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Resources, Energy and Tourism China Review June 2012 bree .gov.au

Resources, Energy and Tourism China Review

June 2012

Resources, Energy and Tourism China Review June 2012 bree .gov.au

bree.gov.au

© Commonwealth of Australia 2012

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ISSN 978-1-922106-07-0 (Print)

ISSN 978-1-922106-08-7 (PDF)

From 1 July 2011, responsibility for resources and energy data and research was transferred from ABARES to the Bureau of Resources and Energy Economics (BREE).

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Acknowledgements

This publication was jointly undertaken by the Bureau of Resources and Energy Economics (BREE) and Tourism Research Australia (TRA), the Department of Resources, Energy and Tourism (RET).

Authors

Bureau of Resources and Energy Economics (BREE): Quentin Grafton and Jin Liu. Tourism Research Australia (TRA): Robyn Agnew, Geoff Bailey and Grant Keys (RET) By Invitation: Zheng (Annie) Wei and Rui Hao

Other contributors

A number of colleagues at BREE and RET have contributed to the preparation and development of the statistical tables in this report and include: Jin Liu, George Stanwix, Yuan Yuan Liu, Seema Mulye and Matt Unicomb.

Design and production

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Cover image

Paul Gunning

Foreword

The past three decades has witnessed the re-emergence of China as one of the world’s largest economies. This change has been dramatic such that by 2010, measured on purchasing power parity, China became the world’s second-largest economy after the United States. China’s GDP in 2011 was 46 times higher than it was in 1980 and accounted for about 14 per cent of global GDP. By comparison, the United States’ GDP in 2011 represented about 19 per cent of world GDP, while Australia’s share was 1.2 per cent.

Along with China’s own economic transformation there has been a structural shift in its trading relationship with Australia. China has become Australia’s most important trading partner and is both our largest export destination and the largest source of our imports in value terms.

The change in the Australian-China trading relationship is most visible in terms of resources, energy and tourism. The real value of Australian exports of mineral resources to China increased from A$0.2 billion (in $2010-11) in 1989–90 to A$49.9 billion in 2010–11. In volume terms, China accounted for around 69 per cent of Australian total exports of iron ore in 2010–11, compared to around six per cent in 1989–90. Over the period 1989–90 to 2010–11, China’s share of Australian total exports of metallurgical coal increased from one per cent to around 11 per cent, while its share of Australian thermal coal increased from 0.1 per cent to around 12 per cent.

From a low base in the mid-1990s, the Chinese tourism market has grown to be Australia’s most important market by value worth A$3.5 billion in export value, and the third largest inbound market by visitor arrivals, with 542 000 arrivals in 2011. By 2020–21, it is projected that Chinese arrivals in Australia could grow to over one million visitors with a total inbound economic value of A$6.9 billion.

Given the importance of China to Australia, especially in terms of my portfolio responsibilities, I am very pleased that the Bureau of Resources and Energy Economics (BREE) and Tourism Research Australia (TRA) have collaborated to produce Resources, Energy and Tourism China Review .

In this, the inaugural issue, there is a valuable overview of China’s economic re-emergence and its economic relations with Australia. There are also three review articles. These include: a

‘By Invitation’ article on China’s demographic transition provided by two Chinese scholars; a

review of the Chinese gas market; and a review of China’s demand for tourism and prospects for

the future. In addition, this issue includes a unique collection of statistical tables, figures, charts

and comparisons to illustrate the ‘China story’ and China’s economic relations with Australia and

also the rest of the world.

relations with Australia and also the rest of the world. Hon. Martin Ferguson Minister for Resources

Hon. Martin Ferguson Minister for Resources and Energy Miniter for Tourism

Contents

Acknowledgements

iii -

Foreword

iv -

Acronyms and abbreviations

vi -

Overview

1

-

China’s economic growth and transition (Quentin Grafton and Jin Liu)

1

-

Reviews

23 -

By Invitation: China’s demographic transition and economic growth (Zheng (Annie) Wei and Rui Hao)

24

China’s demand for natural gas: drivers and prospects (Jin Liu)

31

China’s demand for tourism: Opportunities and implications for Australia (Robyn Agnew, Geoff Bailey and Grant Keys)

37

Statistical Tables and Figures

49 -

Part 1: Chinese trends: economic and social indicators

50

Part 2: Chinese trends: resources and energy activities

65

Part 3: Australian exports to and imports from China

83

Acronyms and abbreviations

ABARES

Australian Bureau of Agricultural and Resource Economics and Science

ABS

Australian Bureau of Statistics

ADS scheme

Approved Destination Status scheme

bcm

billion cubic metres

BREE

Bureau of Resources and Energy Economics

cm

cubic metres

FDI

foreign direct investment

FYP

Five Year Plan

GDP

gross domestic product

GFC

global financial crisis

GFCF

gross fixed capital formation

GNP

gross national product

GTEM

global trade and environment model

IEA

International Energy Agency

IMF

International Monetary Fund

koe

kilogram of oil equivalent

kWh

kilowatt hour

LNG

liquefied natural gas

Mt

million tonnes

NTAF

National Tourism Accreditation Framework (also known as T-QUAL Accreditation)

ODI

outward direct investment

PPP

purchasing-power parity

RET

Department of Resources, Energy and Tourism

TFC

Tourism Forecasting Committee

TIEV

total inbound economic value

T-QUAL

tourism quality assured

TRA

Tourism Research Australia

UNCTAD

United Nations Conference on Trade and Development

Overview:

China’s economic growth and transition

Quentin Grafton and Jin Liu*

Introduction

China’s rapid economic growth in the late 20th and early 21st centuries is one of the world’s most remarkable stories of economic development. Today, China is the world’s second largest economy, its largest exporter and manufacturer. Over the past three decades, growth in gross domestic product (GDP) averaged over 9 per cent a year, and over 500 million people were lifted out of poverty (World Bank 2012). As a result, in 2011 China produced 14 per cent of global GDP (measured by purchase power parity), a sevenfold increase from 2 per cent of global GDP in 1980.

Over the decade 2001–10, China’s economy was a key engine of growth for the world economy—for example, during the global financial crisis in 2009 China provided almost all of the positive contribution to the world’s real GDP growth (see Figure 1).

Figure 1: China’s contributions to world real GDP growth, 2001–10

6 5 4 3 % 2 1 0 -1 -2 2001 2002 2003 2004 2005
6
5
4
3
%
2
1
0
-1
-2
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
China
emerg and devel economies (exc China)
advanced economies

Source: IMF database 2012; BREE.

Note: ‘Advanced economies’ comprises 34 countries: Australia, Austria, Belgium, Canada, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Malta, Netherlands, New Zealand, Norway, Portugal, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Taiwan Province of China, United Kingdom, and United States. ‘Emerging and developing economies’ comprises 149 countries, excluding China.

*: The views expressed in this review are those of the authors alone and are not necessarily those of the Bureau of Resources and Energy Economics (BREE) or the Department of Resources, Energy and Tourism (RET).

While China’s growth has been spectacular, its economic development is not fundamentally different to that which has occurred elsewhere in a resurgent Asia, or in Japan, in earlier decades. That is to say, its ‘super growth’ in per capita incomes has been characterised by:

(1) very high rates of investment in physical capital coupled with substantial foreign direct investment that draws upon on a large pool of ‘surplus’ labour; (2) large improvements in the quality of human capital; and (3) export-led development through rapid increases in exports as a proportion of GDP. Nevertheless, China is special due to its population, in excess of 1.3 billion in 2010, and because of the size of its economy. In particular, China’s economic integration into world trade over the past two decades has had a profound global impact.

Economic divergence and convergence

Until the 19th century China was one of the most economically advanced countries, and Chinese GDP accounted for a third of global GDP in the early 1800s. At that time, its GDP per capita was similar to that of Japan and about half that of Western Europe (see Figure 2).

From the first half of the nineteenth century China experienced economic divergence as Western Europe grew while China’s GDP per capita relative to European nations fell (see Figure 2). As a result, in 1950 China’s GDP per capita was only 9 per cent of Western Europe’s and 38 per cent of Japan’s, while its share of global GDP was less than 5 per cent.

China’s economic divergence was a result of both foreign interventions and domestic failures. According to Lin (2012), China’s economic retrogression was a result of longstanding competitive deficiencies and very limited technological developments over this period. In part, this was because China had a bureaucratic system that was less favourable to commercial interests and that reduced incentives for innovation.

China’s re-emergence in recent decades has reduced its income gap with the West. When Chinese Economic Reform began in 1980, China’s GDP per capita was just 8 per cent of Europe’s, while its share of global GDP was around 5 per cent. By 2010, its GDP per capita was more than 30 per cent of Europe’s and its share of global GDP had more than doubled.

Figure 2: Economic divergence and convergence, 1700–2010

(a) Percentage of Europe GDP per capita 120 Europe 100 80 60 40 20 %
(a) Percentage of Europe GDP per capita
120
Europe
100
80
60
40
20
%
1700
1750
1800
1850
1900
1950
2010
China
Japan
since 1979
(b) Share of world GDP 35 30 25 20 15 10 5 % Since 1979
(b) Share of world GDP
35
30
25
20
15
10
5
%
Since 1979

1700 1750 1800 1850 1900 1950 2010

Europe

China

Japan

Source: Liu & McDonald 2010. Note: Europe refers to Western Europe. GDP measured by 1990 PPP-adjusted international dollars.

Economic transformation and industrialisation

Industrialisation is normally measured by an increased share of industry and manufacturing as a proportion of total economic activity (Weiss 2002). This transformation is, typically, characterised by a shift from agriculture to high-value economic activities, such as manufacturing and services. This process of industrialisation occurred first in Britain in the 18th and 19th centuries, in the United States and Western Europe in the 19th century, in Japan and Korea in the 20th century, and in China in the late 20th and 21st centuries.

China’s path of industrialisation since 1950 has been uneven and has been shaped by various economic and social events. During the period 1950 to the late 1970s, China’s economy was dominated by agriculture and was heavily influenced by the so-called ‘Great Leap Forward’ and ‘Cultural Revolution’. Since the late 1970s, China has experienced ‘Chinese Economic Reform’, with a very rapid economic transformation and growth.

The Great Leap Forward in 1958–59 was an economic and social campaign that aimed to use China’s population to transform the country from an agrarian economy into a modern society through rapid industrialisation and collectivisation. After the Great Leap Forward, when GDP fell between 1960 and 1962, China went through economic restructuring over the period 1963–65 designed to promote faster growth in agriculture. The Cultural Revolution was a sociopolitical movement that took place in China from 1966 through 1976. China’s worst ever earthquake, at Tangshan, and a leadership change after Mao’s death, that both occurred in 1976, had a short-term negative impact on China’s economy.

Chinese Economic Reform is the program of economic reforms called ‘socialism with Chinese characteristics’ that began in December 1978, and was initiated by Deng Xiaoping. The economic reforms were in two stages. The first stage, in the late 1970s and early 1980s, involved the de-collectivisation of agriculture and the opening up of the country to foreign investment that allowed Chinese entrepreneurs to establish their own businesses. The second stage of the reforms, in the late 1980s and 1990s, involved the privatisation and contracting out of some state-owned industry, the relaxation of price controls, and the lifting of protectionist policies and regulations. Despite these reforms, key economic sectors, such as banking, remained within the state ownership and/or control.

Following the Chinese Communist Party’s Third Plenum, held in October 2003, Chinese legislators unveiled several proposed amendments to the state’s constitution. One of the most significant was a proposal to provide protection for private property rights. At the Plenum, Legislators indicated there would be a new emphasis on government economic policy, so as to reduce unemployment, to rebalance income distribution between urban and rural regions, and to maintain economic growth while protecting the environment and improving social equity.

The structural transformation in China in the past three decades has involved a shift that has diminished the importance of agriculture in the economy. This can be measured by changes in the share of output in GDP and employment of different sectors of the economy. Figure 3 shows that China’s industrialisation drive dates from its first Five Year Plan (FYP), which began in 1953.

Figure 3: Structural transformation, output and employment shares, 1952–2010

(a) Output share 60 50 40 30 20 10 % primary secondary tertiary 1952 1954
(a) Output share
60
50
40
30
20
10
%
primary
secondary
tertiary
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010

(b) Employment share

90

80 70 60 50 40 30 20 10 % primary secondary tertiary Source: China statistical
80
70
60
50
40
30
20
10
%
primary
secondary
tertiary
Source: China statistical yearbook 2011; CEIC.
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010

Note: In China, economic activities are categorised into three strata of industry. Primary industry refers to agriculture; forestry; animal husbandry and fishery; and the services in support of these industries. Secondary industry refers to mining and quarrying; manufacturing; production and supply of electricity, water and gas; and construction. Tertiary industry refers to all economic activities not included in primary or secondary industries.

Changes in China’s economic structure are shown in the primary sector’s decreased GDP share, and the industry and tertiary sectors’ increased share of both GDP and employment. Primary industry’s share of GDP, which includes agriculture, fell from 30 per cent in 1980 to 10 per cent in 2010. In 1980, seven in 10 Chinese worked in primary industry, but by 2010 it had fallen to 3 in 10. By contrast, China’s secondary industry continues to dominate the economy and accounted for about 45 per cent of its GDP, on average, over the past three decades. The output share of the tertiary or service sector has grown rapidly and almost doubled, from around 22 per cent to more than 43 per cent, between 1980 and 2010.

Structural transformation has contributed to a massive shift in population from rural to urban areas, and to higher-value-added manufacturing and the service sector. Figure 4 shows the spectacular impact on real GDP per capita.

Figure 4: Real GDP per capita (PPP) by the end of each FYP, 1953–2010

9000

8569

8000 7000 6000 5171 5000 4000 3066 2567 3000 1362 1677 2000 951 570 613
8000
7000
6000
5171
5000
4000
3066
2567
3000
1362
1677
2000
951
570
613
698
781
1000
US$
(PPP)
1957
1962
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: The Conference Board Total Economy Database.
Note: PPP refers to purchasing-power-parity.

Box 1: China’s eleven Five Year Plans (FYP), 1953–2010

The First FYP (1953–57) set the goal of higher economic growth and emphasised the development of heavy industries (mining, iron manufacturing and steel manufacturing) and technology (for example, machine construction), and followed the Soviet model of economic development.

The goal in the Second FYP (1958–62) was to rapidly increase China’s industrial output by ‘mobilising’ the country’s vast rural workforce. This campaign was known as the Great Leap Forward. China began repaying its Soviet-issued loans with agricultural products. During this period the Great Chinese Famine occurred in which millions of people either starved or were malnourished.

The Third FYP (1966–70) aimed to deliver ‘basics’, including food and clothing, to the Chinese population and outlined agricultural and economic goals. This FYP coincided with the beginning of the Cultural Revolution (1966–76).

The Fourth FYP (1971–75) set the target of 12.5 per cent annual growth in industrial and agricultural gross output, with 130 billion Yuan budgeted for infrastructure development. Implemented during the latter stages of the Cultural Revolution, the Fourth FYP stressed the importance of both industry and agriculture. There was faster economic growth in the period of the fourth FYP than there was in all previous five-year periods.

The Fifth FYP (1976–80) was created as part of the Ten Year National Economic Development Plan for 1976–85. It included the institution of the one child policy, which was introduced by Deng Xiaoping in 1979 as a way to control population growth. This policy limits Chinese couples to having only one child. The Fifth FYP began a gradual movement away from a Soviet-style command economy and a gradual introduction of market reforms.

The Sixth FYP (1980–85) was created as part of the Ten Year National Economic Development Plan for 1976–85, but was amended in 1980 and 1982. The final version of the Sixth FYP was ratified in December 1982. The institution of the household responsibility system for farming and the rise of quasi-private township and village enterprises coincided with unprecedented economic growth and capital accumulation in China’s rural sector. During this period the central government, for the first time, opened China’s economy to foreign direct investment. Beginning in 1980, special economic zones were created in southern coastal areas where it became legal for foreign companies to invest in export-producing joint ventures using local Chinese labour.

The Seventh FYP (1986–90) continued to emphasise innovation and economic expansion. Gross national product (GNP) and fixed asset investment both increased over the period, but the 1989 Tiananmen incident had a negative economic impact as foreign loans to China declined or were suspended, and foreign investment fell.

The Eighth FYP (1991–95) marked the beginning of a phase of renewed economic reform under the leadership of Deng Xiaoping. Deng undertook his famous ‘Southern Tour’ in 1992 when he signalled his support for expanding market reforms.

The Ninth FYP (1996–2000) was the first plan enacted under a ‘socialist market economy’. This plan, which straddled the 20th and 21st centuries, aimed to quadruple per capita GNP and double gross national product by 2000.

The Tenth FYP (2001–05) continued and extended previous FYP objectives, including increasing annual economic growth and income, keeping the unemployment rate at 5 per cent, maintaining price stability, continuing the development of foreign trade and increasing international competitiveness, closing the gap between rich and poor by raising levels of urbanisation, increasing research funding to more than 1.5 per cent of GDP, and expanding science and technological progress.

The Eleventh FYP (2006–10) had the same goals as the previous two plans: continue strong economic growth, support urbanisation, improve the quality of life, protect the environment, improve education and access to jobs, and build a better system of medical care and pensions.

China’s industrialisation and urbanisation are, in part, a consequence of foreign investment. China’s admission to the World Trade Organisation (WTO) in 2001, in particular, coincided with a large increase in its exports, imports and inward foreign direct investment. For example, Figure 5 shows that foreign direct investment in China increased 30-fold in nominal dollars from US$3 billion in 1990 to US$106 billion in 2010, with an average annual growth rate of around 24 per cent.

Over the period 1990–2010 the total value of Chinese exports in nominal dollars increased 25-fold, from US$62 billion in 1990 to US$1,578 billion in 2010, while total imports increased 26-fold, from US$53 billion in 1990 to US$1,396 billion in 2010. On average, the growth rate for total exports and imports was 18 per cent per annum over the same period. China’s export- led growth has translated into very large trade and current account surpluses. As a result, its foreign exchange reserves in nominal dollars increased from US$3 billion in 1981 to US$2,847 billion in 2010, with an average annual growth rate of 35 per cent.

Figure 5: China’s foreign direct investment, export and import (nominal dollars), 1990-2010 1600 120 1400
Figure 5: China’s foreign direct investment, export and import (nominal dollars), 1990-2010
1600
120
1400
100
1200
80
1000
800
60
600
40
400
20
200
US$b
US$b
1990
1995
2000
2005
2010
FDI*(RHS)
export (LHS)
import (LHS)

Source: China statistical yearbook 2011. Note: *Refers to foreign direct investment.

A ‘go global’ policy was unveiled in 1999 and consolidated at the Chinese Communist Party’s Sixteenth Congress in 2002. The objectives of this policy were to encourage outward direct investment (ODI) to support national exports, to push domestic firms to internationalise their activities and to link to overseas markets (Hurst 2011). By 2010, total Chinese ODI flows in nominal dollars were US$68.81 billion and the cumulative flows were US$317.21 billion, a dramatic increase from US$2.7 billion in ODI and US$29.9 billion in stock in 2002 (see Figure 6).

Figure 6: China’s outward FDI flows and stock (nominal dollars), 2002–10

350

300 250 200 150 100 50 US$b 2002 2003 2004 2005 2006 2007 2008 2009
300
250
200
150
100
50
US$b
2002
2003
2004
2005
2006
2007
2008
2009
2010
stock
flows
Source: MOFCOM (Ministry of Commerce, China) 2012.

Urbanisation

Since the early 1980s the Chinese government has gradually relaxed the ‘hukou’ system, a formerly very strict policy of household registration. This has helped the rural–urban migration of workers, supported rapid growth in the construction and manufacturing sectors and, in some cases, the settlement of rural workers in urbanised areas. Partly due to the changes in these policies the proportion of China’s population living in cities in 2010 was almost 50 per cent and included some 670 million people (see Figure 7).

Figure 7: Urbanisation in China, 1978–2010

50 40 30 20 10 % 1978 1982 1986 1990 1994 1998 2002 2006 2010
50
40
30
20
10
%
1978
1982
1986
1990
1994
1998
2002
2006
2010

Source: China statistical yearbook 2011.

Based on United Nations (UN) projections, the rate of urbanisation in China is expected to be

68 per cent by 2040, which is equivalent to the urbanisation rate projected for Japan in 2015.

By 2050, the urbanisation rate in China is expected to be 73 per cent, equivalent to the rate of urbanisation projected for Europe in 2015.

The UN projects that China’s urban population will reach one billion by 2030. By 2025, China will have 163 cities with one million–plus inhabitants, compared with 63 cities of that size in Europe. This growth will put major pressure on public funding for the provision of social services and increase the need to supply adequate land, energy and water for cities. On the positive side, concentrated urbanisation has the economic advantage of ‘clustering’ the most skilled workers who promote innovation and higher-value-added economic activities.

Rapid urbanisation has fuelled construction and transportation in China’ s cities. Most of the Chinese middle class live in cities and with increases in their living standards demand better housing and more and higher-quality consumer durables including refrigerators, colour televisions, air conditioners, computers and cars. Rising incomes have meant that, today, most urban households in China have a refrigerator and a colour television, and a growing number have air conditioners. Car ownership has increased from one car per 100 urban households in 2000, to three cars per 100 households in 2005, to 13 cars per 100 households in 2010 (see Figure 8).

Figure 8: Ownership of major durable consumer goods per 100 urban households

140 120 100 80 60 40 20 unit refrigerators colour air computers automobiles televisions conditioners
140
120
100
80
60
40
20
unit
refrigerators
colour
air
computers
automobiles
televisions
conditioners
2000
2005
2010

Source: China statistical yearbook 2011.

Urbanisation and higher incomes have both increased the resource intensity of commodities in China’s economy. Figure 9 shows the relationship between per capita consumption of crude steel, aluminium, copper and zinc and real per capita GDP for selected countries, including China. China’s steel consumption increased sharply over recent decades from a low base in 1980. Steel intensity of use (measured by kilogram consumption per person) in China overtook that of the United States in 2009 and is rapidly approaching the per capita intensity of Japan. Rapid increases in per capita resources intensities have also occurred for aluminium, copper and zinc.

Figure 9: Commodity consumption per capita and GDP per capita: crude steel, aluminium, copper and zinc, selected countries

(a) Crude steel, 1980 to 2010

(b) Aluminium, 1988 to 2010

1,400 30 1,200 25 1,000 20 800 15 600 10 400 5 200 0 0
1,400
30
1,200
25
1,000
20
800
15
600
10
400
5
200
0
0
0
20
40
60
0
20
40
60
GDP per person (thousand of PPP
international dollars)
GDP per person (thousand of PPP
international dollars)
China
Japan
United States
India
S. Korea
consumption per person (kg)
consumption per person (kg)

Source: BREE; Steel statistical yearbook; IMF database 2012.

(c) Copper, 1980 to 2010

(d) Zinc, 1990 to 2010

12 25 10 20 8 15 6 10 4 5 2 0 0 0 20
12
25
10
20
8
15
6
10
4
5
2
0
0
0
20
40
60
0
20
40
60
GDP per person (thousand of PPP
international dollars)
GDP per person (thousand of PPP
international dollars)
China
Japan
United States
India
S. Korea
consumption per person (kg)
consumption per person (kg)

Source: BREE and IMF database 2012.

Economic catch-up

The ‘catch-up effect’ is the view that per capita incomes in poorer economies tend to grow at

a faster rate than those in richer economies. It purports that countries starting out with lower output per capita experience faster growth and the rate of catch-up, in part, is determined by a country’s ability to absorb ideas and knowledge from the technological frontier (Rodrik

2011).

The convergence or catch-up potential of countries is, typically, measured by the income gap that separates poor countries from rich nations. Starting from a low level of income and high incidence of poverty in the early 1980s, China’s catch-up has proceeded at a remarkable pace. Based on measures of purchasing-power parity by the IMF, China’s GDP per capita increased from US$251 (lower than Nepal’s, US$265) in 1980 to US$7,544 (more than two times higher than in India) in 2010, a 30-fold increase over the period. Over the past three decades the Chinese economy has maintained an average annual growth rate of over 9 per cent, equivalent to doubling its size every eight years. As a result, China’s real GDP per capita rose from below 3 per cent of that of the United States in 1980 to 18 per cent in 2010. While China

is now the world’s second largest economy, in 2011 it ranked 93 (US$8,382 PPP measure) on the IMF’s GDP per capita rankings of 181 economies.

China’s economic catch-up has been very rapid and is comparable to the pace of economic growth of South Korea from the mid to late 1960s, and Japan from the mid 1950s (see Figure

10). In part, the fast speed of China’s economic convergence to richer countries is because it started from a significantly lower per capita level than did many other Asian economies (Liu

& McDonald 2010). For instance, in 1955 Japan’s real GDP per capita was around 27 per cent

that of the United States, higher than China’s relative level of 18 per cent in 2010. Moreover, as the global frontiers of income and productivity continue to extend over time, the latecomers (such as China) can move more rapidly than their predecessors (Garnaut 2006).

Figure 10: Economic convergence -

(a) Percentage of US GDP per capita 100 Post 1980 80 60 40 20 %
(a) Percentage of US GDP per capita
100
Post
1980
80
60
40
20
%
China
Japan
S. Korea
Malaysia
Thailand
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010

(b) GDP per capita growth after take-off

Since growth takeoff (Index, period 0 = 100) 1300 1100 900 700 China 500 300
Since growth takeoff (Index, period 0 = 100)
1300
1100
900
700
China
500
300
100
0
5
10
20
25
30
35
40 45
50 55
years after take-off
China
Japan
S. Korea
Malaysia
Thailand

Source: Liu & McDonald 2010.

Note: GDP per capita is in purchasing-power parity (PPP) terms. Growth take-off is assumed to have occurred in 1955 for Japan, 1967 for South Korea, 1973 for Malaysia and Thailand, and 1979 for China.

Key determinants of long-term GDP per capita include workforce participation along with the size and quality of the labour force. Labour force utilisation in the workforce depends on several factors including the number of working-age people in the population, the level of structural unemployment, and hours worked per worker. Labour productivity depends on improvements in labour quality (such as skills and education) and the pace of technical change associated with the capital–output ratio and the quality of capital used by labour.

Figure 11 shows that the ratio of China’s labour productivity to that of the US was about 3 per cent in 1960, but increased to 14 per cent in 2010. By comparison, the ratio of India’s labour productivity to that of the US increased from 5 per cent in 1960 to 9 per cent in 2010 while for Venezuela and South Africa the ratio fell over the same period.

Figure 11: Labour productivity relative to the US: selected economies, 1960–2010

90

16

80 14 70 12 60 10 50 8 40 6 30 4 20 10 2
80
14
70
12
60
10
50
8
40
6
30
4
20
10
2
%
%
1960
1970
1980
1990
2000
2010
S. Africa (LHS)
Venezuela (LHS)
China (RHS)
India (RHS)
Source: The Conference Board Total Economy Database.
As a result of China’s catch-up with developed countries, its economy has moved from the
seventh largest in the world in 1990, with a GDP that accounted for 4 per cent of world output,
to the world’s second largest economy, contributing about 14 per cent of world GDP by 2010
(see Table 1).

Table 1: World economic rankings (purchasing-power parity US$billion)

Ranking

Country

PPP

% World

Ranking

Country

PPP

% World

1990

(US$b)

GDP

2010

(US$b)

GDP

1

United States

5801

24.7

1

United States

14 527

19.5

2

Japan

2328

9.9

2

China

10 120

13.6

3

Germany

1447

6.2

3

Japan

4 324

5.8

4

France

1031

4.4

4

India

4 058

5.5

5

Italy

973

4.1

5

Germany

2 944

4.0

6

United Kingdom

961

4.1

6

Russia

2 231

3.0

7

China

911

3.9

7

United Kingdom

2 181

2.9

8

Brazil

783

3.3

8

Brazil

2 179

2.9

9

India

745

3.2

9

France

2 135

2.9

10

Mexico

612

2.6

10

Italy

1 779

2.4

Source: IMF database 2012.

Economic differences

China’s aggregate catch-up, however, masks diverging paths for different parts of China. Three regions with discrete development paths have emerged in the past two or more decades: (1) the ‘leading’ coastal areas, characterised by high income levels and a high growth rate; (2) the ‘catching-up’ central regions, with average income levels, but rapid structural changes from agriculture to industry and services; and (3) the ‘backward’ regions of the west, with a much lower growth rate.

China’s ‘dual-track’ approach to economic transition has helped it to achieve enviable stability and growth by achieving ‘reform without losers’ (Lin 2012). China’s transition strategy has included a desire to: (1) maintain state-owned industries and (2) achieve dynamic growth while simultaneously pursuing China’s comparative advantage via a market-based approach to economic development. This so-called dual-track system has been used extensively in its urbanisation polices, the conduct of foreign trade and with various reforms in terms of labour regulation, housing, social security and private ownership. The most significant achievement of China’s dual-track transition has been the rapid development of the ‘new track’, or the non-state sector, which includes rural collective industries, urban corporations, private and individual businesses, and foreign joint-venture companies.

Despite rapid growth in China’s economy, there remain large disparities between rural and urban areas. For example, the annual disposable income of urban households was 2.5 times higher than that of rural households in 1980, but more than three times higher in 2010. While rural incomes increased faster than urban incomes from 1980 until the early 2000s, since 2003 rural incomes have lagged behind urban incomes (see Figure 12).

Figure 12: Growth in annual disposable income of urban households and net income of rural households, 1980–2010

800

700 600 500 400 300 200 100 1980 1990 1992 1994 1996 1998 2000 2002
700
600
500
400
300
200
100
1980
1990
1992
1994 1996 1998 2000 2002 2004 2006 2008 2010
disposable income of urban households
net income 1 of rural households
index (1980 = 100)

Source: China statistical yearbook 2011.

Note: 1: Net income refers to the total income of rural households from all sources minus all corresponding expenses. It is principally used for reinvestment in production and as consumption expenditure for the year while also providing funds for saving and non-compulsory expenses.

Economic transition

During China’s economic transition, trade has provided the impetus for investment and also the transfer of knowledge that has allowed China’s per capita income levels to converge towards the levels in the West. In the early ‘catch-up’ years, China’s comparative advantage was in cheap labour in manufacturing. Over time, however, there has been a gradual shift from the labour-intensive sectors to capital-intensive or high-value-added industries.

China’s future prosperity will increasingly depend on growing its domestic demand. Its

household consumption share of GDP was around 50 per cent in 1980, but fell to 34 per cent in 2010. By contrast, the share of gross fixed capital formation of GDP increased from around

29 per cent in 1980 to more than 46 per cent in 2010 (see Figure 13).

Figure 13: Household consumption and gross fixed capital formation: share of GDP,

1978–2010 60 50 40 30 20 10 % 1978 1982 1986 1990 1994 1998 2002
1978–2010
60
50
40
30
20
10
% 1978
1982
1986
1990
1994
1998
2002
2006
2010
share of household consumption
share of gross fixed capital formation

Source: China statistical yearbook 2011.

As China approaches the global technology frontier and its capital intensity converges to that of the West, its speed of convergence will likely decline. In other words, as the easy catch-up gains diminish, future growth will increasingly depend on total factor productivity growth (Eichengreen et al. 2011). China’s future economic growth will become relatively less resource- intensive and become more reliant on services and private domestic consumption. These trends suggest that China’s economic growth rates will moderate and the growth rate in its resource intensity will decline. During this process of economic and structural adjustment, China’s faces a number of risks that include higher and more volatile levels of inflation and a change in asset prices and income relativities.

China and Australia

China’s economic growth and transition have had a major impact on Australia. In particular, China’s spectacular economic growth in the recent past has fuelled the resource commodities boom of which Australia has been a major beneficiary in the form of both higher export prices and volumes. Thus, over the past 20 years the real value of Australian exports of mineral resources to China has increased from A$0.2 billion in 1989–90 to A$49.9 billion in 2010–11, and the value of Australian total merchandised exports to China has increased from A$1.2 billion to A$64.9 billion over the same period (see Figure 14).

Figure 14: Australian exports of mineral resources and merchandised goods to China (A$2010–11), 1989–90 to 2010–11

70 60 50 40 30 20 10 A$b 1989–90 1992–93 1995–96 1998–99 2001–02 2004–05 2007–08
70
60
50
40
30
20
10
A$b
1989–90
1992–93
1995–96
1998–99
2001–02
2004–05
2007–08
2010–11
mineral resources(a)
merchandised goods(b)

Sources: BREE; ABS cat. no. 5368.0 and 5302.0.

Note: a Not based on balance of payments number; b Chain value calculation. Merchandised goods have sub-categories rural and non-rural. Non-rural has the further sub-categories metal ores and minerals; coal, coke and briquettes; other mineral fuels metals (excl. non-monetary gold); machinery, transport equipment; other manufactures and other non- rural.

Australian export of iron ore to China accounted for around 69 per cent of Australian total iron ore exports in 2010–11 compared to around 6 per cent in 1989–90. Over the period of 1989– 90 to 2010–11 the share of Australian export of metallurgical coal to China increased from 1 per cent to around 11 per cent, while the share of Australian exports of thermal coal to China increased from 0.1 per cent to around 12 per cent (see Figure 15). (see Box 2 for a snapshot of Australian commodity exports).

Figure 15: Volume share of exports to China as proportion of the Australia’s total exports:

metallurgical coal, thermal coal and iron ore, 1989–90 to 2010–11

80

70 60 50 40 30 20 10 % 1989–90 1992–93 1995–96 1998–99 2001–02 2004–05 2007–08
70
60
50
40
30
20
10
%
1989–90
1992–93
1995–96
1998–99
2001–02
2004–05
2007–08
2010–11
metallurgical coal
thermal coal
iron ore

Sources: BREE; ABS cat. no. 5465.0.

Box 2: Snapshot of Australian commodity exports

Australia supplied around a quarter of the world’s iron ore production in 2010 and exported more than 90 per cent of its production.

Based on 2011 statistical information provided by the IEA, in 2010 Australian export of metallurgical coal accounted for 57 per cent of the global total, compared to 18 per cent from the United States, 10 per cent from Canada, 5 per cent from Russia and 4 per cent from Mongolia.

Based on the IEA’s estimates, in 2010 Australian export of thermal coal accounted for 21 per cent of the global total, compared to 23 per cent from Indonesia, 14 per cent from Russia and 10 per cent from South Africa.

Based on the 2011 BP statistical review, in 2010 Australian LNG export accounted for about 9 per cent of the global total, compared to some 26 per cent from Qatar and 8 per cent from Nigeria.

Source: Liu & Grafton 2011.

Strong Chinese demand for resources and energy, due to its re-emergence, has resulted in large volumes of Australian exports, more Australian jobs and investment, higher incomes for working Australians and tax revenue.

Direct employment in Australian mining accounted for around 2 per cent of total employment in Australia in 2011, and the number of jobs in the sector has increased by more than 130,000 since 2001. In 2010–11 gross fixed capital formation (GFCF) in the Australian mining sector was worth A$48 billion, or about 4 per cent of Australia’s GDP. The direct value of the mining sector

Jun-1984

Jun-1987

Jun-1969

Jun-1966

Jun-1996

Jun-1999

Jun-1960

Jun-1990

Jun-2008

Jun-1978

Jun-2002

Jun-1972

Jun-1963

Jun-1993

Jun-1975

Jun-2005

Jun-1981

Jun-2011

has more than tripled in terms of its importance to the economy from less than 3 per cent in 1980–81 to 9 per cent in 2010–11.

Since 2003, strong investment and employment in the mining and construction industries have contributed to strong growth in employment in states with large mining sectors. At the state level, the average annual employment growth rate in mining was 12 per cent in Queensland and 11 per cent in both Western Australia and New South Wales.

Higher mineral resource prices, combined with reduced prices in imports (especially imports from low-cost producing countries in Asia), have translated into an improvement in Australia’s terms of trade (the ratio of prices we receive for our exports to the prices we pay for imports). Higher terms of trade, partly attributable to increased prices for resources and energy commodities, increase Australia’s national income and household incomes. The upward trend in the terms of trade has been occurring since 2003, despite a temporary fall associated with the onset of the GFC (see Figure 16), and peaked in 2011.

Figure 16: Terms of trade, June 1960–June 2011 140 120 100 historical average quarterly index
Figure 16: Terms of trade, June 1960–June 2011
140
120
100
historical average quarterly index = 68
80
60

40

20

index

Source: ABS cat. no. 5206.0.

The prospect for China’s commodity demand over the medium term depends on the pace and composition of its economic growth and structural adjustment (IMF 2012). The Chinese government, however, has committed to rebalancing demand away from investment and exports and towards consumption.

China’s re-emergence has had important effects on the non-mining parts of the economy as it is both Australia’s largest export destination and the largest source of Australian imports. In particular, Chinese growth has had a major impact on Australia’s tourism industry. As incomes in China rise, consumption patterns will shift towards higher order goods and services (such as consumer durables, culture, tourism, and advanced education). The growth in Chinese tourists visiting Australia has been dramatic such that more Chinese than Americans or Japanese visit Australia (see Figure 17).

Figure 17: International arrivals in Australia, by country, 2000–01 to 2010–11 -

800

700 600 500 400 300 200 100 ‘000 2000–01 2002–03 2004–05 2006–07 2008–09 2010–11 Japan
700
600
500
400
300
200
100
‘000 2000–01
2002–03
2004–05
2006–07
2008–09
2010–11
Japan
UK
US
China
India

Source: TRA 2012.

Concluding remarks

China was the world’s largest economy until the early years of the eighteenth century. The period from the mid 1800s to 1950, however, was a time of relative economic decline. Starting from a very low base in terms of per capita income China’s has transformed itself over the past 30 years into one of the world’s fast growing economies.

China’s re-emergence, especially in the past decade, has had a profound global impact. To support its very rapid growth, China has undertaken massive capital investments, particularly in its infrastructure, and has become the world’s largest exporter. As a result of this transformation, its demand for key resources, such as for iron ore and coal, has supported very large increases in the real prices of bulk resource commodities in which Australia is a major exporter. Higher commodity prices have also encouraged spectacular growth in mining investments in Australia over the past decade.

China is expected to continue to grow rapidly in the years to come, but at a lower rate than the average over the past decade. The nature of its future growth will also likely change with lower growth in terms of its resource intensity. This structural transformation already underway in China poses both challenges and opportunities for Australia in the decades ahead.

References

Eichengreen, B, Park, D & Shin, K (2011). When fast growing economies slow down: international evidence and implications for the People’s Republic of China, ADB Economics Working Paper Series No. 262, Asian Development Bank.

Garnaut, R (2006). The China resources boom, paper presented at the Australian Agricultural and Resource Economics, Sydney, 8-10 February 2006.

Hurst, L (2011), Comparative analysis of the determinants of China’s state owned overseas direct investment in OECD and non-OECD countries, China & World Economy, Vol. 19(4), pp.

74-91.

IMF (2012). World economic outlook: growth resuming, dangers remain, International Monetary Fund, April 2012.

Lin, J (2012). Demystifying the Chinese economy, Cambridge University Press, Cambridge.

Liu, J & Grafton, Q (2011). Resources and energy prices: trends, volatility and demand shocks, Resources and Energy Quarterly Review, Bureau of Resources and Energy Economics, September

2011.

Liu, J & McDonald, T (2010). China: growth, urbanisation and mineral resource demand, Economic Roundup, issue 2, Department of the Treasury.

TRA (2012). Forecast 2012, Tourism Research Australia.

Rodrik, D (2011). The future of economic convergence, paper prepared for the 2011 Jackson Hole Symposium of the Federal Reserve Bank of Kansas City.

Weiss, J (2002). Industrialization and globalization: theory and evidence from developing countries, Routledge, London.

World Bank (2012). Global monitoring report 2012: food prices, nutrition, and the millennium development goals.

China Review • June 2012 23
China Review • June 2012 23
China Review • June 2012 23
China Review • June 2012 23
China Review • June 2012 23
China Review • June 2012 23

By Invitation:

China’s demographic transition and economic growth 1

Zheng (Annie) Wei, Crawford School of Public Policy, Australian National University, Canberra Rui Hao, Institute for Advanced Study (IAS), Shenzhen University, Shenzhen, China 2

In the past four decades few countries in the world have experienced more pronounced economic growth than has China. In 2011 the growth rate of China’s GDP per capita was over 9 per cent—even higher than its average growth rate over the past 30 years. The ‘miracle’ of China’s growth has been attributed to various factors, including institutional reforms, rapid accumulation of capital and substantial improvement in total factor productivity (see overview in this issue). However, one fundamental factor that has rarely been investigated is China’s demographic structure. During the past few decades China has experienced significant changes not only in its institutions and economy, but also in the age structure of its population. By applying China’s provincial-level data over the period 1989–2004 to a growth regression that incorporated age structure dynamics, we find that changes in demographic structure have had profound implications for the development of China’s economy.

Theoretical framework

According to the demographic transition model (Notestein 1945), a population usually experiences four stages of demographic transition from high fertility and mortality to low fertility and mortality, eventually becoming an ageing society. When a population enters the third stage of demographic transition, fertility starts to decline. This leads to a considerable decrease in the number of dependants, particularly youth dependants. Given the relatively small number of elderly dependants, the demographic structure of the population is dominated by the working-age population (aged between 15 and 65 years); thus the ratio of total dependants—the sum of youth and elderly dependants—to working-age population declines. This ratio, known as the total dependency ratio, is often used as a proxy for a country’s demographic structure.

The so-called ‘demographic window’ opens when the total dependency ratio in a country falls to approximately 40 to 60 per cent (United Nations 2004). During the demographic window, the working-age population provides an ‘ample’ labour supply to an economy. A substantial decline in fertility means more capital is available for productive investment. In smaller families, parents tend to invest more in ‘child quality’—that is, they invest more in their child’s education and health—and, thus, more human capital is accumulated. In short, changes in

1 This report relies heavily on the authors’ paper ‘Demographic structure and economic growth: evidence from China’, published in the Journal of Comparative Economics 38(4), pp.472–91, 2010.

2 The views expressed in this review are those of the authors alone and not the Department of Resources, Energy and Tourism (RET). ‘By Invitation’ provides an opportunity for scholars and experts tp present their research findings on issues of relevance to the Bureau of Resources and Energy Economics (BREE) and/or Tourism Research Australia (TRA)

the demographic structure during the demographic window can boost economic growth by providing an ample labour force, contributing to savings and promoting the accumulation of human capital. The contribution these demographic changes make is often referred to as the ‘demographic dividend’ or ‘demographic gift’ to economic growth (Bloom & Williamson 1998).

The concept of the demographic dividend has been assessed in various cross-country cases. For example, Bloom, Canning and Malaney (2000) found that dramatic changes in demographic structure contributed to at least a third of the extraordinary economic growth in East Asia during the years 1965–90. Despite having experienced similar demographic transition, Latin America as a whole was unable to achieve a demographic dividend in the 1960s to 1990s because of its unstable socio-political environment, hyperinflation and severe unemployment (Bloom & Canning 2004). In this study, we examine the demographic dividend to China’s provincial-level economic growth over the period 1998–2004.

China’s demographic changes and economic development

The Chinese population has experienced dramatic demographic transitions over the past five decades. As shown in Figure 1, birth rates rose as high as 4.34 per cent while mortality declined substantially, except for the three famine years in the 1960s. This was as a result of improvements in preventive health and in environmental sanitation and hygiene. Consequently, China’s total population grew at a rate of 1.95 per cent per annum on average over 1949–70. This relatively high population growth rate began to slow in the early 1970s when the so-called ‘later marriage, longer birth intervals and fewer births’ family planning program was adopted. It declined further once the one-child policy was formally announced and implemented in the 1980s. By 2007 China’s fertility rate had fallen to 1.8 births per woman, from 7.5 births per woman in the 1960s, and was below the replacement rate. Mortality also declined dramatically, from 2 per cent to a level close to that for developed countries, while the annual growth rate of the total population fell to just 0.59 per cent (World Bank 2009).

Figure 1: The demographic transition of the Chinese population, 1949–2006 5 4 3 2 %
Figure 1: The demographic transition of the Chinese population, 1949–2006
5
4
3
2
%
1
0
-1
crude birth rate
population growth rate
crude death rate
1949
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006

Source: Comprehensive statistical data and materials on 55 years of NewChina (National bureau of statistics of China, 2005), World development indicators (World Bank, 2009).

Figure 2: China’s dependency ratios, 1960–2005 -

100

80

60

%

40

20

ratios, 1960–2005 - 100 80 60 % 40 20 1960 1965 1970 1975 1980 1985 1990
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 youth dependency ratio total dependency ratio

youth dependency ratio total dependency ratio

2000 2005 youth dependency ratio total dependency ratio elderly dependency ratio Source: World development
2000 2005 youth dependency ratio total dependency ratio elderly dependency ratio Source: World development

elderly dependency ratio

Source: World development indicators (World Bank, 2009).

The dramatic transition of China’s population has changed its demographic structure. As

illustrated in Figure 2, the total dependency ratio declined by 38 per cent, from 80 per cent to

41 per cent, over the 30 years from 1965 to 2005. This can be attributed largely to changes in

the youth dependency ratio, which fell from 72.5 per cent to 30.2 per cent between 1965 and 2005. By contrast, the elderly dependency ratio remained relatively stable at an average rate of 7.8 per cent. Since 1990 the total dependency ratio has fallen to 49.8 per cent, indicating that China has entered the so-called demographic window, with the opportunity to achieve a demographic dividend to growth.

Figure 3: China’s dependency ratio and economic growth, 1960–2006 -

90 20 15 80 10 70 5 60 0 50 -5 40 -10 30 -15
90
20
15
80
10
70
5
60
0
50
-5
40
-10
30
-15
20
-20
10
-25
0
-30
%
%
total dependency ratio (LHS)
annual growth rate of GDP per capita (RHS)
total dependency ratio
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
growth rate of GDP per capita
1998 2000 2002 2004 2006 growth rate of GDP per capita predicted tendency of growth rate

predicted tendency of growth rate

Source: World Development Indicators (World Bank, 2009).

The implications of demographic transition for economic growth

We investigated the economic implications of the demographic transition in 1989–2004 in a convergence equation that incorporated the key demographic variable—namely the age structure represented by the total dependency ratio.

As shown in the equation below, both the initial level (denoted as lnD

(g D ) of the total dependency ratio were included in order to capture the long-run and short-

run effects of changes in demographic structure. Other demographic variables, such as urban

population share (lnurban were also included.

i,t-1

) and growth rates

i,t-1

), population size (lnpop

i,t-1

) and population density (lnpopden

i,t-1

),

g

y

= α

1

lny

i,t-1

+ α

2

lnD

i,t-1

+ α lnurban

3

i,t-1

+ α lnpopden

4

α

6

g

D

+ β X

i,t-1

+ γ geog + η

i

i

+ δ

t

+ ε

it

i,t-1

+ α lnpop

5

i,t-1

+

The following variables were used:

g y is provincial growth rates of GDP per capita

lny

X

i,t-1

is the initial level of log GDP per capita for capturing the income convergence effect

i,t-1

represents a set of control variables, including openness, marketisation, government

expenditure and investment rates

geog i captures geographic proximity to sea-based international trade and pure geographic topography.

Dummies for periods (η i ) and regions (δ t ) were included to account for unobserved heterogeneities across regions and over time. In addition to ordinary least squares, the instrumental variable (IV) and feasible generalised least squared (FGLS) estimation were applied to account for endogeneity and heterogeneity. Table 1 presents a snapshot of the results.

Even after controlling for other growth determinants and the endogeneity of demographic variables, we found that changes in demographic structure had a significant impact on China’s economic growth. Specifically, a 1 per cent decline in the total dependency ratio leads to a 0.11 per cent increase in the growth rate of GDP per capita. In 1989–2004, China’s provincial- level total dependency ratio fell by 13 per cent on average, which contributed 1.43 per cent to economic growth. Given that provincial GDP per capita grew at an average rate of 8.6 per cent per annum, this indicates that changes in demographic structure contributed about one-sixth of China’s provincial economic growth over the defined period. This finding is similar to the 15 per cent demographic contribution to economic growth reported by Wang and Mason (2008). The impact of changes in demographic structure on China’s economic growth appears to be more important in the long run than in the short run.

The urban population share, representing the degree of urbanisation of an economy, was included to account for the impact of economies of scale. In the past few decades, China’s urbanisation has increased by more than 20 per cent as a proportion of the total population, from 25 per cent in 1978. A larger urban population share is a natural consequence of the expanded labour supply that has come from the demographic transition. Increasing urbanisation can help urban industries achieve economies of scale in production, but it may also generate congestion. The ultimate effect of urbanisation depends on the trade-off between economies of scale and congestion effects. We find that the impact of urbanisation on economic growth becomes positive and statistically significant only if we control for cross- sectional heteroskedasticity and time series autocorrelation.

In our analysis, population density and size were used to examine the effects of density and scale on economic growth. In 1978–2004, provincial-level population density increased by

43 per cent on average, and the population grew from 31.9 million to 43.1 million. Higher

population density may promote economic growth by stimulating technological change, reducing transportation costs, increasing production efficiency and facilitating specialisation, but may hamper it via diminishing returns to limited resources such as land. Likewise, a larger population can help facilitate specialisation and diversification between firms, but may also

cause congestion. In our results, both density and scale appear to have a negative effect on economic growth.

As noted by Bloom and Williamson (1998), the benefits of the demographic dividend are not automatic, but critically hinge on a compatible economic and policy environment. As shown in Figure 3, China’s economy has grown particularly rapidly since the late 1980s, when additional market reforms were formally launched. Marketisation reforms have largely removed impediments to private sector development and optimised allocation of economic resources. As a result, the flexibility of labour and capital markets has been greatly improved. These changes have helped ‘absorb’ the increased labour supply released during the demographic window and translated accumulated savings into productive investment in the economy.

Economic reforms have coincided with the opening of the demographic window, but we contend that reforms may also have helped realise the demographic dividend. We tested this hypothesis by introducing an interaction term between the total dependency ratio and the degree of marketisation. Our results, displayed in Table 1, show that the interaction term is negatively associated with economic growth at the 1 per cent level of significance, while the total dependency ratio itself becomes significantly positive. This implies that marketisation may have played an important role in facilitating the demographic dividend to China’s economic growth.

In summary, our study shows that since the 1990s China has experienced a remarkable demographic transition. This has had a profound impact on the Chinese economy and contributed one-sixth of its rapid rate of economic growth. During this period, marketisation appears to have played a pivotal role in the demographic dividend in the economy. In 2010 China’s total dependency ratio fell to 34.2 per cent, and the fertility rate was even lower than the replacement rate. However, China’s ageing and its dependency ratio will begin to rise in three to five years. A future and less beneficial demographic transition demands further and deeper marketisation in both its labour market and the social security system. Such changes will enable China, the world’s most populous country, to prepare to become an ageing society.

Table 1: Contribution of China’s demographic structure to its economic growth

Average growth rate of GDP per capita in five-year intervals Total dependency ratio, initial level Population density Population size Initial GDP per capita Trade openness Market reform

Contribution

Impact (+/-)

–3.793**

Negative

–0.484**

Negative

–0.082

Negative

–3.394***

Negative

1.389***

Positive

2.111**

Positive

Note: ***, ** and * denote statistical significance at the 1%, 5% and 10% levels respectively. For other estimations, please see Wei and Hao 2010.

References

Bloom, DE & Canning, D (2004). Global demographic change: dimensions and economic significance, NBER Working Paper No. 10817, National Bureau of Economic Research.

Bloom, DE, Canning, D, Hu, L, Liu, Y, Mahal, A & Yip, W (2006). Why has China’s economy taken off faster than India’s?, paper presented at the Pan Asia 2006 conference, Stanford Centre for International Development, 3 June 2006.

Bloom, DE, Canning, D & Malaney, PN (2000). Population dynamics and economic growth in Asia, Population and Development Review 26, pp. 257–90.

Bloom, DE & Williamson, JG (1998), Demographic transitions and economic miracles in emerging Asia, World Bank Economic Review 12(3), pp. 419–56.

National Bureau of Statistics of China (2005). Comprehensive statistical data and materials on 55 years of New China, China Statistical Press, Beijing.

Notestein, F (1945). Population—the long view, in Theodore W Schultz (ed.), Food for the world, University of Chicago Press, Chicago.

Perkins, DH & Rawski, TG (2008). Forecasting China’s economic growth to 2025, in L Brandt & T Rawski (eds), China’s great economic transformation, Cambridge University Press, Cambridge, New York.

United Nations Population Division (2004). World Population in 2300, Proceedings of the United Nations expert meeting on world population in 2300, United Nations, New York.

Wang, F & Mason, A (2008). The demographic factor in China’s transition, in L Brandt & T Rawski (eds), China’s great economic transformation, Cambridge University Press, Cambridge, New York, pp. 136–66.

Wei, Z & Hao, R (2010). Demographic structure and economic growth: evidence from China, Journal of Comparative Economics 38(4), pp. 472–91.

World Bank (2009). World development indicators, World Bank,Washington.

China’s demand for natural gas:

drivers and prospects

Jin Liu 3

Introduction

China is currently the largest consumer of total primary energy in the world, followed by the US (see Figure 1(a)). China’s energy consumption per capita, however, is among the lowest of the top 10 global economies and about a quarter that of the US (see Figure 1(b)). This suggests there is potential for substantial growth in Chinese energy consumption over the coming decades.

Figure 1: Primary energy consumption by selected markets in 2010

(a) Top ten market: Total

(b) Consumption per capita

3

2

2

1

1

btoe

10 8 6 4 2 toe China US Russia India Japan Germany Canada KoreaS. Brazil
10
8
6
4
2
toe
China
US
Russia
India
Japan
Germany
Canada
KoreaS.
Brazil
France
Canada
US
KoreaS.
Russia
Japan
Germany
France
China
Brazil
India

Source: BP 2011 and GGDC 2011.

China’s gas consumption has grown rapidly, in line with robust economic development and accelerated industrialisation and urbanisation. A low-carbon society is a goal for China and the structural transformation of the energy market towards cleaner energy, such as natural gas, is the basis of China’s energy strategy.

Key drivers

The key drivers of China’s demand for natural gas are its rapid economic growth, industrialisation, urbanisation and changes in economic structure. Over the past three decades, China’s path to industrialisation has been characterised by structural transformation. The agricultural sector’s share of gross domestic product (GDP) has decreased from 30 per cent in 1980 to less than 10 per cent in 2010. Since China started to open up its economy in 1979 the average annual growth rate of its urban population has been 3 per cent, meaning that from 1981 to 2011 the proportion of the population living in cities more than doubled, increasing from 20 per cent to around 50 per cent (see Figure 2).

Figure 2: Urbanisation and GDP per capita in China, 1981–2011

80

70

60

50 40 30 20 10 % 1981 1984 1987 1990 1993 1996 1999 2002 2005
50
40
30
20
10
%
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
Urbanisation rate (LHS)
GDP per capita (RHS)

Source: World Bank 2011 and IMF 2011.

100000

10000

1000

US$ PPP

(log scale)

Gas consumption has increased at an average annual rate of 16 per cent over the past decade. This exceeds the growth in consumption of coal (9 per cent) and oil (7 per cent) over the same period. In volume terms, total Chinese gas consumption increased fourfold, from 27.4 billion cubic metres (bcm) in 2001 to 109 bcm in 2010. Despite this robust growth, China’s per capita gas consumption in 2010 was 27 times less than that of the US and nine times less than that of Japan (see Figure 3).

Figure 3: Gas consumption per capita, China and other economies, 1965–2010 3500 90 80 3000
Figure 3: Gas consumption per capita, China and other economies, 1965–2010
3500
90
80
3000
70
2500
60
2000
50
40
1500
30
1000
20
500
10
cm per
cm per
capita
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
capita
United States (LHS)
Japan (LHS)
China (RHS)
India (RHS)

Source: BP 2011 and GGDC 2011.

Per capita gas consumption in China is relatively low partly because of an ongoing energy security policy of ‘more coal; less oil and gas’. As a result, oil’s contribution to primary energy consumption declined by 10 percentage points between 2001 and 2010, from around 28 per cent to 18 per cent. In the same period, coal’s contribution increased from 62 per cent to 70 per cent, while that of gas increased by one percentage point, from 3 per cent to 4 per cent.

Gas consumption in China is affected by the size of household incomes and structural changes in the economy that have affected the distribution of gas among end-use sectors. Table 1 shows that end-use consumption of natural gas has changed substantially over the past decade. For instance, the proportion of gas consumed as an industrial fuel declined from 41 per cent to 28 per cent while the proportion for use in chemical production fell from 37 per cent to 22 per cent between 2000 and 2010. By contrast, the proportion of gas consumption for civilian fuel use increased from 18 per cent to 34 per cent and for power generation rose from 4 per cent to 16 per cent over the same period.

Table 1: Natural gas in China, share of consumption by end-use sector, 2000 and 2010,

End use

2000

2010

Industry fuel

41%

28%

Chemical

37%

22%

Civilian fuel

18%

34%

Power generation

4%

16%

Source: Pan 2011.

While the growth in gas consumption has been very rapid, the growth in gas production has been slower. As a result, imports have become increasingly important in meeting Chinese gas demand, and in 2006 China began importing liquefied natural gas (LNG) from Australia. Between 2006 and 2010, imports of natural gas (both pipeline and LNG) into China increased 16-fold. In 2010, the bulk of the imports were in the form of LNG, with Australia providing about 40 per cent of China’s total gas imports.

Prospects for gas demand

Continued strong growth in Chinese natural gas consumption and imports is expected due to:

(1) robust economic growth and (2) a policy imperative in the existing Twelfth Five Year Plan to increase the share of energy consumed from clean energy sources, including natural gas.

The growth in Chinese demand for natural gas will likely be faster than for other fossil fuels, including coal and oil, because of relatively low carbon emissions from the combustion of gas and the stated objective of the Chinese government to diversity its fuel sources. Another potentially positive factor to growth is the anticipated increase in production of unconventional natural gas, especially shale gas. Rapid advances in gas-fired power generation technologies, the relative price of gas and coal, the removal of gas price subsidies, and investment in fuel infrastructure and distribution networks are also expected to affect future Chinas natural gas consumption and imports.

The Chinese government is actively seeking ways to mitigate energy-related carbon emissions and accelerate the transition to a low-carbon economy. Its policies include a range of measures that support renewable energy generation and the introduction of a carbon tax in 2016. These measures are likely to reduce China’s carbon intensity in coming years, while its energy and emissions intensity are already in decline. The carbon intensity of China’s energy supply increased from 2.5 kg CO 2 per kilogram of oil equivalent (koe) in 1980 to 3.3 kg CO 2 per koe in 2008. Over the same period, its energy intensity declined from 1.2 tonnes of oil equivalent (toe) per US$1000 GDP (in 2005 price, purchasing power parity) to 0.3 toe, and its emissions intensity declined from 2.9 kg CO 2 per GDP to 0.9 kg CO 2 per GDP.

China’s Twelfth Fifth Year Plan, for 2011–15, proposed to increase China’s target gas consumption from 5.3 per cent of total primary energy consumption, the amount in the previous plan, to about 8 per cent by 2015 (IEA 2011a). In 2011, China announced the twin targets of reducing energy intensity by 16 per cent and carbon intensity by 17 per cent during the Twelfth Five Year Plan period. As part of this strategy, China will undertake various measures, including the optimisation of the industrial structure and energy mix, further conservation of energy and improvements in energy efficiency, and the enhancement of the capacity of carbon sinks to sequester greenhouse gas emissions.

To achieve its carbon mitigation goal, China will need to reduce coal’s contribution to electricity generation which increased from 50 per cent in 1980 to 78 per cent in 2010. This suggests that other energy fuels, including uranium and gas, will play an increasing role in power generation. In particular, gas use which currently provides less than 2 per cent of total electricity generation in China compared to the average of over 22 per cent in developed countries (IEA 2011b) should increase dramatically.

ABARES (Australian Bureau of Agricultural and Resource Economics and Sciences) global trade and environmental model, GTEM 4 , can be used to provide projections of the fuel mix for China by 2025. The results of GTEM indicate that the electricity generation generated by coal is expected to fall from 78 per cent to 59 per cent, while the gas share is expected to rise from 1 per cent to 7 per cent over the period 2010 to 2025.

Based on the assumption of 8.3 per cent average annual growth in its GDP, the GTEM projection is that China’s total gas consumption will increase to 653 bcm (at a 13 per cent average annual compounded growth rate) while imports will increase to 112 bcm (at a 14 per cent average annual compounded growth rate) over the period 2010–25 (see Table 2). This means that China’s gas consumption and imports are expected to increase sixfold and sevenfold, respectively, over the 15 years between 2010 and 2025. If these projections materialise, there will be opportunities for Australia to substantially increase its exports of LNG to China.

Table 2: China’s natural gas consumption and imports, 2010–25

 

Average

annual

compounded

 

2010

2015

2020

2025

growth rate

(bcm)

(bcm)

(bcm

(bcm

(%)

Consumption

109.0

237.9

457.4

653.4

12.7

Imports

16.4

37.7

76.5

112.4

13.7

Source: GTEM and BREE.

Conclusions

China’s total gas consumption has grown rapidly over the past decade from a low per capita base. Consumption of natural gas has the potential to grow rapidly in China over the medium term supported by continued rapid growth in economic activity and by policy and structural changes that favour fuel sources with lower emissions. Over the near term, China’s domestic gas production will not be able to keep up with projected increases in demand. This is expected to result in rapid growth in Chinese gas imports from both pipelines and LNG.

4 GTEM is a multiregion, multisector dynamic general equilibrium model of the world economy. GTEM’s projections of commodity demand come from interactions among sectors within an economy as well as bilateral trade flows among various economies in the world. It also captures impacts of climate change policies.

References

BP (2011). BP Statistical review of world energy, June 2011.

GGDC (2011). The Conference Board Total Economy Database (TED), Groningen Growth and Development Centre & The Conference Board.

IEA (2011a). World energy outlook 2011, International Energy Agency, November 2011.

IEA (2011b). Are we entering a golden age of gas?, special report for the World energy outlook 2011, International Energy Agency, June 2011.

IMF (2011), World Economic Outlook Database, International Monetary Fund.

Pan, J. (2011), China’s natural gas industry and its market prospect, Research Centre of Oil and Gas Resources, Ministry of Land & Resources, PRC, the paper was presented at the inaugural Australia Gas Conference, Sydney.

World Bank (2011). World Bank Database.

China’s demand for tourism:

Opportunities and implications for Australia

Robyn Agnew, Geoff Bailey and Grant Keys 5

Introduction

Tourism is an important industry for Australian social and economic development. While tourism directly contributed around 2.5 per cent (or $35 billion) to Australia’s gross domestic product (GDP) in 2010–11, it had a much higher share of exports, where it accounted for 8 per cent of Australia’s total export earnings and 4.5 per cent of jobs in Australia in 2010–11 (ABS 2011). The Australian tourism industry is starting to see significant growth from Asian markets, particularly China, while at the same time growth has slowed in the traditional markets of the United Kingdom, Europe and the United States.

As well as generating important export income for Australia, inbound tourism also enhances intercultural understanding for both Australians and international visitors. In 2010–11 Australia welcomed 5.9 million international visitors with a total inbound economic value (TIEV or tourism exports) of $23.7 billion.

The importance of China

In the past ten years, China has become Asia’s largest outbound market. The United Nations World Tourism Organization (UNWTO) forecasts that by 2020, China will be the fourth largest source of outbound travel in the world, with 100 million outbound travellers. UNWTO data shows that between 2001 and 2008, the average growth rate of Chinese outbound departures was over 20 per cent. A combination of effects, including the 2008 Beijing Olympics, the Global Financial Crisis and the 2009 H1N1 pandemic saw this growth slow, and then recover again in 2010.

Given the uneven nature of economic growth across China, the major cities and surrounding areas of Beijing, Shanghai and Guangdong are the primary source of outbound tourists, although the potential of the second tier cities is being recognised. Part of Tourism Australia’s China 2020 Strategic Plan is to expand current marketing and distribution in 13 6 cities to more than 30 cities by 2020.

5 The views expressed in this review are those of the authors alone and are not necessarily those of Tourism Research Australia (TRA) or the Department of Resources, Energy and Tourism (RET).

6 Tourism Australia’s existing Chinese markets are Beijing, Shanghai, Guangzhou, Hangzhou, Tianjin, Nanjing, Chongqing, Qingdao, Xiamen, Ningbo, Shenzhen, Foshan and Dongguan.

Australia’s inbound Chinese tourism market has grown rapidly in recent years. From a low base in the mid-1990s 7 , the Chinese market has grown to be Australia’s most important market by value ($3.5 billion in exports), and the third largest inbound market by visitor arrivals, with 542 000 arrivals in 2011.

The Tourism Forecasting Committee (TFC) projects that by 2020–21, Chinese arrivals to Australia will grow to over one million, with a TIEV of $6.9 billion (see Table 1 and Appendix 1). At this value, the Chinese market is forecast to represent around one-fifth of total tourism exports in 2020–21, with solid growth in real terms across all purpose categories (Table 1). Over the period 2010–11 to 2020–21, China is expected to account for 40 per cent of the total growth in tourism exports.

Table 1: China’s importance to Australia’s inbound tourism sector

 

Forecast

Forecast contribution to total sector growth (%)

average

 

Share of

Share of

annual

inbound

TIEV,

inbound

growth

(%)

 

TIEV,

expenditure,

forecast,

sector,

2010–11

2010–11

2020–21

2020–21

Purpose of visit Business Holiday Visiting friends and relatives

($m)

(%)

($m)

(%)

(2010–11 to 2020–21)

398

13.8

538

15.3

3.1

32

670

7.8

1632

14.0

9.3

43

498

10.7

869

14.0

5.7

29

Other (education

1836

22.7

3820

28.6

7.6

43

and employment)

All travel

3402

14.1

6860

19.7

7.3

40

Note: the sum of the individual expenditure sub-items (by purpose) may not equal to ‘All travel’, due to rounding

Source: Tourism Forecasting Committee, 2012, Issue 1

Figure 1 illustrates the strong growth in Chinese outbound travel since 1998. For Australia to continue growing its share of Chinese outbound tourism, Australian tourism product must be desirable and relevant to a fast-growing Chinese middle class in an increasingly competitive global tourism marketplace.

Figure 1: Chinese outbound trips, all travel and overnight travel, 1999–2011 -

70

60 50 40 30 20 10 A$m all travel overnight travel Source: Tourism Economics. 1999
60
50
40
30
20
10
A$m
all travel
overnight travel
Source: Tourism Economics.
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

While the growth of the Chinese outbound tourism market has significant economic value for the Australian tourism industry, Australia will face challenges in capturing these opportunities. As can be seen in Figure 2, while overall Chinese expenditure is high, a significant proportion of this growth is currently being derived from the education market.

Figure 2: Chinese expenditure by main purpose of trip 2000-2011 -

4000 3500 3000 2500 2000 1500 1000 500 0 A$ million 2000 2001 2002 2003
4000
3500
3000
2500
2000
1500
1000
500
0
A$ million
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
other
education
business
visiting friends and relatives
holiday

2003
2004

1993
1994

2007

1997
1998

2005
2006

1999
2000

1995
1996

2008
2009

1988
1989

2010

1990

2001
2002

1991
1992

2011

As the Chinese outbound market matures, more Chinese travellers will seek an independent leisure holiday experience. If Australia can gain a share of this independent travel and also continue to grow Approved Destination Status (ADS) travel, it can increase the proportion of holiday visitors from China.

As detailed in Figure 3, Australia accounts for only a small share (1.4 per cent) of the Chinese overnight outbound tourism market 8 , with global competition to attract Chinese visitors intensifying. Of particular concern is the emergence of new intra-Asia markets, such as Macao and intra-China, as investment in tourism (aviation and accommodation) has been very strong in these regions (see Appendix 2).

In 2010, Chinese travellers’ top five outbound destinations were Hong Kong, Macao, Korea, Singapore and
In 2010, Chinese travellers’ top five outbound destinations were Hong Kong, Macao, Korea,
Singapore and Japan. In terms of destinations outside of North East Asia, Chinese travellers
chose to visit Singapore, Vietnam, Malaysia, Thailand and Russia. Australia ranked tenth among
out-of-region destinations.
Figure 3: Australia’s share of Chinese overnight outbound travel
600
1.7
500
1.5
400
1.3
300
1.1
200
0.9
100
0.7
'
0.5

('000)

arrivals from China (LHS)

Source: Tourism Economics.

%

share of Chinese overnight outbound travel (RHS)

Australia’s geographic location will remain a challenge in an increasingly competitive global environment. European, North American and other Asian nations are all aggressively targeting Chinese tourists, with many of these nations seeing tourism as a means of diversifying their maturing economic base.

8 An alternative measure of Australia’s share of China overnight outbound travel is to exclude ‘intra-regional’ travel— that is, from North-East Asia. Chinese travel to North-East Asia represented 62 per cent of all outbound overnight travel in 2010 (see Appendix 2). Australia’s share excluding this region was 3.5 per cent in 2010.

Current government policy:Tourism 2020

The National Long-Term Tourism Strategy (Strategy), released in December 2009, was premised on maximising the net economic benefits of tourism to Australia, with a focus on supply-side strategies. Tourism 2020 (an update to the strategy) was released on 6 December 2011 to respond to ongoing challenges and emerging opportunities for the Australian tourism industry. Tourism 2020 provides a framework for growth and aims to give industry the tools to compete in the global economy, remain competitive and take advantage of the opportunities offered by the Asian Century. Tourism 2020, which is outlined in Box 1, takes a six-strand approach, where the first strand is a specific focus on growing demand from Asia.

Box 1: Tourism 2020

1. Grow demand from Asia

While it is necessary to market investment across a balanced portfolio of markets, Australia has

a unique opportunity to drive demand from Asia. Industry and government need to deepen

consumer understanding, strengthen distribution, tailor marketing campaigns and product

appropriately and develop relevant policy frameworks.

2. Build competitive digital capability

Strong digital capability is essential both in marketing Australia and in distributing product. Eighty per cent of Australians have online access and 66 per cent of the world is expected be online by 2020. Developing strong and efficient digital marketing and transactional capabilities is essential to remaining competitive. Currently, only a third of Australia’s tourism operators have online booking and payment facilities, which limits their ability to service customers both domestically and overseas. Governments will continue to work with industry to ensure more tourism enterprises are able to take advantage of online opportunities.

3. Encourage investment and implement the regulatory reform agenda

Tourism investment in Australia is lagging. From 2000–01 to 2009–10, investment in tourism grew

at only half the pace of investment in the rest of the Australian economy. Tourism currently faces

a disproportionate regulatory burden that impacts negatively on investment. Governments will

work with industry to reduce barriers to investment so that industry can invest in the products and infrastructure consumers are seeking.

4. Ensure tourism transport supports growth

There must be adequate tourism transport capacity and infrastructure for the increasing number of visitors travelling to, from and within Australia. Governments will work in partnership with industry to ensure transport capacity and infrastructure continues to precede demand and facilitate, rather than hinder, tourism traffic.

5. Increase supply of labour, skills and Indigenous participation

The tourism industry has a labour shortage of 36 000 and an employee vacancy rate over four times the national average, which is preventing parts of the industry from effectively servicing global customers. By 2015, an additional 56 000 people will be needed to fill vacancies (including 26 000 skilled positions).

Governments will work with industry to support industry recruitment, staff retention, labour mobility, education and training to fill these gaps. They will also explore ways to increase the supply of skilled tourism labour and Indigenous participation.

6. Build industry resilience, productivity and quality

Industry productivity is low when compared with the rest of the Australian economy and with tourism firms in competitor countries. This is making it difficult for Australian tourism operators to give consumers value for money. Building on Australia’s competitive advantages, governments will work with industry to increase industry productivity, innovation and quality.

As part of Tourism 2020, the Australian, state and territory governments will work in partnership with industry to achieve the 2020 Tourism Industry Potential. Its strategies seek to double annual overnight expenditure from $70 billion in 2009 to $140 billion in 2020.

For the Chinese inbound market, the 2020 Tourism Industry Potential indicates that overnight expenditure will need to grow from the current $3.6 billion to between $7.4 billion and $9.0 billion in 2020.

China has already delivered very strong growth in expenditure in recent years. As illustrated in Figure 4, growth in Chinese inbound tourism is tracking ahead of the 2020 Tourism Industry Potential.

Figure 4: 2020 Tourism Industry Potential: Chinese inbound travel (total overnight expenditure in nominal terms)
Figure 4: 2020 Tourism Industry Potential: Chinese inbound travel (total overnight
expenditure in nominal terms)
10000
Maximum Potential: $9.0b in 2020
8000
TFC Forecast/lower bound: $7.4b in 2020
6000
Tracking to date
$3.8b in 2011, to be $1.0b above 2009
4000
levels (of $2.8b), and is well above the
TIP upper scenario
2000
Trend: $5.0b in 2020
A$b
historical
maximum potential
TFC forecast
actual
linear Trend
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

Source: Tourism Australia; BDA Marketing Planning.

Chinese outbound travel to Australia and the Approved Destination Status (ADS) scheme

For well over a decade the Approved Destination Status (ADS) scheme has underpinned China–Australian tourism. ADS is a bilateral tourism arrangement between the Chinese Government and other governments that allows Chinese tourists to undertake leisure travel in groups to destinations around the world. Australia and New Zealand were the first western destinations to be granted this status in 1999. Without the ADS scheme, Tourism Australia could not market Australia in China.

Initially, ADS travel was available only to Chinese citizens from Beijing, Shanghai and Guangzhou. In 2004, a further six areas were given access to the scheme by the Chinese Government, and in 2006 the policy was applied to the whole nation.

Since 1999, Australia has received over 730 000 ADS tourists in around 53 000 groups,
Since 1999, Australia has received over 730 000 ADS tourists in around 53 000 groups, which
has underpinned the strong growth in Chinese holiday travel to Australia (see Figure 5).
Overall, both ADS and non-ADS leisure arrivals have grown steadily (see Appendix 3). Non-ADS
leisure arrivals are generally either for short-term study or to visit friends and relatives.
Figure 5: The relationship between Chinese ADS and holiday travel
250
125
200
100
150
75
100
50
50
25
0
0
('000)
('000)
holiday (LHS)
approved destination status (RHS)
1995–96
1996–97
1997–98
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11

Source: Department of Immigration and Citizenship.

In 2008 the Department of Resources, Energy and Tourism commissioned research on whether ADS visitors to Australia were satisfied with their experience. Overall, satisfaction with Australia was significantly higher than satisfaction with the tour itself 79 per cent (and 77 per cent for those only on a group tour) compared to 64 per cent.

When this was compared to a similar survey conducted in 2003, it was found that overall satisfaction with the tour had increased 11 percentage points, from 53 per cent to 64 per cent, and that 97 per cent of ADS visitors would recommend Australia as a holiday destination, compared with 73 per cent in 2003. From 2011 TRA has included visitor satisfaction questions for Chinese group travellers in its International Visitor Survey.

Another 138 countries have gained approved destination status since Australia and New Zealand received theirs in 1999. The challenge for the Australian tourism industry will be to remain competitive against key tourism markets such as the United States of America and Canada.

Non-ADS leisure travel to Australia

The number of inbound Chinese visitors to Australia travelling outside of the ADS scheme has grown considerably (see Appendix 3). While the number of ADS scheme visitors is expected to grow as new parts of China take up this form of group travel, other more experienced travellers are likely to look for new leisure travel experiences and opportunities. This may include the opportunity to travel in a more independent manner.

Drivers of Chinese travel choices

Tourism Australia recently conducted extensive research on the target customer in China and what drives their travel decisions, which will help the Australian tourism industry increase its competitiveness and market share. Key findings of the research were:

Chinese tourists prefer group tours when visiting destinations for the first time.

While more experienced travellers will use some element of a group tour, around one in five will opt for individual travel.

When returning to a destination, Chinese tourists prefer to travel independently for some aspects of the trip, with a Chinese-speaking tour guide.

Actions to support growth in the market

China 2020 Strategic Plan

Tourism Australia’s China 2020 Strategic Plan, developed in collaboration with industry and government, identifies a clear direction for enhancing tourism business from China. The five key areas of the plan are:

Knowing the customer. During the first year of the plan’s implementation, Tourism Australia will increase its direct marketing effort in China. Tourism Australia’s target audience in China is affluent couples who have an independent travel mindset and want to explore and experience local culture. This group delivers high volume and spend and is geographically concentrated in Tourism Australia’s current priority cities.

A dedicated geographic strategy. This will identify the focus for Tourism Australia’s resources in order to maximise opportunities for growth in the Chinese market and achieve the 2020 goal.

Quality Australian tourism experiences. This area of the plan will address concerns with current travel experiences and develop new products and services for Chinese visitors.

A healthy aviation environment. Tourism Australia will work with relevant partners to ensure there is sufficient capacity to meet demand from existing and immediate growth markets.

Strong partnerships between government and industry. This will streamline consultation and engagement on whole-of-government issues and approaches to market development.

Tourism 2020 – China strategic projects

Key to growing the independent tourism market in partnership with the Chinese Government will be the development of innovative technologies and the supply of quality tour guides and commission shops.

The tourism industry needs to further understand the Asian consumer and provide the relevant and high quality products and services that this market demands. Part of this will be developing cultural awareness, language skills and services to meet Asian expectations, as much of Australia’s tourism industry remains focused on serving its traditional markets.

Capitalising on the fast-emerging independent travel segment in Asia will require a shift in current business models and practices. Independent travellers will be affluent and expect high quality, Asia-relevant service.

Tourism opportunities continue to arise as trade with Asia grows. There are, for example, major opportunities to increase high-yield Asian education and business tourism following strong growth in these areas in recent years. Over the period 1999–2000 to 2010–11, expenditure from Asian education visitor trips rose by 178 per cent in real terms to $5.4 billion. Asian business visitor trip expenditure has also risen strongly in recent years, up 21 per cent in the two years to 2010–11.

Conclusions

From a low base in the mid-1990s, the Chinese inbound market has grown to become Australia’s most important market by value in 2011. The Tourism Forecasting Committee forecasts indicate that its importance for Australian tourism is likely to grow over the next 10 years. This growth cannot be taken for granted, however, as the rest of the world is also looking to China for a share of its global travel.

China is not just one tourism market; therefore Australia needs to focus on several targets. New waves of first-time ADS visitors to Australia are likely, as new areas of China increase their participation in the ADS scheme, and Australia must continue to provide the products and services that this market is looking for. There is scope for future work by TRA to understand the regions these tourists are coming from so that the industry is best placed to service their needs.

Developing experiences that a more independent Chinese traveller is seeking could reap significant rewards for Australia as well as help to meet meet the expectations that the different demographic groups (based on age, region and income level) demand. While competition for the Chinese tourist globally is increasing, Australia faces an additional, internal challenge—how to encourage regional dispersal of Chinese visitors throughout Australia so that non-traditional destinations can benefit from this growth.

Appendix 1: International visitor arrivals, China

 

Total

 

Business

VFR a

Holiday

Other d

Total e

Change

nights

Exports bc

‘000

‘000

‘000

‘000

‘000

(%)

(m)

($m)

1999–00

31

15

35

16

105

n.a.

3.5

700

2000–01

39

18

57

23

143

36.6

3.9

889

2001–02

36

19

70

31

172

20.1

5.4

1119

2002–03

38

19

74

35

177

2.8

7.1

1210

2003–04

51

24

91

41

217

22.4

8.6

1446

2004–05

62

28

120

50

274

26.5

11.6

1835

2005–06

67

34

132

58

292

6.5

12.6

1687

2006–07

73

40

158

65

338

15.8

15.9

1948

2007–08

71

46

177

78

375

10.9

16.4

2236

2008–09

46

52

171

86

358

-4.6

17.8

2565

2009–10

53

67

165

104

394

10.0

22.6

2959

2010–11

66

82

226

120

500

26.9

26.0

3402

2011–12

78

94

280

136

595

18.9

28.9

4023

2012–13

89

106

322

145

669

12.6

31.4

4499

2013–14

97

117

359

155

736

9.9

33.9

4921

2014–15

104

128

389

166

795

8.1

36.3

5304

2015–16

110

137

408

179

843

6.0

38.6

5604

2016–17

115

145

425

191

886

5.1

40.9

5878

2017–18

119

151

439

204

925

4.4

43.0

6122

2018–19

123

158

452

219

963

4.1

45.1

6369

2019–20

126

163

465

233

1001

4.0

47.0

6619

2020–21

130

169

477

249

1039

3.8

48.9

6860

Compound annual growth rate (%)

2000/01–2005/06

11.8

13.2

18.1

20.2

15.3

26.3

13.7

2005/06–2010/11

-0.3

19.1

11.4

15.7

11.3

15.6

15.1

2010/11–2015/16

10.7

10.8

12.5

8.3

11.0

8.3

10.5

2015/16–2020/21

3.4

4.3

3.2

6.8

4.3

4.8

4.1

2000/01–2010/11

5.6

16.1

14.7

17.9

13.3

20.8

14.4

2010/11–2020/21

7.0

7.5

7.8

7.6

7.6

6.5

7.3

Note: Numbers shaded are forecasts.

a Visiting friends and relatives

b Tourism exports (or Total inbound economic value), TRA calculations

c in real terms, base = quarter 4, 2011

d Other refers to education and employment visitors who stay in Australia for one year or less as well as arrivals for transit and other purposes of visit. On average, education and employment visitors spend more and stay longer than the average tourist.

e Sum of purpose does not add to total as the total includes arrivals who did not state a purpose for their visit.

Source: Tourism Forecasting Committee

Appendix 2: Chinese outbound travel, 1995, 2000, 2005 and 2010

 

Compound

 

Share of

average

overnight

annual

outbound

growth,

 

1995

2000

2005

2010

travel

2005–10

(‘000)

(‘000)

(‘000)

(‘000)

(%)

(%)

Asia

4 339

7 541

16 016

27 584

82.8

11.5

South Asia

31

41

124

330

1.0

21.6

Southeast Asia

793

2 338

3 043

6 148

18.5

15.1

Northeast Asia

3 455

5 003

12 469

20 505

61.6

10.5

Hong Kong (SAR)

2 060

2 707

8 030

11 678

35.1

7.8

Japan

221

352

653

1 413

4.2

16.7

Republic of Korea

178

443

710

2 058

6.2

23.7

Macao (SAR)

548

1 038

2 370

4 012

12.0

11.1

Taiwan

398

413

537

1 128

3.4

16.0

Oceania

60

159

380

601

1.8

9.6

Australia

43

120

285

454

1.4

9.7

New Zealand

9

34

88

123

0.4

7.0

Europe

1 155

1 488

2 534

3 613

10.8

7.3

Western Europe

737

943

1 609

2 239

6.7

6.8

France

383

338

554

897

2.7

10.1

Germany

117

215

418

488

1.5

3.1

United Kingdom

31

41

95

109

0.3

2.8

Emerging Europe

418

545

926

1 374

4.1

8.2

Americas

260

371

452

1 099

3.3

19.4

South America

21

30

46

77

0.2

10.8

North America

227

323

388

997

3.0

20.8

United States

167

249

270

802

2.4

24.3

Central America

9

12

7

8

0.0

4.2

Caribbean

3

7

11

17

0.1

8.5

Middle East

58

49

112

285

0.9

20.7

Africa

67

94

257

723

2.2

23.0

Total overnight outbound trips

5 879

9 543

19 371

33 305

100.0

11.4

Australia’s share of Chinese outbound excluding N-E Asia, per cent

1.8

2.6

4.1

3.5

na

na

Total Chinese outbound trips (day and overnight)

na

10 473

31 026

57 386

na

13.1

Source: Tourism Economics Na: not available or relevant

Appendix 3: Visa Class 676 grants: Chinese nationals

Year

Non-ADS

ADS

Total 676 (ADS and non-ADS) grants No. 37 763 59 825 71 955 73 115 92 589 109 191 128 648 154 194 177 293 176 095 187 388 246 170

Share of ADS grants (%)

(No.)

(No.)

1999–00

30 520

7 243

19.2

2000–01

34 286

25 539

42.7

2001–02

40 265

31 690

44.0

2002–03

43 861

29 254

40.0

2003–04

59 158

33 431

36.1

2004–05

62 283