Unlocking China's Services Sector

I am very pleased to be here to launch Unlocking China's Services Sector, a most timely report from my department's Economic Analytical Unit.

The report was sponsored by AusAID and the Insurance Australia Group. I would like to thank them for their support.

China is the world's fastest-growing major economy. Over the last two years, it has accounted for a quarter of the world's total economic growth.

Australia's trade with China is increasing rapidly; our energy and resources exports are providing the raw materials that are powering its growth.

• Our merchandise exports to China grew by 47 per cent in 2005, led by a 126 per cent increase in iron ore exports, to almost $5.7 billion.
• China is now our second largest merchandise export market, ahead of the United States.

China's industrial transformation is so fast that the long-term potential of its services sector is sometimes overlooked.

Today's report makes its clear that services matter. They are important to China and important to Australia.

Before the Second World War, service industries such as retailing, construction and shipping made up 55 per cent of the Australian economy. Today, services account for 70 per cent of our economy and employ more than four out of five Australian workers.

Every other developed country has had the same experience. People demand better services as their incomes increase. Individuals can afford to travel; companies can afford to buy design expertise to make their products better. At the same time, a large services sector delivers jobs and supports the continued growth of the economy.

China is very different. Its services sector is only about 40 per cent of its economy. The figure is not just low compared to OECD economies like Australia; it's also very low compared to other countries with China's per capita income.

China's weak services sector is one of the legacies of its centrally planned economy. China's planning system was originally based on the Soviet model, which emphasised heavy industry at the expense of everything else, including consumer goods and services.

China's own policies ignored the ability of the services sector to create economic growth. In particular, the Maoist idea that every province and factory should be self-sufficient guaranteed that every company would make the same mistakes, rather than being able to hire experts.

Those days are past. China now recognises that it has much to gain from strengthening and liberalising its services sector.

When China joined the World Trade Organization in 2001, the liberalisation of its trade in services was a key area of the negotiations. The report finds that China's implementation of its WTO commitments has generally been good.

Australian companies have been able to make significant gains in China's services sector. The latest statistics show that our services exports to China increased by 23 per cent in 2004-05, to over $2.3 billion. China is now our sixth largest market for services exports.

Only this week, the Insurance Australia Group announced that it has agreed to negotiate with China Pacific Property Insurance to buy part of the company. The life and property insurance business in China grew by more than 25 per cent a year over the five years to 2004.

Australian banks, such as the ANZ and the Commonwealth, are setting up in China ahead of the full liberalisation of its financial services sector. By 2020, China's financial services market is forecast to be larger than the German one.

China is now the world's largest consumer of international education, and Australian institutions have made significant gains in market share. In 2004, China was the top source country for international student enrolments in Australia.

The report warns, however, that further reforms to China's services sector are still needed. There are still burdensome licensing and operating requirements in many sectors. China's regulatory and legal processes are often opaque.

The enforcement of intellectual property rights is also a well-known problem. For example, the report concludes that 92 per cent of the software used in China is pirated.

The free trade agreement negotiations that we are conducting with China are an important chance for us to deal with these barriers. I want to make it clear today that Australia will be seeking a very strong outcome on services in the negotiations, including in areas such as:

• Legal services, where Australian firms are unable to enter into joint venture arrangements with Chinese firms;
• Tourism, where Australian operators cannot supply outbound travel to Chinese tourists and face excessively high business turnover requirements; and
• Telecommunications, where China's restrictive interpretation of its WTO commitments means there are only limited opportunities for value-adding, such as developing internet telephony.

There are many other areas as well.

Australia and China will hold a major conference in Beijing in April on the opportunities to expand our services trade in the Free Trade Agreement. The conference will look in detail at some major services sectors and will identify how reforms through the FTA could enable Australian companies to do more in China.

At the meeting, I will be putting forward detailed and ambitious goals for us to address in the negotiations.

Australian companies are not a threat to China's service industries. We want to work with China as a partner; the FTA is an opportunity for us to do it better.

So I would like to conclude by thanking Nicholas Coppel and his team for their high quality report.

It sheds valuable light on the role of the services sector in China's economy, and it highlights some of the issues that the Government will be taking up with China, as we seek to reach a Free Trade Agreement that benefits both countries as equal partners.