Background Paper: Harnessing the Opportunities of China's Transitioning Economy

Australia’s trade and investment links with China make a vital contribution to our national prosperity, helping underpin our 23 consecutive years of economic growth.

Key information

China

World’s second largest economy in purchasing power parity terms (2014) and the fastest growing major economy.

Historic rebalancing of economy towards consumption and services underway.

Urbanisation and middle class expansion continues.

Growth outlook is moderating but still strong.

China-Australia FTA

The FTA will enhance and protect Australia’s competitiveness with our largest trading partner, while also attracting growth-enhancing investment.

It will deepen Australia’s integration with a key player in global value chains.

China’s economic transition and outlook

The evolution of the Chinese economy will continue to have important implications for Australia:

China is rebalancing from an investment, manufacturing and export-intensive model of growth, towards a more consumption and services-oriented economy as it looks to sustain economic growth over coming years.

While China’s extraordinary growth rates of recent decades have moderated, the economic outlook remains comparatively strong: the IMF is forecasting 7.4 per cent growth in 2014, easing to 6.3 per cent by 2019.

Key trends in China’s economic development continue. It continues to urbanise rapidly – building cities, infrastructure and amenities. The middle class continues to expand, with increasing demand for a variety of foods, and high-value manufactures, as well as services.

China is expanding rapidly its role in global value chains1(GVCs), with its income associated with these chains growing six-fold in 15 years.

In addition to being the world’s largest exporter and manufacturer, China’s share of outbound foreign direct investment is rising, providing the benefits of increased productive capacity, higher incomes, more jobs and exports to destination countries. Its share of flows of global outward investment reached seven per cent in 2013.

The FTA harnesses the opportunities of China’s changing economy

As China’s economy evolves, the China-Australia Free Trade Agreement (ChAFTA) lays an historic foundation for the next phase of our successful economic relationship. It will bring about increased and more diverse trade in goods, growth in two-way investment, and greater trade in services and knowledge-based industries as China’s economy transforms to achieve a more balanced sustained growth.

Although the growth of Australia’s goods and services exports to China over the past 10 years (average of 24 per cent per annum) may have outpaced the growth of China’s imports from the rest of the world over the same period (15 per cent), that future trend is not assured.

The FTA secures improved access. This protects and advances our competitive position, especially where some trading partners, including ASEAN, Chile and New Zealand, already enjoy favourable access.

FTA outcomes reflect the diversity of the Australian economy:

Agriculture – tariff reduction commitments will position Australia to meet high value food demand.

Resources – tariff savings will increase profitability in the face of softening resource prices.

Manufactures – the FTA will deliver improved integration with a key player in global value chains.

Services – the best possible positioning to take full advantage of emerging opportunities stemming from middle class expansion.

Investment – the FTA will attract new capital for more jobs and enhance productive capacity.

The FTA will allow Australian businesses to be better placed to respond to the changing goods and services demands of Chinese producers and consumers.

As Australia removes remaining tariffs progressively, Australian businesses will also benefit from lower cost imported inputs and consumers will enjoy lower prices.

In recognition of China’s continuing economic reform, a “built-in agenda” will provide a flexible and responsive framework for the FTA to deliver deeper benefits over time.

Projections for the Chinese economy

If China is able to continue to grow at solid rates and boost consumption, by 2020 it may well have the world’s single largest middle class market.

The World Bank predicts that before 2030 China may well become a high-income economy and the world’s largest economy.

According to ABARES, between 2009 and 2050 the real value of beef consumption in China is projected to rise 236 per cent, dairy consumption by 74 per cent, and sheep and goat meat consumption by 72 per cent.

The growth of China’s services economy

According to the World Bank, in 2013 the Chinese services sector overtook industry as the largest contributor to China’s GDP and driver of GDP growth.

This marked an historical shift in the structure of China’s economy.

Services suppliers account for most of the new growth among Australia’s 5600 businesses exporting to China.

Key Australian services are also embedded at different stages of global value chains, including for agricultural and mining exports.

The FTA helps to position Australia as a competitive supplier of services to China.

1 International production, trade and investment are increasingly organised within so-called global value chains (GVCs) where the different stages of the production process are located across different countries.









Last Updated: 20 November 2014