.”
Mr Ferguson offered his perspective on debates around ‘diversifying’ Australia’s economy away from trade with China.
I completely agree, I think we want to find growth areas in in other markets, it's just that it's not easy to do quickly. Our relationship with Japan and South Korea is incredibly important. We’ve signalled our great intent on working with Indonesia. Indonesia’s not even in our top 10 export markets at the moment but it requires a national effort to get it up and going in the next five years. India again is incredibly important for Australia's future given the young population and the opportunities there around their wealth generation.
“Diversification is always a smart thing, but it takes time. We need to keep eye on building and securing our China trade as wel.l I just don't buy into the debate about decoupling. I just don't buy It. It just doesn't make sense for Australia.
Picking up on these points, Professor Golley addressed the pros and cons of our Chinese trade relationship.
“I think there's a real need to strike a better balance than we have in the past. We’ve had two decades of focusing entirely on the economic benefits that our engagement with China could bring. Now COVID-19 has really brought to the foreground not just the traditional security risks of dealing with what we might reasonably call now a non-ally, but also encompassing these much broader human security and health risks that come with living in an extremely globalised world.
“I don't think we're going to return to the world of the past. I think the neoliberal globalised order that we've become so used to and that's been so beneficial for Australia is not going to return. But I can also start to look on the bright side of that, that the economic and security experts here in Canberra and across the country come together and have more nuanced conversations about the balance that we need to strike.”
Related content:
On the CEDA blogProfessor Jane Golley: Australia, China and COVID-19: dependency in a crisis