New research on what the Asian Century means for the development of Asian financial markets underscores the importance of closely tracking Australia’s relationships with the countries of Asia, writes Peter Kerr.

The PwC Melbourne Institute Asialink Index measures Australia’s engagement with China and other Asian economies across seven key indicators: trade, investment, research and business development, education, tourism, migration and humanitarian assistance. It provides the only long-term and multi-layered understanding of our dynamic relationships in the region, going beyond simple trade and investment statistics.

The 2013 Index was launched at the Asialink Chairman’s Dinner in Melbourne in December. It shows that over the decade to 2012, Australia’s overall engagement with China increased by more than 150 percent. In 2012 there were increases in all Index indicators except investment. Tourism, migration and research engagement recorded particularly encouraging growth. China is now Australia’s largest single trading partner, accounting for 20.3 percent of Australia’s total trade in goods and services in 2012 (up from just 13.2 percent four years earlier) and 26.3 percent of total exports.

The key driver of Australia’s greater engagement with China has been trade in energy and resources, but service sector exports are becoming increasingly important, in particular education and tourism services. China is the largest source of overseas students studying in Australia, with the number of incoming Chinese students growing by 3.2 percent in 2012 to 152,582. Tourism between Australia and China has also escalated since the early 2000s to around 675,000 person movements in 2012. The number of tourists coming from China to Australia rose by 24.4 percent in 2012, with increasing prosperity in China facilitating greater travel abroad, while tourists travelling from Australia to China grew by a much more modest 3.5 percent. However Australian Bureau of Statistics data for November 2013 show a dramatic fall in Chinese visitors to Australia, down 9.4 percent compared with November 2012.

Whether this is a trend will become clear by the 2014 Index. Following a significant upwards spike in 2011, Australia’s outbound investment engagement with China fell sharply by 40.2 percent in 2012. Due to the multi-year data collected and presented in the Index, we can understand that the shifts reflect the dramatic nature of investment engagement, a component known for its volatility.

However, the strength of the Australian dollar, as well as concerns about foreign investment, did not stop an increase in inward Chinese investment in 2012. The stock of Chinese investment in Australia at the end of 2012 is estimated by the Australian Bureau of Statistics at just under $23 billion – 73 percent of which was direct investment. China’s significant economic growth is expected to continue, securing its position as the world’s second-biggest economy after the United States, and ahead of Japan.

Australia’s economic engagement with this growing China has the potential to be further enhanced by the establishment of an Australia-China Free Trade Agreement. An FTA between Australia and China would have enormous benefits for two- way trade and investment, and the new Coalition Government in Australia has made concluding the agreement a priority and set an ambitious 12-month deadline. A discussion on the potential benefits of FTAs is featured in the Viewpoints component of the 2013 Index. Leading Australian business people, academics and trade officials offer their expert insights on the significance of FTAs and their influence on various industries.

Mike Smith, Chief Executive Officer of ANZ Banking Group, says the extent of benefits from an Australia-China FTA would depend on the type of FTA that is agreed – the more comprehensive the FTA, the more benefits it will bring to both countries. “It is hard to actually describe the opportunity that access to a market like China will give. Anybody who is doing business in the region is going to benefit from this. The prize is enormous,” Mr Smith says in the Viewpoints section.

A major ANZ research project on what the Asian Century means for the development of financial markets in the region says its prosperity will be led by seven economies: China, India, Indonesia, Japan, South Korea, Malaysia and Thailand. The ANZ research says that by 2050 these seven economies will account for 75 percent of Asia’s population and 90 percent of its gross domestic product, equating to 50 percent of global GDP and 53 percent of the world’s middle class. Mr Smith told the Asian Financial Forum in Hong Kong in January that “to support this growth the depth of Asia’s capital markets need to converge with developed economy norms”. But he said that “for such deepening of capital markets to occur there will have to be a significant step away from the government control of bank-dominated systems to allow capital markets (primarily equity and debt) to flourish.”

The PwC Melbourne Institute Asialink Index continues to track trends in our engagement with China and the rest of the region, providing a dynamic record and helping Australia to build on our interactions with Asia. It is an increasingly important tool for Australian businesses, policymakers and academics to better understand the pace and complexity of Australia’s engagement not only with China but also the other countries of Asia. ■

*To read the full Index, visit www.asialinkindex.com.au
**Peter Kerr is Asialink’s Executive Director, NSW.