30 November 2017

Capitalising on broadening trade and investment links to China could help Australia extend its record 26-year run of economic growth.

This year marks the 45th anniversary of the establishment of diplomatic ties between China and Australia.

Trade between the two countries has grown from USD86 million in 1972 to USD107.8 billion in 2016. China is now Australia’s largest market for exports and its largest source of imports.

But the composition of the goods and services flowing between the two countries has changed as China’s economy shifts from an investment-led to a consumption-driven growth model.

China’s 13th Five-Year Plan aims to grow its service sector’s share of GDP to 56 per cent by the end of this decade. In 2015 it was 50.5 per cent, the first time services accounted for more than half of GDP.

China is now Australia’s largest market for exports and its largest source of imports

So while Australia will continue to export resources to China, the next big opportunities lie in services, such as tourism and education, and in high-quality food products. China is already Australia’s largest export market for wine, and recently overtook New Zealand as Australia’s largest source of inbound tourists.

Australia has been a key beneficiary of China’s outbound investment (ODI) growth, being the second-largest recipient country for accumulated Chinese ODI since 2005. Again, the shift in China’s economic growth model has shaped what Chinese companies invest in.

In the 1980s, China’s two largest investments outside Hong Kong were both in Australia and related to natural resources. In 2016, by contrast, commercial real estate and infrastructure accounted for almost two-thirds of Chinese ODI in Australia. The infrastructure sector may continue to attract strong inflows, given Australia’s need for investment and China’s appetite for overseas infrastructure projects.

China’s transition to a more sustainable economy will also provide opportunities for Australian businesses and investors who are keen to play their part in reducing carbon emissions.

Take the bicycle. According to the Earth Policy Institute, bike ownership in China fell by 35 per cent between 1995 and 2005, while car ownership more than doubled. Recently the bicycle has made a comeback in China as a means to improve air quality and reduce congestion. There are now two major bike-sharing start-ups in China. Green can be good for business as well as the environment.

Green can be good for capital markets as well. The 13th Five-Year Plan aims to reduce the consumption of water and energy and the emission of pollutants. China’s green bond market has already developed rapidly: more than USD33 billion of Chinese green bonds were issued in 2016, accounting for at least one-third of the global total and up from USD1 billion in 2015.

The opening-up of China’s capital markets to foreign participants, as well as the construction of sustainable infrastructure under the Belt and Road Initiative, will be catalysts for further growth in the green bond market.

Australia has benefited greatly from China’s economic boom. As China’s GDP has doubled over the past 10 years, Australia’s has grown by 25 per cent. This close relationship will have plenty more to offer Australian companies and investors as China continues its transition to a services-oriented and more sustainable economy.

A version of this article first appeared in The Australian newspaper on 13 November 2017.