Payne’s great leap for­ward for China ties

Ac­tion is afoot against Bei­jing’s ex­pan­sion­ism

The Weekend Australian - - WORLD - GLENDA KORPORAAL CHINA COR­RE­SPON­DENT

Af­ter more than two years of strain, Aus­tralia-China re­la­tions have taken a huge leap for­ward this week with vis­its by For­eign Min­is­ter Payne and Trade Min­is­ter Si­mon Birm­ing­ham, as well as a con­tin­gent of busi­ness lead­ers, Queens­land Premier An­nasta­cia Palaszczuk and the Queens­land Bal­let.

The week has seen the first visit by an Aus­tralian for­eign min­is­ter since Julie Bishop’s frosty re­cep­tion in Bei­jing in Fe­bru­ary 2016, and the first of­fi­cial visit by a trade min­is­ter to China since the for­mer min­is­ter Steve Ciobo was in Bei­jing in Septem­ber last year.

The events co­in­cided with a big show­ing by Aus­tralian com­pa­nies at China’s first big im­port expo in Shang­hai.

On Thurs­day morn­ing Sen­a­tor Payne met her Chi­nese coun­ter­part Wang Yi at the Diaoyu­tai guest­house, held a se­ries of meet­ings and then, in the evening, launched the hard­cover ver­sion of 45 years, 45 sto­ries pro­duced by the Depart­ment of For­eign Af­fairs and Trade to mark 45 years of Aus­tralia-China re­la­tions.

Last night in Shang­hai, the Queens­land Bal­let opened the first night of its four-city China tour with Liam Scar­lett’s pro­duc­tion of a Mid­sum­mer Night’s Dream un­der the artis­tic di­rec­tion of Li Cunxin, fa­mous for his au­to­bi­og­ra­phy Mao’s Last Dancer.

Af­ter many ups and down in the re­la­tion­ship, to use the words of Mr Wang, the Aus­tralia-China re­la­tion­ship is look­ing a lot bet­ter than it has for some time.

Now three months into the job of For­eign Min­is­ter, a con­fi­dent Sen­a­tor Payne made re­peated com­ments dur­ing her one-day visit to the Chi­nese cap­i­tal about the warmth of her wel­come — im- por­tant words in a re­la­tion­ship that has been frosty for some time.

In her pre­lim­i­nary com­ments as the Aus­tralians faced the Chi­nese across a long ta­ble at the start of the talks, Sen­a­tor Payne re­counted go­ing to China as a staffer with a for­mer NSW premier 25 years ago as Aus­tralian were be­gin­ning to see the op­por­tu­ni­ties in the China mar­ket.

When she praised the Shang­hai expo, an ini­tia­tive of Chi­nese Pres­i­dent Xi Jin­ping, Mr Wang’s nor­mally stern face lit up.

Aus­tralia has re­alised it needs to take a more diplo­matic ap­proach to its deal­ings with China, but it can do so at the same time as mak­ing de­ci­sions China might not like.

And China has recog­nised that in a more se­cu­rity con­scious, frac­tious Trump-led new world or­der, that the re­la­tion­ship can with­stand some de­ci­sions that it re­ally doesn’t like, in­clud­ing the ban on Huawei from sup­ply­ing Aus­tralia’s next-gen­er­a­tion 5G net­work.

Sen­a­tor Payne and Mr Wang’s more than two hours of talks came af­ter the news Can­berra was con­sid­er­ing block­ing a bid by the Hong Kong-based CKI for pipe­line com­pany APA — which some ob­servers ini­tially took as an­other anti-China move.

But by care­ful word­ing of the an­nounce­ment, Sen­a­tor Payne was able to ex­plain that it was be­cause one for­eign in­vestor was al­ready seen as hav­ing sig­nif­i­cant own­er­ship of crit­i­cal in­fra­struc­ture in Aus­tralia and not a mea­sure aimed at any one coun­try.

Lis­ten­ing to her ex­pla­na­tion, Mr Wang in­di­cated the re­la­tion­ship would not be af­fected by “one de­ci­sion”.

That said, there are many po­ten­tial stresses in the re­la­tion­ship, in­clud­ing China’s role in the South China Sea and the Pa­cific Is­lands as well as its mass “re-ed­u­ca­tion camps” of Uighur Mus­lims in the Xin­jiang re­gion.

Chen Hong, di­rec­tor of the Aus­tralian Stud­ies Cen­tre at Shang­hai Nor­mal Univer­sity, de­scribed the meet­ing as a “con­crete step to bring the stand­still of bi­lat­eral re­la­tions out of the freeze”.

“Both sides have shown their will­ing­ness to im­prove the re­la­tion­ship which is very im­por­tant to both Aus­tralia and China in this time of un­cer­tain­ties,” he told The Week­end Aus­tralian yes­ter­day.

He was crit­i­cal of the de­ci­sion to block the CKI bid for APA as a “new bar­rier on the path of the im­prove­ment of the re­la­tion­ship”.

Yet to be out­lined in any de­tail is the one agree­ment which ap­peared to be reached on both sides about work­ing to­gether in the Pa­cific Is­lands. Sen­a­tor Payne said later it could in­volve health and ed­u­ca­tion ini­tia­tives. While her ideas were not very spe­cific, the fact that both sides are look­ing for joint aid and hu­man­i­tar­ian work in the Pa­cific Is­lands could go some way to help to dif­fuse ten­sions over that re­gion.

The next step is a visit to China by Prime Min­is­ter Scott Mor­ri­son which could be on the cards be­fore the end of the year. It is not a cer­tainty but what is cer­tain is that re­la­tions be­tween Aus­tralia and it big­gest trad­ing part­ner have reached a prag­matic new and po­ten­tially work­able ac­com­mo­da­tion for the sim­ple rea­son that both sides have recog­nised it is in their best in­ter­ests to do so.

Re­la­tions with China look set to thaw af­ter a lengthy diplo­matic freeze brought about by the Coali­tion’s tough re­sponse to Chi­nese in­flu­ence op­er­a­tions in Aus­tralia, cy­ber theft and a grow­ing ri­valry in the South Pa­cific.

For­eign Min­is­ter Marise Payne’s two-day visit to Bei­jing is be­ing touted as an ice­breaker. A fol­low-up visit by Scott Mor­ri­son is likely de­spite China’s dis­plea­sure over Can­berra’s de­ci­sion to block a Hong Kong com­pany’s bid for gas pipe­line com­pany APA on na­tional in­ter­est grounds. Busi­ness lead­ers are de­lighted Xi Jin­ping has sig­nalled his ap­par­ent will­ing­ness to al­low for­eign com­pa­nies bet­ter ac­cess to the Chi­nese mar­ket in a land­mark speech to an in­ter­na­tional im­port expo in Shang­hai this week.

But not ev­ery­one is con­vinced that this marks a de­ci­sive turn­ing point in Sino-Aus­tralian re­la­tions or that Bei­jing will re­ally open its pro­tected do­mes­tic mar­ket to in­ter­na­tional com­pe­ti­tion. And crit­ics are scep­ti­cal of China’s abil­ity to weather the ap­proach­ing trade and geopo­lit­i­cal storms that are cloud­ing the rosy fu­ture Xi de­picts for his coun­try. The para­dox of China’s rise is that the more suc­cess­ful it be­comes, the more there are doubts about the dura­bil­ity of the Chi­nese eco­nomic mir­a­cle.

So how can we make sense of th­ese con­flict­ing opin­ions? To bet­ter un­der­stand the likely tra­jec­to­ries of pow­er­ful states, ex­perts con­struct and de­bate hy­pothe­ses known as al­ter­na­tive fu­tures. Many Aus­tralians be­lieve this cen­tury will be­long to China, a fu­ture con­sid­ered far like­lier than the al­ter­na­tives of China mud­dling through or im­plod­ing be­cause of un­re­solved po­lit­i­cal ten­sions. This view is cham­pi­oned by the Aus­tralian Na­tional Univer­sity’s Hugh White, who says China will be­come “the world’s rich­est and most pow­er­ful coun­try in the 21st cen­tury”.

How­ever, the pos­si­bil­ity — once con­sid­ered con­trar­ian — that China may stag­nate rather than pros­per is gain­ing trac­tion and needs to be taken se­ri­ously. If cor­rect, this would re­quire a sub­stan­tial re­think of our as­sump­tions about China’s fu­ture, and the im­pli­ca­tions for pol­icy and busi­ness risk man­age­ment would be pro­found. The stag­na­tion the­sis rests on the in­creas­ingly plau­si­ble ar­gu­ment that China’s con­tin­ued rise is threat­ened by the con­ver­gence of three eco­nomic, de­mo­graphic and geopo­lit­i­cal trends. Its debt and ex­pen­di­ture are ap­proach­ing dan­ger­ously high lev­els at the wrong time in the coun­try’s eco­nomic and de­mo­graphic cy­cles as the econ­omy slows and the pop­u­la­tion be­gins to age rapidly.

Xi’s de­sire for cen­tralised con­trol over all sec­tors of the econ­omy is damp­en­ing the dy­namism of the tech­nol­ogy sec­tor. All this is tak­ing place at a time of ex­pan­sion in China’s global in­flu­ence and pres­ence, which is re­source in­ten­sive and is gen­er­at­ing an in­ter­na­tional push-back that is gath­er­ing mo­men­tum, threat­en­ing a new cold war, com­pli­cat­ing China’s choices and rais­ing the po­lit­i­cal stakes for Xi.

Stan­ford Univer­sity eco­nomic his­to­rian Niall Fer­gu­son is one of many in­ter­na­tional ob­servers who worry the trade war with the US will post­pone es­sen­tial re­forms that are nec­es­sary to deal with mount­ing debt, over­ca­pac­ity in heavy in­dus­try and the opac­ity of the shadow bank­ing sys­tem. Fer­gu­son says “win­ter is com­ing” for highly lever­aged economies such as China.

In Aus­tralia, a lead­ing pro­po­nent of the stag­na­tion the­sis is the re­spected di­rec­tor of the Aus­tralian and Ja­panese Eco­nomic In­tel­li­gence Unit, Manuel Pana­giotopou­los. He be­lieves the Chi­nese econ­omy is “a house of cards, grow­ing on per­for­mance-en­hanc­ing drugs like un­sus­tain­able debt and fis­cal ex­pen­di­ture”.

Pana­giotopou­los tells In­quirer China’s stel­lar eco­nomic per­for­mance in the past decade is largely at­trib­ut­able to su­per-rapid credit growth in which its non-fi­nan­cial sec­tor credit nearly dou­bled to 235 per cent since the 2008 global fi­nan­cial cri­sis.

As Alan Kohler has writ­ten in this pa­per, fi­nan­cial China re­sem­bles “a Ponzi scheme”. The bank­ing sec­tor’s $US40 tril­lion ($55 tril­lion) loan book is equiv­a­lent to about half of global gross do­mes­tic prod­uct, a level of debt that is dou­ble the rate of in­crease in debt to GDP in­curred by the US in the lead-up to the GFC.

Most of this has been spent on con­struc­tion, much of which is un­likely to gen­er­ate a com­mer­cial re­turn. In a fu­ture of de­mo­graphic de­cline, this is a tick­ing fi­nan­cial time bomb. The Chi­nese Com­mu­nist Party can choose to re­form lend­ing and ac­cel­er­ate a down­turn or main­tain lend­ing at present high lev­els and cre­ate a much big­ger crash down the track. The party ap­pears to have cho­sen the lat­ter op­tion.

Based on ex­ten­sive per­sonal re­search, Pana­giotopou­los says the de­mo­graphic im­pact on the econ­omy has been greatly un­der­es­ti­mated. The lat­est pop­u­la­tion pro­jec­tions bear him out. Chi­nese fer­til­ity rates fell be­low re­place­ment lev­els 20 years ago and the age­ing of the pop­u­la­tion is ac­cel­er­at­ing. In the early 1980s, only 5 per cent of the pop­u­la­tion was over 65. To­day, that fig­ure is 10 per cent, putting the coun­try on track to be­come the world’s most aged so­ci­ety by 2030.

Thus, China’s once vaunted de­mo­graphic div­i­dend be­comes a de­mo­graphic im­post, ex­ac­er­bated by the one-child pol­icy, as the sup­ply of cheap labour dries up.

“Un­der the im­pact of an age­ing and shrink­ing pop­u­la­tion, high lev­els of ex­ist­ing cap­i­tal stock will be met by con­tin­u­ally lower con­sumer de­mand, lower prof­itabil­ity and raised debt re­pay­ment ra­tios” cre­at­ing de­fla­tion­ary pres­sures and lead­ing to “a pre­cip­i­tous drop in China’s eco­nomic growth rate”, Pana­giotopou­los says.

We are not talk­ing about a slow­ing econ­omy where China drops back to the growth rates more typ­i­cal of de­vel­oped economies over time. Nor is this a pre­dic­tion of re­ces­sion, which is part of the nor­mal eco­nomic cy­cle and which un­doubt­edly will take place in China at some point. Pana­giotopou­los says China “will fol­low the path of other age­ing so­ci­eties and face eco­nomic growth rates close to or be­low zero per cent, all while its GDP per capita re­mains low.” Its fu­ture will be more like Ja­pan’s dur­ing the past two decades: eco­nomic slump fol­lowed by de­fla­tion. The key dif­fer­ence is that Ja­pan be­came rich be­fore get­ting old, whereas China’s per capita in­come won’t get to Ja­panese lev­els be­fore de­mo­graphic de­cline re­duces eco­nomic vi­tal­ity.

Writ­ing in the jour­nal China Watch, Ma­hon China In­vest­ment Man­age­ment ex­ec­u­tive chair­man David Ma­hon says al­though China soon may be­come the world’s largest econ­omy, it is also one of the poor­est economies of scale: it has a per capita GDP of be­tween $US12,000 and $US15,000 (de­pend­ing on how it’s mea­sured) rank­ing it about 100th in the world and on a par with Suri­name and the Do­mini­can Repub­lic. Ma­hon says: “The size of the Chi­nese econ­omy does not make the coun­try a su­per­power that can match the might of the US econ­omy.”

There are also ques­tion marks about China’s ca­pac­ity for in­no­va­tion. This seems coun­ter­in­tu­itive given China’s ad­vances in sci­ence and tech­nol­ogy. Hardly a day goes by with­out news of the lat­est break­through by Chi­nese re­searchers, sci­en­tists and hi-tech en­trepreneurs in su­per com­put­ers, new ma­te­ri­als, quan­tum tele­por­ta­tion and stealth fighters. Chi­nese re­search and devel­op­ment spend­ing is ex­pected to surge past the US within a decade.

Th­ese gains are largely at­trib­ut­able to the enor­mous re­sources Bei­jing is pour­ing into strate­gic in­dus­tries and sci­en­tific R&D as well as in­ten­si­fy­ing col­lab­o­ra­tion with for­eign, mainly US, sci­en­tists.

But crit­i­cal fea­tures of China’s in­no­va­tion land­scape are weak and there are grow­ing doubts about how much bang for the yuan it gets for all this in­vest­ment.

ANU’s An­drew Kennedy says the re­turn on in­vest­ment is patchy and “the ef­fi­ciency with which Chi­nese com­pa­nies trans­late in­vest­ment into valu­able patents and com­pet­i­tive new prod­ucts is quite low. Even the state-con­trolled me­dia de­rides China’s patent boom as ‘high quan­tity, low qual­ity’.” Much has been made of the gains China has made from steal­ing mil­i­tar­ily and com­mer­cially valu­able in­tel­lec­tual prop­erty. But Kennedy says there are real chal­lenges in as­sim­i­lat­ing and ap­ply­ing knowl­edge from stolen IP, which in­hibits the devel­op­ment of an in­no­va­tion cul­ture do­mes­ti­cally and cre­ates or­gan­i­sa­tions “op­ti­mised for im­i­ta­tion rather than in­no­va­tion”.

The will­ing­ness of for­eign com­pa­nies to in­vest and sci­en­tists to col­lab­o­rate may cool or be re­stricted be­cause of an es­ca­lat­ing push-back against China led by the US. Af­ter a long pe­riod in which Xi’s charmed geopo­lit­i­cal run seemed un­stop­pable, the in­ter­na­tional en­vi­ron­ment is be­gin­ning to turn against China. The man dubbed “Chair­man of Ev­ery- thing” soon will have to pay a real price for the gains made on the back of what the Trump ad­min­is­tra­tion has branded China’s mer­can­tilist and preda­tory be­hav­iour. Few ex­pected such an abrupt turn­around.

From the South China Sea to Africa, cen­tral Asia and South Amer­ica, the world has be­come con­di­tioned to the pres­ence of Chi­nese diplo­mats, en­gi­neers, ad­vis­ers and mil­i­tary per­son­nel. But the prob­lems as­so­ci­ated with this en­large­ment of China’s in­flu­ence and pres­ence are mul­ti­ply­ing for Xi. The trade war with the US is evolv­ing into a full-spec­trum con­test with the US for global pre­em­i­nence. US Vice-Pres­i­dent Mike Pence’s Oc­to­ber 4 speech makes clear Wash­ing­ton is go­ing to make life far more dif­fi­cult for Xi by tar­get­ing China’s vul­ner­a­bil­i­ties and lim­it­ing or pro­scrib­ing co-op­er­a­tion on a wide front.

Alarmed by Chi­nese in­roads into their tra­di­tional spheres of in­flu­ence, other coun­tries are con­duct­ing their own push-backs. In the South Pa­cific, the Mor­ri­son gov­ern­ment is flex­ing its fi­nan­cial and aid mus­cles to deny China the use of ports and air­fields that could be used for mil­i­tary pur­poses. It an­nounced a $2 bil­lion in­fra­struc­ture ini­tia­tive on Thurs­day.

The Bri­tish, French and Ja­panese navies are ramp­ing up their South China Sea ac­tiv­i­ties to sig­nal their sup­port for free­dom of nav­i­ga­tion and their re­fusal to recog­nise China’s claims to dis­puted is­lands in the Spratlys and Paracels. Malaysia, Viet­nam and The Philip­pines have all strength­ened their mar­itime ca­pa­bil­i­ties. And In­done­sia and In­dia signed an agree­ment in June to de­velop strate­gic ports on the eastern en­trance to the Malacca Strait, draw­ing com­plaints from China that this could ig­nite a “mil­i­tary race”.

Of­fi­cials across Eu­rope are pub­licly ex­press­ing con­cern about the se­cu­rity im­pli­ca­tions of Chi­nese own­er­ship of crit­i­cal in­fra­struc­ture such as com­mu­ni­ca­tions to air­fields and port fa­cil­i­ties.

Pretty soon, Bei­jing is go­ing to run up against sig­nif­i­cant fi­nan­cial con­straints just to main­tain, ser­vice and pro­tect this sub­stan­tial and ex­pand­ing new uni­verse of peo­ple and cap­i­tal projects as other large pow­ers have dis­cov- ered to their cost. Im­pe­rial over­reach is a con­di­tion for which we have yet to find an an­ti­dote.

This year alone, China has lent African coun­tries $US60bn, some of it in­ter­est free, and has had to write off loans to sev­eral of the con­ti­nent’s poorer states. Xi’s Belt & Road Ini­tia­tive, where re­turn on cap­i­tal seems to be a sec­ondary con­sid­er­a­tion, is start­ing to look more like a drag than a boon.

Any sud­den down­turn in the Chi­nese econ­omy could worsen this squeeze and make more likely the de­fla­tion an­tic­i­pated by stag­na­tion pro­po­nents. The prob­lems con­fronting Xi are all po­ten­tial stag­na­tion trig­gers for a self-de­scribed de­vel­op­ing coun­try. They in­clude “known un­knowns” such as en­vi­ron­men­tal pres­sures, in­equal­ity (the sec­ond high­est in the world), the trade war with the US and con­tin­ued restive­ness in Xin­jiang, Ti­bet and Hong Kong.

Then there are the costs of main­tain­ing the sur­veil­lance state and its Or­wellian so­cial credit sys­tem. US Stud­ies Cen­tre se­nior fel­low John Lee es­ti­mates Bei­jing “spends more than 40 per cent of its bud­get on ex­ter­nal de­fence and in­ter­nal se­cu­rity af­ter tak­ing out oblig­a­tory fis­cal trans­fers to pro­vin­cial and lo­cal gov­ern­ments”.

Such el­e­vated lev­els of na­tional se­cu­rity spend­ing will be dif­fi­cult to sus­tain as the pop­u­la­tion ages and de­mand for bet­ter health­care and so­cial wel­fare in­creases. It doesn’t re­quire a big leap of imag­i­na­tion to see a down­turn catalysing do­mes­tic dis­con­tent and am­pli­fy­ing crit­i­cism the gov­ern­ment should be ad­dress­ing prob­lems at home rather than wast­ing money on for­eign ven­tures.

The im­me­di­ate prob­lem for Xi is try­ing to work out whether US Pres­i­dent Don­ald Trump will make good on his threat to levy tar­iffs on the re­main­ing $US257bn of Chi­nese im­ports. It’s true the tar­iffs are likely to prove mu­tu­ally dam­ag­ing when viewed from a nar­row trade per­spec­tive. But in the wider com­pe­ti­tion fore­shad­owed by Pence, China stands to lose more be­cause it ex­ports to more than it im­ports from the US. More­over, the sup­ply chain dis­rup­tions flow­ing from Trump’s push-back will erode China’s ad­van­tage in labour costs and scale as US firms look to de­velop new man­u­fac­tur­ing tech­nolo­gies.

There is also the im­pact of “un­known un­knowns”, the un­fore­seen and un­in­tended con­se­quences of the shift from co-op­er­a­tion to strate­gic com­pe­ti­tion be­tween an es­tab­lished su­per power and an aspir­ing one.

Even if this doesn’t bring an end to Xi’s win­ning streak, the eco­nomic tur­bu­lence gen­er­ated could fuel po­lit­i­cal and so­cial un­rest, desta­bil­is­ing China’s po­lit­i­cal sys­tem.

The piv­otal ques­tion for Aus­tralia is what would it mean for our pros­per­ity and se­cu­rity should China once again stag­nate and de­cline rather than be­com­ing this cen­tury’s rich­est and most pow­er­ful coun­try. The an­swer is the world would be a sig­nif­i­cantly dif­fer­ent place re­quir­ing ma­jor pol­icy and com­mer­cial ad­just­ments as con­se­quen­tial as any we have made to sup­port and ac­com­mo­date China’s rise dur­ing the past four decades.

Pru­dence dic­tates we need to be open to al­ter­na­tive fu­tures for our largest trad­ing part­ner and that we need to pe­ri­od­i­cally re­ex­am­ine our as­sump­tions about its tra­jec­tory. The stag­na­tion the­sis should be seen in this light be­cause there are many rea­sons to doubt Xi will be able to re­cap­ture his coun­try’s for­mer great­ness be­fore de­mo­graphic de­cline sets in.

Ja­pan be­came rich be­fore get­ting old, whereas China’s per capita in­come won’t get to Ja­panese lev­els be­fore de­mo­graphic de­cline re­duces eco­nomic vi­tal­ity

Alan Dupont is chief ex­ec­u­tive of po­lit­i­cal and strate­gic risk con­sul­tancy The Cognoscenti Group and a non-res­i­dent fel­low at the Lowy In­sti­tute.

Wang

Payne

Xi Jin­ping’s de­sire for con­trol over all sec­tors of the econ­omy is damp­en­ing the dy­namism of the tech­nol­ogy sec­tor AFP

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