NAME OF CANDIDATE :SHWETA SAWANEE

STUDENT ID -44003471
MGSM 845 Economic context of Management
SUBMITTED TO : TOM VALENTINE

AUSTRALIAS FUTURE ECONOMIC PROSPERITY IS

LARGELY DEPENDENT ON ITS RELATIONSHIP
WITH CHINA.
ESSAY - SUBMITTED AS A PART OF EVALUATION OF ECONOMIC
CONTEXT OF MANAGEMENT ( MGSM 845)

Table of Contents
Executive Summary

I. Australian Economy Overview

II. China: Economy Overview and its trade relation with Australia
a. Comparative advantage of Australia and China Resources

b. Bilateral trade relations of Australia and China 7

c. Exposure of Australian exports to shocks in Chinese Economy

10

III. Factors influencing Australian growth

11
a. The impact of China- Australia Free Trade
Agreement. 11
b. The Future Trajectory of Chinese economy
growth.12
IV.
Australias
Strategy
towards
China
Diversification..14
a. Political

hedge

and

Steps

balance

to
by

Australia
14
b. Economic
Hedge
...15
V.
Conclusion
16
References
17
AppendixI
.18
Appendix-II
(A
new
perspective
for
..21

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future

growth

ASEAN)

List of Figures
Figure 1: Changes in GDP measure, ABS data 2014.
Figure 2: Changes in net exports and import value for Australian Economy, ABS
data 2014.
Figure 3: Growth indicators of Chinese economy CIEC data.
Figure4: Foreign Direct Investment in Australia, ABS data 2014.
Figure5: Iron ore exports to China, ABS data 2014.
Figure6: Service Exports by Australia to China, ABS data 2014.
Figure 7: Australia Exports as share of GDP and Australia Exports to China as
share of GDP.
Figure 8: Commodity price changes in Australia, Industry report and ABS.
Figure 9: Changes in Real exchange rate with change in exports, RBA data.
Figure 10: Long term Forecast for China, World bank Data 2014.
Figure11: (Appendix II) Expected growth of ASEAN households in Consumption
levels.
Figure12: (Appendix-II) Export comparison of ASEAN countries with China and
India.

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Executive Summary
Australia China relations both Political and economic have taken a great shape and strength
during the last decade. Although, it is obvious that the words and deeds are inconsistent with
the established political framework of China-Australias comprehensive strategic
partnership and undermined the two countries strategic trust and settlement of regional
hotspot issues.
Looking to the current relationship between China and Australia, it is

predictable

that

economic and trade cooperation will remain the pillar of their bilateral relations. The

broad

and central question to answer is how Australia should respond sensitively and sensibly to a
rising China:

how Australia adjusts its China policy to maximize its national interests,

especially economic interests; and to deal with the

inevitable

negative consequences

either through its own hedging strategies or through strengthening ties with its allies,
especially the US and other Asian Economies.
The purpose of this essay is to analyse dependency of Australian economy on China,
considering growth in both countries, changing economic trends world economy and future
growth potential to realize whether Australias economic prosperity will depend on China, in
long-term. Trade and Macroeconomic indicators will be analysed to develop a rationale for
the issue. This paper also discusses the potential new perspective path in which Australia is
changing to maintain its economic position through new bilateral trade agreements with
developing economies of the world.
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I. Australian Economy Overview.

Australia has the largest mix resource based economy with GDP of 1.454 trillion, high income OECD
(World Bank data, 2014). The major merchandise exports include mining products such as Iron Ores,
coal, bauxite, natural gas gold and crude petroleum accounting to 133Bn A$ (DFAT statistics,2014).
Australia's trade in services account for: Exports of services (A$ m): 60,176 Imports of services
(A$m): 70,395 with a services trade deficit (A$m): 10,219 (ABS,2014). In the last financial year
2014-15, real GDP growth was 2.5%, which is expected to reach 3.0% by the end of financial year
2015. The industries that have performed strongly over the year have been, Mining, Accommodation
and food services, Information, media and telecommunications and Financial and insurance services.
Annually for GDP expenditure, Household final consumption expenditure grew by 2.5% for the
201415 financial year. There were also strong contributors from gross fixed capital formation and
Exports of goods and services
In Australia, C = 53%, I = 22%, G = 24%, X = 22%, M = 24%, GDP = 2.9%, inflation 1.5%, cash
rate-2% and unemployment rate-6.2%.
Consumption is a major part of the Australian economy followed by Government expenditures and
investments. With Imports contributing to 24% of GDP , the major import destinations for Australia
include China 20.6% Japan 18.2% United States (g) 11.4%, Japan 6.8% Germany 4.8%. The major
import products include Passenger motor vehicles , Telecom equipment & parts , Crude petroleum ,
Medicaments (including

veterinary). Fig 1 indicates the real GDP growth rate and Fig 2 the

Merchandise net export Contribution to growth.

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Fig 1;
Source ABS 2015.

Fig2: Source ABS,2015

Net exports represents the difference between exports and imports of goods and services. Net exports
detract from GDP growth when the change in the volume of imports is greater than the change in the
volume of exports. The figure above reveals that, in the June quarter 2015, Exports of goods and
services fell 3.3% and Imports of goods and services fell 0.7%( see fig: 2). The detailed country wise
merchandise Exports and Imports by Australia is shown in table 1 and table 2 (Appendix I)

II. China: Economy Overview and its trade relation with Australia
Chinese economy statistics reveals that consumption is a modest part of economy. With
highest contribution by Investment (44%).
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Y = C (35%)+ I (44%) + G (15%) + X (25%) - M(20%) ;

Unemployment - 8.1%, Inflation - 6%, GDP 5.6%
In Chinawhere policy measures guided a gradual decline of growth to 7.4 percent in 2014
economic activity continues to slow in 2015, although continued policy easing has moderated the
deceleration. Investment remains constrained by overcapacity in heavy industries, an on-going decline
in the housing sector, and regulatory tightening of non-traditional lending. According to World Bank
(World Bank Global Economic Prospects June 2015) Data on industrial prices, imports (particularly
of commodities), and lead indicators of manufacturing activity point to further weakness. The ongoing shift from industry to services (including private services) continues to support dynamic job
creation and robust consumption growth.1 While low oil prices have reduced inflation, core inflation
remained stable in the first quarter of 2015, reflecting robust private consumption and policy easing.
The Real retail sales have maintained its level above 10% fixed asset investment has drastically
reduced to 9% in 2015.

Fig: 3;
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Source CEIC Data; RBA

(a)Comparative Advantage of Australia China Resources.

To understand how comparative advantage affects bilateral trade between Australia and China, it is
useful to know whether existing trade between the two countries is consistent with what the theory of
comparative advantage predicts. This theory states that a country will export goods and services that
employ its most abundant resources most intensively; and, conversely, it imports the goods and
services produced from resources for which it has relative scarcity. For example, if Australia enjoys a
relative abundance of agricultural land and mineral and energy resources compared with other
countries while China enjoys a relative abundance of cheap unskilled labour compared with other
countries, then these are likely to be where the two countries comparative advantages lie.
Hillman (1980) suggested that the revealed comparative advantage index can also be used to measure
dynamic competitiveness and comparative advantage of a country relative to the rest of the world if
we assume that the elasticity of the revealed comparative advantage with respect to a particular export
change is positive. First, comparing the average indices of revealed comparative advantage of
Australia and China, bilateral trade patterns reveal a comparative advantage that seems to support our
prior assumptions about what the comparative advantage should be. Australia has a comparative
advantage in producing and exporting agricultural products, such as grains and vegetables, animal
products, textile fibre, and mineral and energy products, such as metallic ores, coal, and gas. The
revealed comparative advantage for all those products are in particular, those for meats, cereals and
cereals products, textile fibre, metallic ores, coal, and natural gas. China seems to have a comparative
advantage in producing and exporting labour-intensive goods.
(b)Bilateral Trade relations between China and Australia:
Since the end of the Cold War and especially since the start of the new century, Australia
developed

closer

has

economic relationship with China. China has gradually begun to

supplant the US as Australias largest trading partner and destination market, so Australias booming
economy

was largely due to the sound economic development of

China.

According

to

the

International Monetary Fund, China has been recapturing its share of global GDP since 1978. In 1990
Chinas share was 5.61 percent, increasing to 15.83 percent in 2007.33 Furthermore, compared to its
GDP of only US$215.08 billion in 1978, China was in 2007 the third largest economic entity in the
world with a GDP of US$10.21 trillion.
China has been Australias most important export market since 2009. In 2013-14, Australia sold
China goods and services worth A$107.5 billion, which accounted for roughly one in every three
export dollars earned over the financial year. According to ABS statistics survey report,
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Chinese foreign direct investment in Australia has been increasing in recent years, more than
double since 2011, to $30.0b in 2014. However, the United States of America continues to be the
primary investor in Australia, with foreign direct investment of $163.4b in 2014.

Fig 4 ;
Source :ABS 2015
In 2014, Chinese foreign direct investment equity in Australia increased $0.9b (8%) to a level of
$12.1b, contributing 2% to total foreign direct investment equity. Over the past decade Australian exp
orts of goods to China have grown more strongly than exportsto any other country. In 2009, China bec
ame Australia's major destination for exports of goods, On an international merchandise trade basis,
the

divergence between exports of goods to China and other countries has continued to grow, with

China receiving $89.4b, or 34%, of Australia's exports of goods in 2014.(Fig4 ) This was followed by
Japan , that received $47.6b, or 18%, of Australia's exports of goods.

In terms of the growth in exports, Chinas role was even more critical than its contribution to the
overall totals. Australias total exports of goods and services increased by 9.5 per cent over 2013-14
to be up by A$28.7 billion; exports to China alone grew by 27 per cent, or A$22.8 billion (Appendix
I table 3 and 4)
The scale of Chinas contribution to overall export growth dwarfed that of every other major trading
partner: it was roughly ten times the size of that from Japan or the United States, for example.
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Exports of resources in general, and of iron ore in particular, have of course been central to the story
of the China export relationship, just as they have been to Australias overall trading outcomes in
recent years. Iron ore was Australias leading overall export in 2013-14, accounting for about 23 per
cent of total exports of goods and services and about 27 per cent of goods exports. Exports of iron ore
to China alone accounted for about 76 per cent of all iron ore exports in the same year, or roughly 17
per cent of all of Australias export earnings. China has been Australias largest export market for iron
ore since 2004.

Fig:5; Source ABS,2014

Although the degree of Chinas dominance as a destination for goods exports is not replicated for
exports of services, nevertheless, China is still Australias single most important services export
market.( Fig:6) Total exports of services to China in 2013-14 were worth A$7.5 billion or about 13
per cent of all services exports.

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Fig: 6 Source ABS report 2015.

China is a critical market for both sectors. In 2013-14, for example, China accounted for about A$4
billion, or more than 26 per cent, of Australias exports of education-related travel services. Likewise,
it was by far the largest source of international students, with an estimated 119,237 students present in
Australia in 2013, or about 29 per cent of the total number of overseas students. That was well ahead
of the second largest source of foreign students (Department of Education. International student
numbers 2013. Research Snapshot. April 2014. 12).

(c)Exposure of Australian exports to shocks in Chinese Economy:

Theres no doubt that the economic rise of China has been a good news story for Australias economy.
Chinas rapid industrialisation and urbanisation helped to trigger a global resource boom that boosted
the terms of trade, lifted government revenues and encouraged a surge in local resource investment.
Chinese demand also provided an important source of growth during the dark days of the global
financial crisis. And, as the previous analysis demonstrates, China is currently a critical driver of
Australias overall export performance. The risk here means costs involved in having a high level of

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export concentration in the form of a risk of increased volatility in exports and overall economic
growth
Australias export risk to China is a combination of overall exposure to changes in exports
(measured by the ratio of total exports to GDP) as shown in figure below which captures exposure to
a general export shock, plus measures of export concentration such as those set out above, which
capture exposure to a specific country shock.

Fig: 7
Source ABS data.
However, since Australias overall ratio of trade to GDP is relatively low (fig: 7), the economys total
exposure to China export risk turns out to be lower than that of countries with a higher ratio of trade
to GDP but a lower level of export concentration with China.
III. Factors influencing Australian Growth.
At least two factors seem likely to influence the future pace of Australian growth to China and hence
the level of our export exposure:

The impact of the China-Australia Free Trade Agreement (ChAFTA).

The future trajectory of Chinese Economy growth;

a. The impact of China-Australia Free Trade Agreement.

Australia's economy is expected to benefit greatly from ChAFTA, given that China is Australia's
largest trading partner with two-way trade valued at over $160 billion. Under ChAFTA, over 85% of
Australias goods exported to China will enter duty free when ChAFTA enters into force, rising to
93% after four years and 95% when ChAFTA is fully implemented. ChAFTA also greatly increases
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access to China for Australian services businesses in specific industries and improves investment
facilitation between Australia and China.
Specific benefits Australia-China industry wise include:

Improved access for Australian food exports phased tariff removal on dairy, beef, sheep-meat,

wine, horticulture, seafood, hides-skins-leather.

Improved access for Australian resource exports tariff removal on coal, alumina and several

other mineral ores

Improved market access for Australian service providers including finance, healthcare, legal

services, construction and mining services.

Facilitates increased Chinese investment in Australia increasing FIRB screening threshold for

private sector investment projects.

This FTA will help to level the playing field for market for Australian industries facing rival producers
who already have FTAs (NZ dairy, Chilean horticulture). Lower tariffs are a big help in boosting
market position of Australian exporters but other things also very important (such as lifting Victorian
dairy output, good record on phytosanitary for horticulture exports from Sunraysia). Almost all
resource exports will end up having duty free access but the tariff reductions on coal just ending new
restrictions recently introduced. Improved access for Australian services providers could end up
delivering sizeable benefits eventually, although current trade flows are relatively small.
On the other hand, the Chinese market is maturing, especially in sectors where foreign and private
enterprises are able to fully participate. Australian companies are facing increasing competition from
local Chinese firms and other Multinational Corporations (MNCs). Australian companies are aware
they must start implementing new strategies in order to maintain competitiveness, notably partnering
with Chinese firms. Competition Increasing competitive pressure is regarded as a major risk for
Australian companies. Increased competition from Chinese companies and other MNCs are ranked as
a higher risk than other perceived market challenges such as currency risk, rising production cost and
lack of skilled labour (Figure). Like Australian companies, global MNCs are increasingly seeing
China as an important market and will therefore continue to compete with Australian companies to
maintain their positions. This indeed indicates that in spite of several benefits of ChAFTA the
sustainability of future businesses in the Chinese market cannot be guaranteed due to the intense
competition.
b. The future trajectory of Chinese Economy growth.
The surge in Chinas stock market continues, the financial and economic consequences from a
possible correction will increase. Should it materialize, a sharp slowdown in China could usher in a
prolonged period of slow growth as the economy heals, and would have regional and global spill
overs. According to World Bank Statistics (World bank report CEF, 2015), China, growth is projected
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to moderate to 7.1 percent in 2015 and 6.9 percent in 2017, reflecting policy efforts to achieve a more
sustainable growth path. Continuing measures to contain local government debt, curb shadow
banking, and tackle excess capacity may reduce investment and industrial output. Australian Economy
being more closely attached may also face adverse consequence of the slow Chinese growth.
Market access being improved in sectors where growth outlook strong (protein demand, fresh fruit,
services) as Chinese growth model re-balances toward consumption and with less focus on investment
and less metal intensive activity, Australia needs to diversify its trade dependencies to avert the shock
wave from these trends. Even the Agricultural Products which are second most important export
products must be considered to explore other Consumption based economies Such as ASEAN
countries because China may still be more submissive towards New Zealand for its Agriculture
imports
Financial market volatility or sharply tightening financing conditions pose significant risk to the
outlook. This may take the form of asynchronous monetary policy tightening in major economies, or
geopolitical risks. Abrupt increases in bond yields and exchange rate volatility could result, as
investors reassess growth prospects and policies. Debt stands at high levels in several countries.
Although the probability is low, the risk of a hard landing in China remains. The Slow growth in china
and less demand stemming from reduction in demand has led to sharp fall in commodity prices (Fig :
7). Moreover, the Real Exchange rate has also shown signs depreciated in value with the fall in
Chinese

Demand

(as

shown

fig:

8). Volume

of exports of manufactures

esp.

Iron

ore

have been flat, with any boost from the change in Exchange rate apparently offset a combination of
structural changes within the sector, soft global demand, and intense international competition.

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Fig:8
Source: Industry report ABS.

Fig9; Source ABS, RBA data.

The future forecasts show that the shift towards the service sector as the economy matures and
becomes more consumer-oriented will lead to a slowing in productivity growth. China will also feel
the effects of the one-child policy with the working age population starting to decline from 2017.
Increases in participation and continued urbanisation.
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Fig : 10; Source World bank 2015 forecasts.

The future of Chinese economy also indicates that the Australian economy must diversify its labour
import sources and work on increase in manufacturing sector to outperform as a self -reliant economy
in future.

IV. Australias Strategy towards China and Steps in diversification:

a. Political Hedge balance by Australia.
In the context of a rising China and Changing geopolitical architecture, the AustraliaUS
military alliance is more so seen as an essential cornerstone to balance Chinas impact and

ensure

Australias security interests.

As for the maritime disputes in the East China sea and South China Sea, Australia has done its utmost
to keep in step with the US.
Australia believes rebalancing relations in that maintaining close political, cultural and people-to
people exchanges with China will not only reassure China over concerns with military alliance with
the US to some extent, but also act as a bridge in China-US relations, leading to less strategic
competition between US and China.

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(b)Economic Hedge:
In order to find a way out of this, the Australian government has adopted a more

delicate

hedging

strategy towards china over recent year. While deepening its relationship with China over recent years
Australia

focuses

on

strengthening

its

economic and security ties

with the US, and dedicates itself toward fostering economic and security relations with major regional
powers including Japan and India. Meanwhile, it fully participates in Multilateralism, expands its
diplomatic space and fully safeguards Australias interest.
In the recent years Australia has benefited greatly from the economic growth of china, but it does not
place all its eggs into one basket. Apart from developing close economic and trade ties with China.
Australia also focuses on developing such relations with other influential economies of Asia Pacific
Region. Among Australias foreign trade relations, Japan and the US are the second and third largest
trading partners respectively, accounting for 10.8% and 8.7% of its total.
The US, Singapore, and Japan are its major investors, making up 26.7%, 5.3%, and 2.5% of its total
investment in 2014.

Australia was one of the earliest Asian countries to sign a free

trade

zone

agreement with the US and also look took lead in joining US-led TPP as one of the first TPP
negotiators. In 2014, Australia completed its free trade zone negotiations with the Republic of Korea
and Japan while accelerating that with India. Australia also shows interest in the ASEANled 10+6 Regional Comprehensive Economic Partnership (RCEP).
which demonstrates Australias devotion to diversified trade relations and less dependency on China
alone.
Moreover,

efforts should be made to promote bilateral military cooperation and exchange

Australia

and

Japan,

India

and

other

Asian

countries.

between

Developing security

partnerships with Asian countries is a vital measure taken by Australia to respond to the

shift

of

power in Asia.
The key aspects of Australias relationship with ASEAN from a macroeconomic standpoint but also
from a company and consumer perspective as seen through the results of Australias International
Business Survey (AIBS), the International Visitor Survey and unpublished data from the Australian
Bureau of Statistics.
(Key Aspects and potential of ASEAN growth discussed in Appendix II).

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V. Conclusion:
From the above Discussion and argument, it is clear that although Australia is currently dependant on
China for its trade relations and will have some short term effects on the economy. This is explained
in the Free-trade Agreement with China. The change in the Chinese economy with slow growth rate,
ageing population and more consumption based economy, this may affect the long term growth of
Australia provided it limits the market outlook.
Australia is already pacing to diversify its economy prospects, having abundance in natural resources
and strong agriculture produce and its initiative to diversify its consumer base with other nations such
as Japan, US, ASEAN and Republic of Korea, while maintaining its relation with China
As in present times, Australias Strategic relationship with United States will be an important factor in
policy factor Australia. Dependence on United States for the Defence and other political aspects will
route towards decrease in its dependency on China.
Australias future economic prosperity is moderately very less dependent on the future Chinese
Economy. Moreover, as hinted in appendix II it depends on ability of Australian economy to act
upon structural changes and reforms, in its economy and diversifying away from less efficient
comparative advantages, i.e. natural resources, toward more productive and additional comparative
advantage such as Service exports to fuel the economic growth. Australia is and will be looking to
capture growing markets like ASEAN, and emerging economies including India.

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References
A Country Case study: China. (2015). [online] Available at:
http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5302.0Feature%20Article1Jun
%202015?opendocument&tabname=Summary&prodno=5302.0&issue=Jun
%202015&num=&view= [Accessed 15 Nov. 2015].
Balassa, B. (1965) Trade Liberalisation and Revealed Comparative Advantage, The
Manchester School, 33, pp. 99-123.
Kalisch, D. (2015). AUSTRALIAN NATIONAL ACCOUNTS: NATIONAL INCOME,
EXPENDITURE AND PRODUCT. [online] www.abs.gov.au. Available at:
http://www.ausstats.abs.gov.au/ausstats/meisubs.nsf/0/869E4A2169F714BACA257EB30011EB8
B/$File/52060_jun%202015.pdf [Accessed 11 Nov. 2015].
Hillman, A.L. (1 980) Observations on the Relation between Revealed Comparative
Advantage and Comparative Advantage as Indicated by Pre-Trade Relative Prices,
Weltwirtschaftliches Archive, 1 16, pp. 3 15-32 .

Smith, R. (2015). China_CEF sample 2015. Country Economic Forecast, World Bank,
pp.5-7.

Song, L. (1996) Changing Global Comparative Advantage: Evidence from Asia and the Pacific
(Melbourne: Addison-Wesley).
United Nations (2014) United Nation Com trade Online Database, online service, website:
http://www.uncomtrade.org.

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APPENDIX

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Appendix I
Table 1: Merchandise Exports by Australia (Country Wise).

Table 2: Merchandise Imports in Australia (Country Wise)

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Table 3: Material Exports to China.

Table 4: Materials imported from China.

Appendix II
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Future Scope with ASEAN: A New growth perspective.

ASEAN as a whole is an important region for Australian businesses but the diversity of economic
systems in the region means that analysis of ASEAN s relationship with Australia is not always as
insightful as analysis of Australias individual relationships with the member countries of ASEAN.
As predicted by World bank reports (World bank report ,2015), the ASEAN countries have potential
to grow in the future and Australian ties with ASEAN has dramatically outpaced the rest of the world
on growth in GDP per capita since the late 1970s. Income growth has remained strong since 2000,
with average annual real gains of more than 5 percent. Some member nations have grown at a torrid
pace: Vietnam, for example, took just 11 years (from 1995 to 2006) to double its per capita GDP from
$1,300 to $2,600. As per a report by Mckinsey and Co. (Vinayak et al, 2014) the Consuming
household is expected to double by 2025, which indicates scope for shift the merchandize market of
Australia.

Fig 3 Source Mckinsey 2014.

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ASEAN also leads China and India when it comes to the number of goods exporters earning
over $250,000 in global goods export revenue, who are doing business in the region this
adds significance to the point about balanced revenue.

As ASEAN moves towards one ASEAN Economic Community, a region-wide perspective of

Australias bilateral relationship brings a sense of scale and opportunity that is not otherwise
visible through analysis of Australias bilateral relationships with individual countries in the
region.
The benefits of an ASEAN regional perspective in building a narrative about the depth of
Australias engagement, from a business perspective, a regional perspective delivers a sense
of scale. It highlights the extent to which Australian business, education providers and the
wider community are already engaged with ASEANs businesses and its people through a
range of economic activities. The analysis highlights that some of Australias economic
activities in the region are strong in both value and/or volume measures - for example,
ASEAN commands a leading position the value of goods and services exports and the
number of exporters (manufacturing industry exporters, agriculture13 industry exporters, and
in general exporters of goods). It also highlights strengths in the bilateral relationship for
example in offshore FDI and tourism.
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Overall, a view of Australias bilateral relationship with ASEAN as a region should help
drive thinking about the future economies of scale available to Australian companies through
the AEC initiative.

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