China services boom for Australia
China services boom for Australia? - April 2016
As the Chinese economy makes its transition from investment-led to consumption led growth, the Australian service sector which currently accounts for around 20% of total exports, will produce a second 'Chinese economic windfall' for Australians.
Overview of poll results by Dr Lauren Johnston
This month’s poll drew attention to the broadly held view that it is, as put by one respondent, “highly unlikely imports of services from Australia will compensate adequately for the ongoing fall in Australian resource exports to China.”
|Agree||7||We will have more competition from other exporters of services than we have had from other exporters of iron ore and coal (where our marginal costs have been well below even today's low prices of those resources). And that will be more so the more Australia's real exchange rate is held up by our relatively high real interest rates.|
|Agree||8||There are already substantial service exports to China in the form of inbound tourism and Chinese students studying in Australia. There is little doubt that both export streams will continue to expand over the next few years. There are also opportunities in business, financial and legal services as China becomes more integrated into the global economy. However, Australia's comparative advantage in exporting these services is less clear than in the case of the resource exports.|
|Agree||6||Windfall is too strong. That the growing market and its proximity (location and timezone) creates (and has created) opportunities is without doubt. But there should be no presumption of an opportunity that is easily won, and Australian services businesses will have to craft offerings that are appropriate to the Chinese marketplace, including having regard to the different institutional arrangements that apply between the countries.|
|Agree||9||I agree, but with an important qualification. The transition of China towards a consumption-led economy with a growing middle-class will not automatically result in a windfall for Australia. The potential for a windfall is there (Chinese demand for Australian services is growing at an impressive rate and the value-added in services exports is higher than from other sectors), but there is also strong and growing international competition ready to take advantage of increased demand for services coming out of China. Australian policymakers need to acknowledge that this time is not going to be as easy as it was for resources. I wish to acknowledge discussion with James Laurenceson at the Australia-China Relations Institute on these issues.|
|Agree||6||We will have to ensure that our cities remain SAFE and foreign-friendly, and with adequate public transport (all concerning tourism and foreign students).|
|Uncertain (neither agree nor disagree)||6|
|Disagree||8||With Chinese growth continuing to fall, together with its comparatively low per capita GDP, it is highly unlikely imports of services from Australia will compensate adequately for the ongoing fall in Australian resource exports to China.|
|Agree||9||Whatever (positive) happens in China will be beneficial to the Australian economy, this follows simply from the sheer size of China compared to the Australian economy. That Australia is a "big" exporter of education (and that situated in a nice and save environment) is just an additional benefit.|
|Agree||4||This is a possibility, for example the transition made by Japan produced a similar outcome in the past. However, there is no necessity that Chinese service imports should be focused on Australian exports - there is no necessarily greater natural endowment of service sector products which meet Chinese demand located in Australia as was the case for the mining boom. How much of the demand Australia can capture depends on how well we can compete in the international arena in service provision. It is unlikely that there will be a 'windfall' as such, this will need to be earned.|
|Disagree||5||I am uncomfortable with the phrase "boom" to describe this. Australia certainly has the potential to benefit from rapid growth in Chinese demand for both personal and commercial services - but we are unlikely to be able to grow our capacity to meet that demand as rapidly as we did our capacity to meet Chinese demand for coal, iron ore and LNG: and we will face far more competition meeting that demand for services than we ever did in meeting the rapid growth in Chinese demand for iron ore. So while we should certainly gain economically from growth in Chinese services demand, it's unlikely to constitute a "boom" in the same sense as the mining boom was.|
|Disagree||7||The commodity-led boom Australia experienced due to Chinese demand for our raw materials is unlikely to be echoed in a boom led by Chinese demand for our services in the coming years because, while they cannot copy Australia's raw materials deposits, the Chinese are largely able to copy Australia's service sector products in the medium run. Our educational exports are likely to remain strong for some time, but Chinese universities are developing quickly and over time a larger share of the best Chinese students will be educated in China. Other services Australia could provide will gradually become home-grown in China as that country develops, and from the perspective of Chinese consumers these services will be not only in a preferred language and location, but likely cheaper than what Australia can offer with its high labour costs.|
|Disagree||5||Yes China will provide a significant shift in demand. But also, other export countries and China itself will increase supply capacity. Result, a larger market and more sales with a relatively small price premium.|
|Agree||7||This is about tourism, visas (education), and security of wealth. It is a tricky one to predict, but on balance I indeed expect our financial sector to benefit from the continued wealth evasion activities of the Chinese elites, particularly if the Chinese politburo maintains its supposed anti-corruption drive that makes people nervous about the security of their wealth. We might also sell more visas to the Chinese (via low-grade university education) than before, but I think we are already selling those at a very high rate. Also, we are slowly waking up to the negative effects on our own university quality and governance, so I don't see much additional growth potential there. Tourism from China clearly has quite a bit more growth in it to go: the Chinese economy does keep on growing, making increased tourism pretty much guaranteed.|
|Agree||5||The service sector is more advanced in Australia as compared to China, in terms of its professionalism and ethical practices. So one expects there to be demand for this as China transitions to a consumption led growth path.|
|Uncertain (neither agree nor disagree)||10||Continued Chinese economic growth will benefit the world economy and directly or indirectly benefit Australia. Undoubtably some areas of Australia's service exports (such as higher education) will be well placed to benefit. So the key issue is whether China will continue to grow - which has more to do with politics (and beyond my expertise) than economics.|
|Agree||7||There are indeed good prospects for expanding service exports to China. In particular, our exports of education, tourism and financial services should prosper, subject to the qualification that our withholding tax regime needs to be more generous if we want to become a regional hub for funds management.|
|Strongly agree||9||Many of the opportunities available in the healthcare and aged care sectors are so large they will require consortiums of companies which in Australia are competitors.|
|Agree||10||It seems certain that China is making the transition and consumption levels are rising. Some Australian sectors have natural advantages (education and tourism) but for the rest of our service sector there will be significant challenges in taking advantage of the opportunity.|
China is already Australia's largest single trading partner, accounting for around twenty per cent of its total trade on a two way basis. This share should increase as a result of the ground-breaking China Australia Free Trade Agreement that not only removes tariffs on agricultural and energy commodities,
processed foods, pharmaceutical products and car engines, but promotes significantly increased trade in services, especially tourism, health services and financial services, including new market access in banking and securities. Private sector health and aged care providers will also be allowed to establish
Chinese facilities. |
How much of a boom greater services trade will prove to be for the Australian economy will depend on whether China can sustain relatively strong growth under the weight of its post-GFC debt burden and whether we can prevent further deterioration of our poor international competitiveness. Refer to PDF document entitled 'Australia's competitiveness: Reversing the slide'.
There are two ways to view China: firstly from the top down, via which there are not enough consumers in China, young enough and wealthy enough to support a sustainable transition to a consumer-led economy. Secondly from the bottom up, where from an Australian company's point of view, the smallish
(relatively speaking) Chinese middle class looks like a large market, which compared to Australia it is.|
Accepting the top down view, China does not make the transition to a consumer-led economy and is totally reliant on foreign consumers (read the US). Hence no opportunity.
Accepting the bottom up view is more prospective. However, the domestic goods and services markets in China are among the most competitive and least regulated in the world. Moreover, services are less likely to be imported than are goods. So, aside from high end consumer goods, which Australia does not produce or export, it is unlikely that Australia benefit from selling either goods or services, outside of bulk commodities, to China.
|Agree||5||Agree. While it is true that Australia can substantially benefit from an increase in the demand for services in China, there is a crucial distinction between the international market for iron ore, for example, and the international market for services such as education, health and tourism. Whereas three companies (BHP and Rio Tinto in Australia and Vale in Brazil) account for more than 60% of the exports of iron ore to China, the market for services is much more competitive. Australian universities, pharmaceutical companies, hotels and tourism operators have a small market share of a competitive worldwide market. Thus, while the economic stakes associated with an increase in demand for services in China are potentially much larger than the economic benefits that arose from the mining boom, the ability of Australian businesses to benefit from such an increase is less certain.|
|Uncertain (neither agree nor disagree)||5||Assuming higher education is a big component of the 20% of total Australian exports related to the services sector, I don't think there is likely to be an increase in demand from China. But there may well be other service exports (financial services?) that could grow at a faster rate.|
The resources boom was an entirely different phenomenon from any potential upside for Australia resulting from consumption led growth in China. In the former there was a very significant positive impact on Australia's terms of trade (subsequently reversed). Australia was able to reap economic rents
from its high quality (relative to many competitors) resource endowments, coupled with well developed existing production from those resources when prices were relatively high. The terms of trade impact had a flow on to real incomes and GDP.|
The massive capital investment programs spawned by growth in demand beyond existing capacity also gave the impression of further windfall. Market adjustments following the lagged development of excess capacity may, however, result in an overhang of capacity and subsequent capital market adjustments on account of this. It has already resulted in a strong reversal of the favorable terms of trade.
In the case of the consumption led growth in China there will be opportunities for Australian services providers in many fields such as education, health, tourism. However, Australia does not have the obvious comparative advantage in these sectors that it had in the resources sector. It is very unlikely that there will be any favourable impact on Australia's terms of trade as a result of the refocusing of the Chinese economy, indeed they may even fall a little further with falling resources prices. Thus the real income boost achieved from the mining boom, which was the result of the temporary improvement in the terms of trade, will not be repeated. Australian services providers will need to be competitive with other developed economies including newer developed economies in our region such as Singapore. Australian suppliers will need to work hard and smart to be competitive in this market.
|Strongly agree||8||The transition may be a long time coming. Probably Australia will benefit most from "domestic" exports - tourism, education, maybe health - in the shorter term. While the commodities price boom is over, the demand for Australian commodities by China continues to grow.|
|Strongly agree||7||We can expect continued growth in services exports to China and Asia in general. The impact on GDP may be less than for the mining boom, but the benefit actually flowing to Australians in general (which was very limited in the mining boom) may be greater.|
|Strongly disagree||9||If "windfall" refers to rising prices that deliver economic rents, as distinct from expanding volumes at a competitive rate of return, then the answer is no. Thanks to the unprecedented pace of China's industrialisation and urbanisation, Australia has indeed enjoyed an extraordinary "windfall" of rents in the first decade-and-a-half of the present century. For example: from the turn-of-the-century base to its peak, iron ore prices rose by a factor of nine whilst oil prices rose by factor of three. And Australia's monopoly position in iron ore, shared only with Brazil, exceeds that of any single oil-exporter. But there is no reason to expect the new Chinese economy to deliver a comparable "windfall" of rents for the Australian services sector. Rather, Australia will need to compete for its share of the Chinese market with other advanced economies: with the US and the UK in education, with Germany and France in engineering services, with France in tourism, and so on. So, we would do well to recognise that the technologies, skills, practices and mind-sets needed to compete in these fields are not necessarily the same as those needed to collect the fruits of monopoly.|
|Agree||7||Australia will benefit some, but it will be nowhere close to what was reaped in the mining boom. There will not be a terms of trade surge, there will not be a significant investment stimulus, and there will be only a modest expansion in services production. Those services that can cross borders economically will continue to face substantial global competition, and Australia's market share will remain small. That said, we can anticipate benefits for education and tourism in Australia.|
|Agree||5||Whereas Australia's comparative advantage in resources is fairly clear, it is not so evident that Australia has a comparative advantage in services. That is there will be a lot more competition. In finance, doubtful that we have much to offer. In tourism, we will get a share of a big pie as we did with Japan but Europe and other destinations are also close to China. Ironically, in mining services we do have a comparative advantage.|
|Disagree||8||The service industry is very competitive at the global level compared to the mining industry. Therefore, the expected "Chinese economic windfall" from services is likely to produce less benefits for the Australian economy compared to those generated by the mining boom (2003-2011).|