The Year of the Ox will require a substantial amount of patience, stability and persistence if deals between Australia and China are to succeed in 2009 writes Rowan Callick.

 

This Year of the Ox is opening in an extraordinarily different way from the Year of the Rat. In China, the challenges in the first half of 2008 were primarily physical ones: first the snowstorms that caused workers’ traditional trips home to resemble the Retreat from Moscow, then the shocking Sichuan earthquake. China recovered magnificently from these tribulations. But the economic challenges confronting China as this new year opens, may in some respects be more difficult to overcome.

One positive, is the nature of ox years – honouring prosperity achieved through fortitude and hard work, the ox’s virtues of patience, stability and persistence. Just what our besieged economies need.

As 2008, the year of the Olympics, dawned, China’s economy was roaring along. The rate of its gross domestic product growth for 2007 as a whole has recently been revised upwards, to a staggering 13 percent. It seemed almost too good to last. And so it proved. 

It now appears that two huge economic issues were starting to confront China at the same time. The first was the global downturn, which had its chief genesis with the sub-prime mortgage failures in the US. China’s own finance houses, which are all effectively state owned, never developed the abstruse and ultimately fantastic instruments which laid low the US and then also Europe. Over the last decade, the proportion of China’s economy dependent on exports and investment has soared, and both have suddenly contracted rapidly due to the Western crisis – the tumble in investment made worse because of the overdue bursting of a bubble in up-market housing within China. The second issue is its very over-dependence on exports and investment. The yuan, for instance, has been held back in order to help preserve the export sector – at the expense of making goods cheaper for consumers.

Indeed, in the last two months of 2008, when many commentators focused on how China’s exports were starting to decline – by 2.2 percent and 2.8 percent – the more significant and troubling figure, was the simultaneous collapse, by more than 20 percent per month, of China’s imports, indicating that the country was heading back to the future.

Unsurprisingly, the rhetoric in the relationship between Australia and China has shifted at the same time. This is natural, given its strongly economic focus. A year ago, as Kevin Rudd was preparing for his first visit to Beijing as prime minister, it was widely being said by Australian business leaders and economists – and some politicians – that China’s apparently insatiable demand for resources would keep Australia booming. But as the Year of the Ox opens, an apparent collapse in China’s demand is instead being blamed for plunging Australia into the economic nether-regions. Treasurer Wayne Swan said in late January: “There's no doubt that a slowing China will have a very substantial impact on countries in this region, and most particularly Australia.”

This reminds us how important it is, for those of us interested in developing the relationship between the countries, to foster it in a broader manner so that it does not simply contract as trade and investment decline. It also emphasizes the need to make further progress towards a free trade agreement. Naturally, both China and Australia have turned inwards to ameliorate the impact of the downturn, especially on jobs.

But it is important that contact between policy makers is not merely maintained but enhanced. One of the most important visits to Australia in recent times, was that in late October of Zhang Ping, the chairman of the National Development and Reform Commission – China's chief planning agency, with ultimate power over economic policy and over the dominant state owned enterprises, who led a delegation of 17 people to Melbourne and Canberra.

Zhang, a highly regarded official, was previously a vice secretary general of the State Council, China's Cabinet – which is the body to which the NDRC reports. Zhang is also responsible for China's investment strategy, and drove to Victoria’s power generating heartland, the LaTrobe Valley, where plans are being finalized for an A$750 million joint venture between Australia's HRL and China's Harbin Power. 

Harbin and HRL are proposing to develop together a 500-megawatt power station that would reduce carbon dioxide emissions by about 35 percent and use half as much water compared with other brown coal generators. This would provide a template for a big roll-out of similar generators in China, where two thirds of all electricity is produced by coal.

Funding for the venture has yet to be concluded, and the support of the NDRC is crucial in involving Chinese state owned financial institutions. Zhao Xiaoping, the deputy director of the NDRC who is responsible for China's energy policy, was with the delegation.

Despite the collapse in share prices in recent months, presumably creating some good buying opportunities, China’s economic powers-that-be – led by Zhang – appear reluctant to pour what might seem to be good money after bad.

Deals may still get done between Australia and China later in 2009, but they may require some exemplary patience, good contacts of course, and shoulders to the plough, to bring them to fruition during this Year of the Ox.

* Rowan Callick is The Australian's Asia-Pacific editor.