Introduction

China is home to more than 1.3 billion people – almost one-fifth of the world's population. While it is around 20 per cent larger than Australia by land mass, much of this is unsuitable for habitation or cultivation. China's one sea border faces North and South-East Asia, affording it prime access to international trade. China's inland provinces, which share borders with India, Central Asia, Russia and South East Asia, exhibit a huge mix of cultural and historical influences.

In the foreseeable future – perhaps in this decade – China will replace the United States as the world's largest economy in purchasing power terms. Old images of China as the low-wage factory of the world or simply as a voracious consumer of raw materials, are being broken down and replaced with an understanding of China's growing sophistication, prosperity and complexity. China's untapped economic potential is remarkable. So far, much of China's growth has been built on the development of its coastal east, but the Chinese Government is encouraging similar economic transformation in the less-developed central and western provinces that remain unknown to many Australians. Nearly half of China's vast population still lives in rural areas inland and those provinces will be integral to the success of China's next stage of development.

Government, Business and People-to-People Links

The history of people-to-people links between Australia and China is long and vibrant. Chinese immigrants were among the first free settlers in Australia and have long since become integral members of our community, government and economy. Australia is home to over 860,000 Australians of Chinese descent, and Mandarin is the second most spoken language in homes after English. Australia is a major destination for Chinese students and tourists.

Australia's growing diplomatic network in China is one of our most extensive. It includes the embassy in Beijing and consulates in Shanghai, Guangzhou and Hong Kong, with Chengdu to open in 2013. Australian state governments also have extensive representation in China's leading commercial centres. In addition there are some 83 sister-state/province and sister-city relationships. Through this network, Australia has built relationships centred on our core bilateral interests. These interests continue to grow and we are seeking to enhance political and strategic engagement; boost bilateral and global economic prosperity; and further develop people-to-people links, especially education, tourism and cultural links.

Since China started to open its economy to the world in 1978, including accession to the World Trade Organisation (WTO) in 2001, the Australia-China commercial relationship has grown rapidly. Forty years ago, Australia sold China wool and tallow and bought light manufactured products, such as textiles. Today Australian commodities are helping to build new cities in China, roads, bridges, dams and ports, to fuel factories and to heat homes and offices in China. We in turn are now buying from China all kinds of household goods, computers, and heavy machinery. China has become Australia's largest export market, largest import source and largest trading partner overall with flows in excess of $121 billion in 2011.

Industry bodies like the Australian Chamber of Commerce (AustCham) in Beijing, Shanghai and Guangzhou and the Australia China Business Council (ACBC) involve the business community and work closely with both the Australian and Chinese governments to support Australian companies on the ground and to help improve China's business environment. Through the Australia-China Council, the Government also supports greater people-to-people links in education, science, technology and culture, and promotes Australia's economic and trade interests.

Australia's resources sector has been the standout performer in our trade relationship with China over the past decade or so. We see a healthy resources trade continuing. At the same time, China's economic rebalancing along with the growth of its middle class and continued urbanisation means that our trade and investment relationship with China will also change. There are more opportunities to integrate and diversify our economic relationship. In government, we are playing our part to engage China on policy issues, and to help give Australian business the opportunities and exposure they need to get a start in Chinese markets. Australia and China are seeking to build on the success of the trade relationship through the negotiation of a Free Trade Agreement (FTA). An FTA would bring benefits to our economies through increased merchandise trade and investment flows, as well as the facilitation of future trade in services. China has been investing in Australia for more than 25 years. One of the earliest investments was Sinosteel's joint venture with Rio Tinto in the Mt Channar iron ore project in the Pilbara in 1987. The project, extended in 2010, led the way for China's economic engagement with Australia. Although starting from a low base, Chinese foreign investment into Australia has increased considerably in recent years. The stock of Chinese investment at the end of 2011 was $19 billion, more than three times the level in 2007. In terms of foreign investment approvals Chinese investment is growing strongly with it ranked in the top three sources of proposed foreign investment in Australia in the past three years. Currently, China is our 13th largest investor, with less than one per cent of the total stock of realised inward investment.

China was Australia's 12th largest destination for investment abroad at the end of 2011, with a total stock of $17 billion invested there. There will be scope for Australian companies to invest further as China modernises and the economy opens up further.

China has the world’s largest Internet user population and by 2025 a vastly increased proportion of China-Australia commerce will be conducted online. It will be in both nations’ interests to collaborate to build trust and confidence in the online environment to facilitate innovation and economic growth.

One of the most visible features of our people-to-people links has been the increasing flow of Chinese students and tourists to Australia. In fact, more people now travel to Australia from China than at any other time in our history. In 2011, 542,000 Chinese people visited Australia, making it our third largest source of visitors. China is also a major destination for Australian travellers, who made over 369,000 trips to China in 2011. China is the largest international education market for Australia, with more than 120,000 Chinese students studying in Australia. China is also a major source of migrants. In 2011-12, 25,509 Chinese migrants arrived in Australia, making it the second largest source of permanent migrants after India.

The two-way flow of ideas, students and academics has found form in the increase of formal research links between Australian and Chinese universities. Most Australian universities now have exchange and research partnerships with Chinese counterparts. Monash University recently established a joint Graduate Campus in Suzhou Industrial Park in partnership with South East University, leading the way for research to be directly linked to commercialisation. There are also 31 Australian Studies Centres in Chinese universities and 12 Confucius Institutes in Australian universities, which work to promote greater knowledge of each other's sociological, environmental and political landscapes.

Cultural and artistic exchanges between Australia and China extend widely across the visual and performing arts, literature, new media, design and fashion, and beyond. Every year scores of Chinese and Australian artists, intellectuals and opinion makers travel between both countries. Most recently, consecutive reciprocal 'Years of Culture' have seen heightened collaboration and interest, and encouragingly, these are building longer-term institutional and cultural partnerships.

As a natural extension of our broader bilateral relationship, our defence engagement with China aims to enhance mutual understanding, demonstrate reciprocity, expand opportunities for open communication and improve cooperation on regional security issues. Our bilateral defence relationship has grown steadily over the past few years through an enhanced program of senior-level dialogue, working-level exchanges and, in the areas of peacekeeping, maritime engagement and humanitarian assistance and disaster relief exercises.

Australia's total estimated Official Development Assistance (ODA) to China in 2011-12 was $35.7 million, focussed on health, environment and governance. Australia also made significant financial contributions in the areas of human rights and education. In line with its new Effective Aid policy, in June 2011 Australia announced the phasing-out of bilateral aid to China. The Government is interested in engaging China as a donor partner on development issues of regional and global importance. This shift recognises China's increasing economic resources, aid program and joint work with international donors.

Towards 2025

Out to 2025, Australia and China will continue to develop the political linkages underpinning our relationship, including regular high-level political dialogue. The process of mutual understanding that began in earnest four decades ago – and that has brought both countries significant economic and cultural benefits – will serve as an important enabler for new areas of cooperation. In addition to regular high-level political exchanges, Australia and China share an increasingly extensive network of dialogue mechanisms covering the range of our bilateral interests.

Better understanding at the political level will bring closer cooperation in regional and international forums and on key international challenges in support of Australia's international priorities. China is already influential in most global and regional issues of importance to Australia. We will continue to work closely with China in the G20 and through regional forums including the East Asia Summit, APEC and the ASEAN Regional Forum. China's continued economic growth will likely mean increased engagement with these forums as well as in the WTO and the UN. There will also be greater scope for cooperation as bilateral donors of development and humanitarian assistance throughout the Asia-Pacific.

Geographically, China's development will continue to penetrate the inland provinces. Second tier cities including Shenyang, Wuhan and Chengdu will become tomorrow's Shanghai and Beijing. This means Australian government and businesses will need to constantly 're-learn' China, even as Australians become more and more familiar with it as a country and a business partner.

China's urbanisation process will continue to bring millions to the country's growing cities, albeit at a progressively slower rate in the years out to 2025. This will provide significant opportunities for Australian businesses. Areas of growing cooperation include regulatory and legal standards for urban planning and construction, health and welfare services, and complex infrastructure including water management and sanitation.

Opportunities for further collaboration on climate change will increase as both our countries respond to the challenge posed by climate change, through the development of strategies to reduce emissions, including pricing carbon, increasing energy efficiency and building renewable energy capacity

China's new city-dwellers have increased expectations for their standard of living. This, coupled with rising discretionary incomes, will see growing consumption of welfare-enhancing services and goods. Health, financial, legal and logistic services are all areas in which Australia excels and will find new market opportunities for in China. Demand for environmental remediation services and energy efficient and green building technologies will increase as China looks to enhance its sustainable growth. Consumption of agricultural products and agribusiness services will continue to rise as China's new middle class demands a more nutritious diet and higher quality textiles, clothing and footwear.

It is likely there will be a proportional balancing of our people-to-people ties, as more and more Australians come to better understand China and its languages. Moreover, as the number of China's world-class tertiary education institutes increases, the bilateral flows of students, researchers and academics will grow apace. In all disciplines, more Australians will seek to augment their tertiary qualifications with a hands-on knowledge of China. Collaborations between scientists will also shift more towards China as it develops world-class research institutes, building on our long-standing partnership with China in the area of science and innovation.