Chapter 2 - Economic developments in China
has only been carrying out its 'reform and opening' policy for twenty years. It
has only trod the path of the market economy for ten. The changes that have
were unimaginable twenty years ago. The changes to take place in the coming twenty
years are even harder to imagine.
Background to China's
has taken just over two decades to make the successful transition from a closed
economy to one of the leading trading nations in the world. Economic reforms were
central to this transformation and have paved the way for China's
integration in the global trading system.
Prior to 1979, China
followed a policy of socialist economic development where the country's
economic output was directed and controlled by the state. According to one
analyst, by 1978 nearly three quarters of industrial production in China
was 'produced by centrally controlled state–owned enterprises (SOEs) according
to centrally planned output targets'.
Another noted that the State Planning Commission's import plan covered more
than 90 percent of all imports. In
this highly protected and planned economy there was little room for private
enterprises and foreign investment firms.
In the late 1970s, however, China
began to open its doors to foreign trade and to reform its SOEs. In 1978, the
Deng Xiaoping–led government promoted the 'opening–to–the–outside world'
principle as its national policy. China's
integration with the global economy started in earnest with the implementation
of this policy and the introduction of market oriented reforms. Since then, China
has begun to dismantle the planned economy apparatus and has allowed the
private sector to assume a more prominent part in the economy.
Although slow at first, the pace of reform quickened
during the 1990s. In 1993, China
revised its constitution to include the statement that 'the State adopts [a]
socialist market economy mechanism'. This declaration recognised the role of
the non–state sector as an important and legitimate activity of the nation's
economy and provided 'a legal basis for the continued development of a market
economy in China'. The rate of change accelerated in the
lead-up to China's
accession to the World Trade Organization (WTO) in 2001 and has continued.
In moving from a centrally planned economy to a market–oriented
one, China has
increased competition in its domestic market and emerged as a major force in
international trade. At the moment, China
is one of the major drivers of global growth and has also become a magnet for
foreign direct investment. The Organisation
for Economic Co-operation and Development (OECD) has predicted that China
'could become the largest exporter in the world by the beginning of the next
Recent economic performance
Over recent years, the Chinese economy has been growing
at rates hovering around the nine per cent mark. This trend shows little sign
of abating with the prospect of rates remaining above 8 per cent for 2005. Indeed, China
has set itself a gross domestic product (GDP) growth target of around 8 per
cent for 2005. The World Bank is of
the view that the external environment and domestic macroeconomic conditions
suggest 'a favourable outlook for 2005'.
Looking longer term, the Department of Foreign Affairs and Trade noted that
official projections of real annual GDP growth over the next decade continue to
be in the 7–9 per cent range.
participation in global trade increases so its influence on the world economy
grows. Its overall share in world trading was 1 per cent in 1979, 1.9 per cent
in 1990: 4 per cent in 2000 and by 2003 had reached 6 per cent. China's
share of world imports has also increased from 1.5 per cent in 1990, to 3.6 per
cent in 2000 and 5.7 per cent by 2003.
and imports have grown at an average rate of 15 per cent each year since 1979,
compared with a 7 per cent annual growth of world trade for the same period.
In 2004, China's
foreign trade 'leapt to a new level'.
The volume of China's
imports and exports totalled US$1.15 trillion, an increase of 35.7 per cent,
moving China to
third place in the world from fourth.
confident that the domestic economy will continue to grow rapidly and the
demand for imports will also rise and expand.
economic development over the past decade has been remarkable, it has presented
the Chinese government with some challenges. Chinese leaders accept that as China
moves from a planned to a market economy, the country will face 'thorny
domestic issues as well as complicated and volatile international situations'.
Indeed the Chinese Ambassador to Australia,
Her Excellency, Madam Fu Ying
acknowledged that China's
development is 'not all rosy and is not without challenges'.
specialists agree with this assessment. While optimistic about China's
economic prospects, they maintain that the country faces a variety of problems
in maintaining its economic growth. Some questioned whether China could sustain
the momentum and identified factors that could undermine China's steady
economic progress. 
The following section examines some of the challenges to
economy. They include: the Chinese government's ability to manage effectively a
rapidly expanding economy; the potential for social and political discord as
the country opens up to new ideas and its people's expectations change; the disparity
between rich and poor; China's
growing demand for energy resources; and environmental degradation.
Maintaining economic stability in a
rapidly changing economic environment
A booming economy brings many advantages, but one
expanding at a rapid pace can pose particular problems for a government. China
is aware of the importance of managing its rapidly growing economy in order to
avoid disruptions or distortions in the market place. In the first quarter of
2004, the Chinese government took steps to slow growth to a more sustainable
pace. In particular it introduced measures to strengthen and improve macro regulation
with the intention of addressing 'the problem of overheating especially in
fixed asset investment'. By mid–year,
the fast growth in the problem sectors had eased and China
was confident that it could maintain economic growth at a sensible and healthy
The actions taken in 2004 to manage the expanding
economy continued to produce positive results in 2005. The World Bank noted
that investment was shifting away from 'sectors previously considered as
overheated such as steel and cement'.
It found that the risk of China's economy overheating had declined, as domestic
demand growth and consumer price inflation had come down in the wake of
measures taken to cool the economy'.
In April 2005, it reported:
A rebound in investment in early 2005 raised concern among
analysts, but the trend remains one of a slowdown. Indeed, while investment
remains high, also as a ratio of GDP, the changing composition should give some
comfort to policy makers that the policies introduced in 2004 are working.
ABARE similarly noted a 're–acceleration' in fixed asset
investment and industrial production in early 2005. It suggested that while
growth in money supply and inflation had slowed from the high rates in 2004,
'excessive investment spending could lead to further bottlenecks in China's
economy, as energy and transport are still in short supply'. It surmised that China
could introduce further tightening measures to ease economic growth to more
acknowledged that it had had some success in keeping the economy progressing at
a steady pace. Premier Wen Jiabao told a press conference in March 2005, that
China avoided 'major ups and downs in the economy, preventing excessive price
hikes, keeping prices at a stable level and maintaining steady and fairly rapid
economic growth'. The Chinese government,
however, realises that careful management of the economy is needed.
In March 2005, Premier Wen presented a report on the
work of the Government to the 10th National People's Congress. This report
recognised a number of problems that had emerged in China's
economic activities over the previous two years. They included tight grain
supply, overheated investment in fixed assets, excessive money and credit, and
shortages of coal, electricity, petroleum and transportation. The report noted that China
had entered a period of important strategic opportunities in which the economy
should grow rapidly but should 'not be allowed to overheat'. It stated:
Maintaining steady and rapid economic development is an
important issue that the government must successfully handle...Both drastic
upturns and downturns in economic growth are bad for economic development,
reform and opening up, and social stability.
Premier Wen recognised the need to find a sensible
...a slow economic growth rate won't do, because it would make it
more difficult for us to create jobs, increase revenue, and engage in necessary
undertakings for society. Yet too fast economic growth rate won't do either,
because it may make the economy to stretch out for a long time in an
The Chinese government made a commitment to follow
prudent fiscal and monetary policies in 2005 to ensure the 'correct orientation
of macroeconomic policies'. Its objective was to cut the budget deficit and
keep in check increases in general spending.
It was determined to 'improve coordination of macroeconomic policies and to
continue to curb excessively rapid growth of fixed asset investment'. The government intended to control the
supply of money and credit appropriately in order to support economic
development while guarding against inflation and financial risks. 
The World Bank was of the view that the prudent
monetary and fiscal policies announced by the government were appropriate, 'if
this means that there is flexibility to adjust the policy stance to changing
circumstances'. An OECD report
stated that China's
fiscal policy has been 'run in a stabilising fashion'.
Witnesses to the inquiry also noted the cautious
approach adopted by the Chinese government to manage the economy. Observing
China's changing economy over time, Dr Stephen Morgan told the committee that even
Deng Xiaoping talked about crossing the river by grasping stones—'moshi guohe'.
In his opinion, China
at first really muddled through; there had been no plan. He maintained that:
If you look at the original documents from late 1978 when the so–called
plenum committee of the CCP launched economic reform, you will not see
reference to economic reform—'jingji gaige'. It does not appear in any of the
documents. A number of initiatives were taken there that set in train
developments that were in part already taking place. 
Turning to the future, however, Dr
Morgan noted the various incremental changes
occurring and was confident that those ready to take over the reigns in China
were well equipped to deal with and manage change.
The committee notes the prudent approach Chinese
leaders have adopted to ensure that growth remains steady and sustainable.
Success in guiding the economy through this phase of rapid growth depends, in
large measure, on the Chinese government's ability to prevent overheating in
the economy. It has shown a readiness to reduce deficits and keep expenditure
under control in order to maintain a stable macro–economic environment. The
committee has studied closely China's
Report on the Work of the Government and notes the commitment made by the
government to continue economic reform in an effort to further open its markets
and to make China
an attractive place to do business.
Maintaining political and social
stability as China
opens up to the world
is a country of great diversity: its economy is expanding rapidly, its social
structures are undergoing reform and its people are being exposed to new ideas
and changing expectations. According to the Chinese Ambassador to Australia,
there are 80 million internet users in China, over 300 million cell phone
users, 9,000 newspapers and 2,000 magazines in circulation, diverse TV programs
showing on 70 channels and 'serious and sensitive social issues are openly
debated on TV and in newspapers'.
Twenty million and more Chinese visit abroad each year. She noted that the
dynamics of a changing China
have 'unleashed so much creativity and vitality'.
The Chinese government accepts that its people face
many new situations as the country opens up to 'the outside world'. Maintaining
stability in such a large country emerging from a tightly controlled and
planned political, social and economic system is a major challenge. Premier Wen
described the task most pointedly:
with 1.3 billion people, any small problem multiplied by 1.3 billion
will become a huge issue. Any big amount of wealth divided by 1.3 billion
will be reduced to a small amount of per capita figure.
manages the various social and political forces at work as the economy expands
and the society becomes exposed to new ideas has generated lively debate among China
specialists. Professor Ross
Garnaut was of the view that the biggest
test for China
to sustain economic growth would arise as pressures grow within the country for
democratisation of the political process.
Of the same view, Professor David
Goodman noted the potential for conflict
caused by a political structure out of step with the expectations of people
living in a country undergoing significant economic and social change.
Woodard, former Australian Ambassador to China,
also commented on the magnitude of the problems confronting the leadership in China.
But the range of difficulties within China, the range of vulnerabilities
that the Chinese leadership themselves see within their own country, are very great...Holding
China together is a fantastically difficult thing for a government to do...the
range of problems that China faces every day is so vast compared with ours that
it was really impossible for us to understand how the leadership there grappled
with them. I think China
will not advance as quickly in some respects as we would like it to. However,
that is their decision to make and we cannot be too judgmental, because of the range
of those difficulties that I outlined.
cautious approach to change
shared with many other China
specialists the view that the leadership in China
would take a careful and considered approach to dealing with any elements likely
to cause unrest. He stated further:
At the moment I think we have a very cautious leadership in Beijing,
partly because it is tackling many other problems which are disruptive. It is
tackling corruption, which applies particularly at higher levels of the party
and affects the reputation of the party throughout the country. It is grappling
with the uncertainties of unequal economic development and always fears an
uprising of the workers, particularly when associated in some way with intellectuals.
That is how significant changes have come about in China
in this century and in previous centuries. In some respects it probably just
does not know what to do in terms of whether, for instance, to revalue the
currency, and I think it has genuine problems about how it makes decisions.
With all those political problems I expect that the leadership will be cautious
and will continue to put emphasis on stability.
Davis, Australian Chamber of Commerce and
Industry, also thought that incremental change in the political system was most
likely in China.
He thought that political reform would be, 'in continued roll–out at the town
and village level. You will see probably a bit more competition emerge for
elected positions such as mayors'.
He was of the view that democracy is evolving slowly; that 'at the town and
village level there is a choice between party members. There is progress now
that entrepreneurs can become party members'.
Harrowell, Hunt and Hunt Lawyers, posed
similar questions about the ability of China's
leaders to guide the country through its transformation. He supported the notion
that there would be careful and steady management of the changes under way in China
with the focus fixed on maintaining stability:
has tried to have controlled development. I have to say that, yes, there are
fundamental issues that have to be addressed by China
but the most important thing for China
and, I suspect, for us as their major trading partner, or one of them, and the
region is to ensure stability as China
moves through the process of change. We have to be careful of pushing our
too hard and too fast and destroy stability. One of the stark comparisons
and some other countries in the region is that China
does an extraordinary job of feeding its people, educating its children and in
economic development. You do not see that desperate, desperate poverty in
Chinese cities that you can see elsewhere. So it is a balance. It is certainly
not perfect but it is a balance and it is working and there is enormous growth.
For the first time in our history we have this major trading partner that is
well disposed to us, in essentially the same time zones and very close. So
there are huge opportunities there. There has been tremendous change...What has
happened is quite breathtaking. 
The Chinese government acknowledges the difficult task it
has in navigating the nation through this period of transition. President
Hu Jinatao noted
that 'social conflicts are emerging in great numbers and in more varied forms'.
He told a high-level Party seminar that:
Independent thinking of the general public, their newly–developed
penchant for independent choices and thus the widening gap of ideas among
different social strata will pose further challenges to China's
As with their cautious management of a rapidly growing
economy, Chinese leaders are taking the same considered approach to political
and social change. Internal stability is of paramount concern to Chinese leaders
who equate stability with prosperity. For example, in noting that China's
reform is 'unprecedented in its history', Madam Fu
stated that given the country's size and complexity, 'it can only be carried
out in an incremental manner'.
Premier Wen has indicated that the government would 'energetically yet
prudently promote political restructuring and develop socialist democracy'. On
various occasions, Chinese leaders have stated their commitment to paying close
attention to social stability placing a heavy emphasis on building a
The attempt to suppress the activities of the Falun
Gong is an example of actions taken by the Chinese government to shut down a
group it perceives as a threat to the country's stability. Some commentators
consider that China
has over–reacted and regard the measures taken against the practitioners of
Falun Gong as extreme and in some cases a violation of human rights.
A number of witnesses, however, who have lived and
worked in China,
place the actions of the Chinese government firmly in the context of a country
undergoing rapid transformation. Rather than looking at the human rights issue
from the outside, they try to appreciate the Chinese perspective.
Dellios, an international relations analyst,
noted that China
is not the West and furthermore that it needs to move through this period of
development where it still feels internally vulnerable. 
In referring to the Falun Gong, she stated:
It is a human rights issue insofar as individuals feel that they
have been targeted because of their beliefs. But China
is not the West. China
is transforming itself into perhaps a Confucian style democracy in the future,
but it is going through a process and it needs to be assured of its security.
In China there
is a greater sensitivity to such cults as the Falun Gong.
She acknowledged that the arrest and torture of people
are of great concern to the outside world and that China
has a lot of work to do in dealing with the activities of dissident groups. In
her view, China
needs 'to match the excitement the world has about the Chinese market and the
boom that China
represents with some form of legitimacy in terms of human rights'. She stated
...it needs to get into political reform mode to get it out of the
problem of legitimacy—but at a pace that it can sustain so that it will not
collapse. If it is given time and if its pace is directed towards opening up
and not overreacting to such groups as Falun Gong, it will be successful. I
would say it is a mistake on the part of the Chinese government, but it is a
mistake which is of the nature of the concept in the Chinese saying, ‘We cross
the river by feeling the stones with our toes.’ They feel a stone, they draw
back, and then they will move on again. It is this process of gradual transformation
of the Chinese state that needs to take place. Falun Gong is perhaps a tutorial
for China of
how not to do things, but, at the same time, it cannot let groups such as Falun
Gong run away with the political agenda and take over. China
is experiencing that kind of balancing act at the moment.
Mr Reginald Little, an experienced former DFAT officer,
also looked at the suppression of the activities of the Falun Gong from the
perspective of China's
leaders. He told the committee:
I would also mention, in passing, that it is hard to be critical
of the Chinese approach to Falun Gong at a time when they have seen the example
of Aum Shinrikyo in Japan,
which attacked the subway there with sarin gas. You also have Islamic movements
very actively engaged in terrorism. I think the Chinese government would be
somewhat amiss if it did not seek to follow very closely the activities of an
organisation that was trying to use a form of religion for political purposes.
The committee notes that Chinese leaders perceive the
activities of the Falun Gong as a threat to their one party state and more
generally to the stability of Chinese society. Their harsh suppression of Falun
Gong practitioners highlights the extent to which they believe that dissidents
within their society are a real danger and should not be tolerated. The
committee understands the Chinese government's desire to maintain social and
political stability as it moves from a tightly
controlled planned economy to a country more open to world ideas and
influences. It heeds the advice from some witnesses that Australia in its
dealings with China must take account of the changes taking place in that
country and appreciate the cautious approach taken by leaders, described as
'crossing a river by feeling the stones with its toes'. The committee is of the
view, however, that Australia
should not fall silent or ignore issues such as human rights abuses in order to
remain in good favour with a major trading partner. It believes that any
criticism of China
should be informed and constructive. This matter is discussed further in chapter
Inequality between rich and poor
As noted previously, most analysts agree that China's
economy will continue to expand. Even so, China
faces a number of challenges to ensure that all its citizens benefit from
reform and change. One of the most concerning developments is the growing
inequality between various sectors in China,
particularly the divide between the urban and rural areas, and possibility of such
conditions creating social unrest.
Poverty in China
Official Chinese statistics show a steady decline in
the number of people living in poverty since 1978. The annual decrease of
poverty population, however, has slowed down in recent years. The Rural Survey
Organisation reported that the population of rural poor fell from 250 million
in 1978 to 85 million in 1990 and decreased further to 32.1 million in 2000. It
noted that the poverty population increased 80,000 in 2003, due mainly to
natural disasters, and stood at 29 million.
It stated that the disparity between different regions was 'huge' with 58.6 per
cent of the poor living in 12 western regions.
One group of analysts described the poverty population in the western areas as
'very large' and the degree of poverty 'very deep'.
Analysts tend to agree that China
has achieved significant results in alleviating poverty since 1978. A number of analysts note, however,
that poverty decrease has not corresponded with economic growth and, as the
above figures show, the rate of decline has slowed in recent years at a time
when the economy is booming.
Potential for unrest
The committee took evidence from a number of witnesses who
referred to the gap between rich and poor in China
and its attendant problems. Dr Morgan
If the WTO accession is going to work the huge mass of farmers
and rural based people in China
will have to get something out of it. Sixty–five per cent of the population are
dependent upon agriculture and they are going to have to get something out of WTO
accession not just those who live in East China, in the
big cities of Shanghai, Nanjing,
Beijing and so on. The committee,
Australian businesses and the Australian government need to understand that
incredible diversity and extremes from those who can afford to buy a Lamborghini,
although they may not have much room to drive it, to those who cannot even buy a
bus ticket to go and find a job.
Supporting this view, Dr
Australian Fair Trade and Investment Network, noted that China
is still a developing country but that development is very uneven. She also
drew attention to the contrast between the bigger and prosperous cites of China
with the poorer regions. Mr
Harrowell drew a direct connection between
the inequality between urban and rural areas and the potential for social unrest:
There is a major gap between the prosperity of eastern China,
along the seaboard, and western China.
In provinces like Inner Mongolia and out to Urumqi,
people are not getting the benefits. Two things are going to happen. Firstly,
they are going to get very cross with the government and there will be
political and social instability. In western China,
in the city of Urumqi, for
instance, there are ethnic groups. It surprises people sometimes that the
street signs are in Arabic as well as Chinese. It is said that people cannot
worship in China,
but you will hear the Muslim prayer calls in the afternoon. That is happening
in China right
now. Secondly, people will all rush to the east and you will get slum dwellers
there, as there are around the city of Manila
in the Philippines,
for instance. Everyone heads east to find their fortune. That means that you
lose people who would otherwise work in the west. The Chinese government has a
big program at the moment to try to help balance that internally by encouraging
people in eastern China
to invest in the west.
...To some extent, the Chinese government has got a tiger by the
tail. That tiger has to keep running because that is what is getting them
through the economic reform process. Some people are out of work but for a lot
of people the standard of living is growing.
Similarly, Mr Edward
Murphy, Australian Council of Trade Unions, drew
attention to the poorer paid, underpaid or unpaid working class people, who are
often transitory migrants to the cities, and the 700 million people who are
still rural based. He noted the potential for social disruption should they become
disillusioned with what they perceive as the uneven distribution of benefits.
In his view if that were the case:
... in the absence of ameliorative action by the government, it
will be the biggest cause of social tensions in China.
It is probably the reason that recently the government ordered an increase in
the remuneration of its peasantry for their products. That was partly designed
to stop or limit or at least control the flow of rural migrants to the cities
but was also designed in recognition of the fact that they were becoming
stated that, because of the rich-poor divide, China
is highly focused on the internal dimension of its security. Dr
Davis was also of the view that the Chinese
government, aware of the differences between regions, was seeking to address emerging
problems. He stated:
The principal benefit is that the Chinese leadership know the
challenges they have. There is no denial of the problems. They are aware of and
acknowledge the problems. I think they are working their way through what they can
do about them.
has progressed through a number of phases since 1978 in its struggle against
poverty. In 2001, the Development Orientated Poverty Alleviation Program was
initiated with the aim of solving 'the subsistence problems of the remaining
absolute poor and to help the low–income group to improve their development capability'. In May 2004, Premier Wen noted that
despite their achievements in alleviating poverty, China
faced a daunting task in reducing poverty. He stated that China still had
'nearly 30 million rural citizens who do not have adequate food and clothing,
over 20 million urban residents whose incomes are lower than minimum standard,
and over 60 million handicapped in need of help'.
In March 2005, he told journalists that he was 'deeply
aware of the paramount importance of agriculture, rural areas and farmers in China'.
In his view, there would be no moderate prosperity in the whole country without
moderate prosperity in the countryside. He stated that he had a long–term plan,
made up of two phases, for rural reform and development. The first phase
involved liberalising productivity in rural China
through the introduction of a family contract system that allowed farmers
greater autonomy in production and management. He maintained that China
had since moved into a second phase in which 'we make industry nurture
agriculture and cities support the countryside'. This second phase has four
promote rural reforms with rural tax and
administrative fee reforms;
improve productivity in the countryside by
building water conservation projects and promoting wider applications of
agriculture–related science and technology;
develop education, science, technology, culture
and other social undertakings in the countryside; and
promote primary-level democracy by ways of self–governance
among villagers, direct elections at the village level and greater transparency
in government affairs at the country and township levels.
Jintao noted that 'when the farmers can lead
a good life and assume a higher overall quality, the vast countryside will be
stable and prosperous.'
The problem of unemployment and poverty is not confined
to the rural areas of China.
According to a report on economic and social development, the year 2005 will
see 11 million urban residents, including those entering the workplace for the
first time, ex–servicemen and college graduates needing to find employment. It
There are now 13 million unemployed and laid-off urban workers,
and large numbers of surplus rural laborers need to find work in urban areas.
Employment pressure is therefore still intense. Estimates based on the
relationship between economic growth and job creation show that by adhering to
a vigorous employment policy, the country should be able to create 9 million
more jobs this year. Given that we will basically incorporate subsistence
allowances for workers laid off from state–owned enterprises into the
unemployment insurance system this year, the registered urban unemployment rate
at the end of 2005 is expected to be somewhat higher than last year.
told the committee that there are 400 million people floating or on the move
[reserve labour pool]. He stated further that China
...have a major challenge in handling that unrest, but managing
unrest is not unknown in Chinese history. We do not endorse the way it was
done. It was a very heavy-handed militaristic approach, but they do have to
bring them along. The best way they can do that is to sustain those growth
...There are a great many people who would say that, within the
Chinese culture, stability, the social order and the pressure to make commerce
and entrepreneurship come first and politics is indulgent. 
does not shy away from this problem of reducing poverty and publicly
acknowledges that poverty alleviation is one of the 'largest challenges in the
developing process of China'. Chinese leaders state forthrightly
that the employment situation is gloomy. The 2005 report on China's
economic and social development plan recorded that the income gap between some
members of society is 'too wide, and some low-income people lead difficult
The Chinese government has stated its commitment to
help people raise their standard of living and has set itself a target of
creating 9 million more jobs for urban residents and containing the registered
urban unemployment rate to 4.6 percent.
The World Bank surmised that much of the rise in
inequality 'may well have been the result of a desirable growth strategy that
maximised overall gains for the average Chinese'. It argued that inequality has
become a major policy concern with authorities facing the task of finding
policies that will moderate inequalities but at the same time maintain high
growth and alleviate long-term poverty. It noted, 'perhaps most important in
achieving this is to ensure that those that have become rich first do not
capture the political debate to prolong their privileges that are no longer
needed to sustain growth'.
The committee recognises that China
has made significant gains in alleviating poverty but that much more needs to
be achieved. It notes further that although its economy has been expanding at a
remarkable rate in recent years, the reduction in the number of poor has not
been commensurate and unemployment remains a serious problem. The gap in living
standards between the rural and urban areas, the extent of poverty in the
country coupled with a people increasingly exposed to new ideas and higher
expectations creates a major problem for China's
leaders in keeping China
on a steady course of economic and social development.
energy and resources needs
A number of analysts contend that China's
growing appetite for energy resources presents a serious challenge to its
economic growth rate. Chinese
domestic sources cannot meet the demand and China
relies heavily on overseas suppliers. This reliance places China
in a vulnerable position. Indeed, two researchers from the Hong Kong University
of Science and Technology argued that China's
access to foreign resources is 'necessary both for continued economic growth
and, because growth is the cornerstone of China's
social stability, for the Chinese Communist Party'.
Yet even with foreign supplies, China
over recent years has experienced power shortages. ABARE noted that power
shortages have become a major issue in many parts of China
since 2003. It recorded that 24 of 31 provinces and regions suffered from power
shortages in 2004, an increase from 19 in 2003. The Energy Information
Administration noted that in 2004 Beijing
shut down approximately 6,400 industrial facilities for one week and then
staggered their operations for the rest of the summer to avoid peaks in demand. Power shortages have continued into 2005
and the demand for more energy sources is steadily increasing. Dr
Davis highlighted the rate at which this
demand is rising:
The old rule of thumb is that energy supply has to grow at about
2½ times the rate of your economic growth. It is simple arithmetic. Even if
they got six per cent per year, their demand for energy is going to grow at 15
per cent. This is an economy that already accounts for about $1 in every $8 of
total world production. According to this morning’s newspapers, at the moment
the Chinese economy is one-fifth of the size of Japan’s
economy. By 2050, it will be six times the size of Japan’s
economy. We cannot even contemplate that...It is the single largest source of
growth in the world economy, outpacing the United
States. Those threats are not just abstract.
has acknowledged that economic expansion and growing prosperity has placed a
significant strain on its energy supplies and infrastructure. 
For example, Madam Fu stated
that by 2010 China
will have to import one third of its mineral needs and by 2020, half of China's
consumption of oil and gas will depend on overseas providers. As noted above, China
has already experienced power shortages.
leaders also noted that stubbornly high international oil prices and the rising
prices for the means of production could slow the rate of growth in the volume
of trading activity for China. At a press conference in March 2005,
Premier Wen stated that coal, electricity, oil and transportation were in short
supply. He pointed out that in the first two months of 2005 power generation
had increased by 12 per cent but that '25 provinces, autonomous regions and
municipalities experienced blackouts'. He stated bluntly that the 'supply chain
Securing its supply of energy resources by improving
domestic productivity is a high priority for China.
Coal in particular remains its major source of energy. As part of its economic
and social development plan, the government stated in 2005 that it would
'organize and guide the efforts of enterprises to increase effective supply
without compromising production safety'. The report went on to state:
Focusing on developing large coalmines, we will put more effort
into expanding coal transport facilities such as railways and embarkation ports
in the north, and we will continue to support renovation and upgrading of coalmines
for production safety.
Determined to 'stay on the new road of industrialization', the Chinese government also
announced that it would:
accelerate major projects for liquefying coal, exploiting
petroleum and natural gas, generating power by natural gas, and utilizing
renewable energy sources;
rationally develop hydroelectric power;
intensify the development of inter–regional
power grids to continue to improve the demand side management of power;
implement a principle of guaranteeing power
supply to some sectors and restricting it for others to ensure the orderly supply
and rational use of power;
improve the policy of adjusting the charge for
power in response to changes in demand and charging different prices for
different users to promote power conservation; and
rationally arrange transport availability,
giving priority to transport of grain, coal, petroleum fertilizers and other
key goods and materials.
faces a major challenge to relieve the supply shortages for its energy demands.
There are significant opportunities for Australia
as a major producer of minerals to assist China
with its growing need for resources. This matter is considered in detail in
Environmental degradation associated with the
increasing demand for resources and China's
policy for developing its domestic sources also poses a threat to the economic
prosperity and stability of the country. The recent OECD economic survey of China
found that five of the ten most polluted cities in the world are in China. The US Department of Energy noted
that about 30 per cent of China's
territory experiences acid rain precipitation. According to Madame
Fu, the negative effect caused by the
excessive use of land, water and other resources 'is worrying'. She stated that
'Though tremendous efforts and money have been put into increasing forest and
grassland, treating deserts as well as river and lake pollution, the problem is
still serious and the pressure is mounting'.
has placed a priority on strengthening environmental protection and ecological
improvement as a task to be accomplished during 2005. The Report on the Work of the Government stated:
We must promptly solve environmental pollution problems that
seriously affect the health of the people. Focusing on prevention and control
of water pollution, we will intensify efforts to clean up industrial and urban
pollution and rural nonpoint pollution and to protect potable water sources. We
will implement a system for strictly controlling the total amount of pollutants
discharged and increase monitoring and law enforcement relating to
environmental protection. We will energetically promote clean production and
develop environment-friendly industries.
In July 2005, Premier Wen urged China
to become a 'resources–saving society':
...while promoting economic growth, we must strengthen
environmental protection and improvement so that our people can drink clean water,
breathe fresh air, have safe food, and work and live in a sound environment.
Environmental degradation is a serious problem in China
and one that is worsening as the country accelerates down the path of
industrialisation. Australia needs to join the international community in
helping China better manage its economic development in a way that will not
only prevent further damage to its environment but help China repair damage
already done. In the bilateral context, Australia
can also make a contribution. It has the research and development capacity to
and should place a high priority in using this capacity to participate in joint
ventures with China
to combat its environmental problems. The contribution that Australia
is making to assist China
to better manage the environment is covered in greater depth in chapters 7 and
emerging political and economic dominance in the region and its presence as a
powerful force in world affairs poses a challenge for its nearest neighbours,
its key trading partners and its major strategic allies. All confront the
difficulty of managing a relationship with a country that is undergoing
political change and rapid economic and social reform and whose influence is
relations in particular with Taiwan,
the US and Japan
are fraught with difficulties. The recent flare-up of tension between Taiwan
and China over
independence and the demonstrations in China
against Japan over
the interpretation of history are most sensitive issues and indicate deep-seated
potential for conflict in the region. The bilateral trade deficit of the US
with China is
also a factor that places strain on the relationship. The deficit rose from US$30
billion in 1994 to $US162 billion in 2004, the largest the US
has with any single trading partner.
a serious dilemma should tensions mount between Australia's
closest ally, the US,
and one of its most important trading partners, China.
These matters encroach on the terms of reference
dealing specifically with China's
political and strategic influence and will be dealt with in full in the
committee's second report which is to be tabled some time after the
presentation of this first report.
growing importance and the need to understand the nature of change
is important to Australia
which has a vital interest in the country maintaining its steady and sure economic
growth path. As discussed above, there are potential social, political and
environmental factors that could derail China's
economic progress. Australia
needs to monitor developments in China
and have specialists available who are able to analyse events and accurately
predict future trends. Dr Stephen
Morgan looked at the importance of Australia
having a pool of experts at the ready to advise decision makers in Australia
on developments in China.
I guess my main concern is that we are struggling to maintain our
existing capacity. This obviously presents difficulties if we have a major meltdown
in China. For
example, due to social or political disturbances creating a crisis in the
legitimacy of the Chinese Communist Party, we may find that Australia would not
have sufficient people able to provide advice to intelligence agencies, your
committees and defence services, let alone provide advice to business and
civilian interests wanting to work out how to deal with what is going on in
China. It is important that we look at how to improve the number of
Chinese-competent people coming through, but not only in language.
I would like to see more people primarily trained in disciplines
such as law, economics, business, engineering and architecture who are
competent to use Chinese and can conduct themselves effectively in Chinese when
dealing with their colleagues in those areas. I do not think we have been able
to properly develop that here. I made a couple of suggestions such as that we
try to provide more support for in–country training. Across Australia
we see innovations such as the modern language diploma at University
of Melbourne, which encourages
students to do a foreign language whilst also doing law or engineering or
whatever. But I think we need those broader discipline areas to be married with
competency in Asian languages and, in terms of the reference of this committee,
is of growing importance to Australia
which is coming to rely increasingly on that country's continuing prosperity to
economy. The committee endorses the view that Australia should place a high
priority on ensuring there is a highly skilled pool of China experts in
Australia ready to advise government and business leaders on developments in that
country. This message is repeated throughout the
report and made most forcefully in chapter 15.
It is clear that Chinese leaders face difficult
challenges in piloting their country through a period of rapid transformation. Guided
by the desire for steady economic growth, political stability and social harmony,
the Chinese government, to date, has taken a prudent approach to managing its
economy. The committee shares the optimism of most commentators that although
there are problems ahead for China,
it will gain in influence and economic strength as it continues on the path of
continuing economic growth and expanding trading activities offer new
opportunities for its trading partners. It is a huge market for a variety of
goods, services and investment. Its sheer size and the dynamics of its growing
economy make it increasingly important to its trading partners. Against this
background of a booming economy and rapidly expanding Chinese market, the
following chapter looks at the nature of Australia's
trading relationship with China
and the effect that China's
growing prosperity has on Australia
as a trading partner.
Part I of the report recognised that China
is now a force to be reckoned with in the global marketplace and is set to
exert growing influence on world economic affairs.
Within this context of China
as an economic powerhouse, Part II of the report focuses on Australia's
trading links with China.
It looks first at the overall trade relationship including incentives and
impediments to trade before examining in greater detail the agriculture sector,
the manufacturing sector, the minerals sector, and the services and investment
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