2009 AUSTRALIA-CHINA REVIEW

UNCLAS SECTION 01 OF 02 CANBERRA 000663 SENSITIVE SIPDIS TAGS: ECON PREL ETRD AS CH SUBJECT: 2009 AUSTRALIA-CHINA REVIEW REF: CANBERRA 631 ¶1. (SBU) The Australia-China relationship is currently under stress over the pricing of contracted iron ore exports to China, the detention of Rio Tinto's iron ore manager in Shanghai as well as resentment in China over the Rudd government's seemingly unwelcoming approach to Chinese investment. New light was shed on these issues at the China Update 2009 conference, held at the Australian National University (ANU) in Canberra on 14 July 2009. END SUMMARY. THE EMERGING AUSTRALIA-CHINA RELATIONSHIP ¶2. (SBU) Speakers at the China Update 2009 conference highlighted how China has become a key economic partner for Australia and a leading market for Australian exports. Treasurer Swan stated at the conference that, "As our second-largest trading partner in 2008, China is of particular importance to the Australian economy." China is Australia's biggest export market for iron ore, copper, wool, cotton and a major market for natural gas. China's more recent investment proposals, however, have been the subject of controversy. ¶3. (SBU) Swan defended the GOA's guidelines and investment review criteria, released in February 2008, as applying equally to all investments by foreign governments and related entities, including Chinese state-owned enterprises, sovereign wealth funds and other government-related investors that have thrived recently. Swan supported his defense of the foreign investment screening regime by adding that China-sourced investment proposals have been approved at the rate of more than one per week. ASSESSING FOREIGN INVESTMENT POLICY ¶4. (SBU) Professor Peter Drysdale, head of ANU's East Asia Forum noted that production at some resource projects, such as OZ Minerals, was only maintained thanks to Chinese investment. However, according to Drysdale, concern about the Chinese government's influence over contracts and pricing of resources by state-owned enterprises (SOEs) motivated a nationalist reaction in Australia. He stressed that Australia has a globally-competitive mining sector but warned that opposition to Chinese investment could lose markets for Australian exporters, as happened in the 1970s with Japan, and would slow the development of resources... Drysdale expressed confidence that existing taxation, foreign investment and corporate governance regimes can cope with any potential problems with SOEs, such as transfer pricing. GEOPOLITICAL IMPACT OF CHINA ¶5. (SBU) Professor Hugh White, head of ANU's Strategic and Defense Studies Center, emphasized the impact of China's economic rise on the geopolitical leadership of the U.S. White questioned Secretary of Defense Gates' view that non-state actors, such as terrorists and the rogue states that allow them to operate, should be the focus of future U.S. defense policy. Instead, White suggested that China's growing economic power will erode U.S. primacy in the Western Pacific region, which would in turn expose Australia to a less benign strategic environment. While not endorsing the Australian Defense White Paper finding that China could overtake the U.S. economically by 2020 (he considers it will take longer),White pointed to an erosion of U.S. superiority in sea power in the region as an indicator that a turning point in strategic balance was Qas an indicator that a turning point in strategic balance was occurring. Professor Corden, from Johns Hopkins University,) was more conciliatory about China's rise and emphasized that income in China is still only around USD 3,000 per capita. Corden also pointed out the positive impact on the world economy of China as a buyer of U.S. financial securities and Australian resources CLIMATE CHANGE POLICY ¶6. (SBU) China and the U.S. are two of the largest carbon emitters in the world. Professor Yongsheng Zhang, from the Development Research Center of the State Council, argued that China and other developing countries should accept binding caps on emissions, so long as these caps are set fairly. Zhang called for caps in all countries to avoid carbon leakage -- emissions-intensive industries moving to countries with weaker policies -- and argued for allocating entitlements on a per capita basis. Zhang also supported developed-country financing of R&D, commercialization of low-emission technologies and their subsequent adaption to developing countries. In contrast, Professor Ross Garnaut, head of Garnaut Climate Change Review, advocated a more gradual introduction CANBERRA 00000663 002 OF 002 of per capita-based allocations. ¶7. (U) COMMENT: During the conference, which was part-sponsored by Rio Tinto, commentary on the Hu detention case (reftel) was limited to a small mention during opening remarks. The multi-faceted discussion on the Australia-China relationship generally concluded that, despite some thorny areas, economic growth, trade and investment were all enhanced by the relationship. END COMMENT. CLUNE