China

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April 2016

China’s economic transformation makes it an attractive destination for investors and exporters. Over the past 10 years, real GDP has expanded by an average 9.7% p.a. and per capita income has quadrupled to US$8,280. China is the world’s second largest economy, behind the US, and outperforms its peers in Emerging and developing Asia on not just growth and per capita income, but creditworthiness and business climate.

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Economic outlook

Economic growth is expected to moderate over the medium term as the economy continues its march towards advanced economy status. GDP growth is forecast to slow to toward 6% p.a. by 2018 and decline further to 5% over 2021-30 as investment-led growth gives way to a more consumer-oriented economy.  But large imbalances in the banking sector brought on from excessive lending in the wake of the global financial crisis could start to impede the flow of credit and bring on a proverbial hard landing.

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Despite the softer growth trajectory, per capita income will continue to increase rapidly, and exceed US$10,000 by 2018 — equivalent to Malaysia and Mexico. Since China ranks only 75th in the world for per capita income (up from 85th in 2013), it has considerable scope to grow even richer.

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Business climate

China enjoys an investment grade credit rating and an OECD country credit grade of 2. This indicates a relatively low likelihood that it will be unable or unwilling to meet its external debt obligations in a systemic sense (though, needless to say, individual private and ‘sub-sovereign’ debtors can and do default).

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The World Bank’s ease of doing business gauge — which attempts to measure regulation and red tape relevant to a domestic small to medium-sized firm — ranks the Chinese business climate 84th out of 189 economies.   

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The World Bank ranks China in the second bottom quartile for three dimensions of governance: rule of law; political stability and absence of violence; and control of corruption. China scores in the lowest quartile for voice and accountability. 

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Bilateral relations

China overtook Japan to become Australia’s No. 1 export destination in 2009 and the two-way merchandise trade totalled more than $138b in 2014-2015. Bulk commodities — iron ores and concentrates, coal and gold — are the chief exports, but Australia’s 45,000 exporters are also gaining traction in agriculture (e.g. milk and live cattle) and services (e.g. aged care and education).

China’s rebalancing toward a more consumer-oriented economy and rising middle class is weighing heavily on hard commodity producers, but the transition will support Australian agricultural and service exports. Indeed, the surge in Australia’s exports of both farm products and services over the last 18 months is a good barometer of Chinese rebalancing. 

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China is also Australia’s second largest source of visitor arrivals and its largest source of foreign students. The visitors exceeded 900,000 in 2015 — behind only New Zealand. The number of students topped 170,000 in 2015 (ahead of India, Vietnam and Korea with combined enrolments of 130,000).

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Sino-Australian investment relations lag behind trade, tourism and education. Nevertheless, the ties are thickening fast.

In terms of foreign investment stocks, China ranks only 7th as an investor in Australia, owning a portfolio of just $64.5b in 2014. This is well behind the No. 1 investor, the US, with $758b, and the UK with $484b. But China is rising through the rank as its stock of investment has risen 28-fold since 2005.

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The story is similar for Australian investment into China; smallish stock, but large and growing flows, expanding the stock quickly. The stock of Australia’s investment in China reached $58b in 2014. The US ($575b) and UK ($304b) remain the leading destinations for Australia’s foreign investment.  

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