Major role in Beijing's plan Business The Australian

Australia's economic ties are in some ways closer to China than with New Zealand, writes China correspondent Rowan Callick
May 15, 2006
NOW that Treasurer Peter Costello has done the right thing by most of us - although the Asian Wall Street Journal discounts it as a timid budget - will the good times keep rolling on?
Much of the answer depends on China. Few pairs of nations are now as interlocked, economically, as Australia and China. In some ways, they are closer even than the Closer Economic Relationship with New Zealand.
Whole regions of Western Australia in particular have never known such prosperity. They are selling their minerals to China for top dollar and using those bucks to buy everything from plasma TVs to trainers from the same country for ever lower prices.
It's no wonder the West Australian Government is spending $500,000 on a China tour for the state's symphony orchestra and even less wonder that the Australia liquefied natural gas consortium is matching it. Its first shipment of gas, under its $25 billion contract with China National Offshore Oil Corp, leaves Karratha this week.
The easiest part of answering the core question is that China will not waver in its determination to keep the economy growing at 8 to 9 per cent a year. This is the central feature of its unwritten contract with the Chinese people. We ensure wealth keeps increasing; you let us rule as we always have.
Sure, the leadership has shown legitimate concern about the widening gap between rich and poor, between city and countryside, between coast and inland, about the environment and about corruption. But none of these concerns will be allowed to over-ride the prevailing requirement to maintain rapid growth.
China has the long-built impetus, the track record, the ever increasing foreign investment and domestic liquidity, the hungry labour force, the under-employment among the 800 million rural Chinese, the capacity of its comparatively tiny services industry to develop, to keep growing.
But with such growth comes change. And what are the changes that Australians should look out for in the months ahead?
Fortunately, a number of them will ensure Australia benefits even more from China's transformation.
For instance, the Ministry of Land & Resources says in its new five-year plan (every organisation in China seems to have such a plan, as well as individual Communist Party members) that it will by 2010 build reserves of uranium, copper, aluminium, manganese and other minerals the country "urgently needs". Gold may be about to join the list, already full of products Australia exports in large amounts.
Liu Shanen, at the Beijing Gold Economy Development Research Centre, said recently that China only holds about 1.3 per cent of its foreign reserves in gold, less than most countries, and that it should thus increase its holdings from about 600 tonnes to about 2500 tonnes, helping the price reach a 26-year-high last week.
There's a view that the intention to build reserves mainly means a greater focus on boosting exploration and accelerating the exploitation of China's proven deposits. This wouldn't be as beneficial to Australia, but would still provide some gain given that Australian firms such as Oxiana and Sino Gold are prominent among the first wave of foreign miners gaining access - however limited as yet - to China's own resources.
The news last week on China's yuan was also good. The US Treasury sensibly opted against declaring China a currency manipulator. In response, the People's Bank of China began to ease the yuan's trading band, letting it rise. It will inevitably move past the barrier of eight to $US1 ($1.30), perhaps this week.
That will mean China is even better able to afford to buy Australian commodities. Not that it lacks funds. It has accumulated $US875 billion reserves, just above Japan's $US860 billion.
Besides the capacity to buy Australian, and the need for our resources, China also crucially has the inclination to do so.
While US business is embracing China over, around and below the Capitol, Australian business and governments are singing from the same song book. In some respects, Canberra is even taking a lead.
This is necessary for the big deals, which are all decided politically in China, at the State Council level.
That's why CNOOC, despite being eager to sign new gas deals, has been unable to follow through on the supply contracts agreed with Australia and Indonesia in 2002. Beijing has capped power prices because growth remains its dominant goal, and as the gas price has kept rising, the margin for the buyers has been wiped out.
There's a strong belief in China that Prime Minister John Howard, at a time when the balance of strength was with the gas market, not the supply, talked the producers into a bargain-basement deal that can't and won't be repeated.
Beijing has been sitting out the succeeding contracts, waiting for the economic cycle and the political imperative to come good again. But, of course, its own race for resources access all over the developing world is a crucial element of that escalation in the cycle.
While the prevailing circumstances are great for this basic complementariness with China, it's a different matter to presume that it's easy to leverage off that in other sectors.
Beijing has Australia pigeonholed, like every other body it deals with at home or abroad. And being merely good at providing services or products beyond that pigeonhole is unlikely to be good enough to capture a market.
For China is not, of course, capitalist. Few decisions are made from business plans.
All the leading companies on its casinos of stock exchanges, in Shenzhen and Shanghai, are state-owned. So much money is sloshing around that, for now, misallocating it is not an issue.
Listed companies often simply use the funds they raise to buy speculative shares or real estate, and the recent announcement of new rules to stop such naughtiness merely underlines the extent of the problem without holding out too strong an expectation that serious consequences will follow.
Australia's prospect of making fresh inroads into new markets in China will depend considerably on how comprehensive the free trade agreement will be.
Talks start in earnest next week in Beijing, after months of exchanging information.
By the end of this year, we'll know the strength of the political direction issued to the Chinese negotiators from which everything else will or won't follow.