News story 7th Sep 2016

Health and education could be winners from China’s rebalancing economy

China could become the dominant export market for Australia’s health and social assistance services by 2026, while up to one million jobs could be created in the key areas of health, education, tourism, finance and construction, according to new a new report produced by Monash Business School’s Australian Centre for Financial Studies (ACFS).

The modelling of three potential trade growth scenarios between Australia and China rebuts the view that China’s softening growth will have a predominantly negative impact on Australian trade, arguing there are still considerable economic benefits to be gained from China.

It suggests a largely optimistic future, where trade between the two countries is more diversified and jobs are shared more broadly across Australia’s economy rather than concentrated in the resources sector.

Construction industry

Australia’s construction industry could also be another big winner if inward Chinese investment into Australia continued its current growth trend. But while the ACFS research confirms tourism and education are most likely to benefit from a “rebalancing” of China’s economy, the report also warns these export industries face potentially limiting cost and capacity pressures.

The research from the ACFS forms part of the report “The Long Boom: What China’s Rebalancing means for Australia’s Future”, commissioned by the Australia China Business Council for its 2016 Australia China Trade Report. The report is supported by ShineWing Australia.

Australia’s largest trading partner, China is “rebalancing” its economy away from its powerhouse role as the so-called “factory of the world” and now focusing on consumption, as its population becomes more affluent and demanding of services.

China’s headline GDP growth has been slowing since the global financial crisis and is now expected be 6.5-7 per cent in 2016. Australian policymakers have concentrated their efforts on ensuring that Australia’s economy – so closely tied to the global economic giant through its resources – can pivot to non-mining sectors for continued export growth.

The report says while it is difficult to be certain of the composition and strength at which the Chinese economy will grow over the next decade, China is likely to remain a strong source of demand for the world’s products and services, including Australia’s.

Scenario one: baseline

Under this baseline, the growth rate of Australian exports to China begins to fall from 9% in 2017 and 2018 to 5% per annum by 2025 (remaining slightly higher than the OECD’s projected slowing growth rate of Chinese GDP).

It finds educational services, already Australia’s third-largest export after iron ore and coal, would continue to expand significantly, creating 227,000 jobs and that China’s share of this export would grow from 31 per cent to 42 per cent. However, growth will face challenges including perceptions that Australia is an expensive destination to live and study.

China’s share of tourism exports would be expected to rise to 30 per cent by 2026 - although Australia faces strong international competition and capacity problems. The China Australia Free Trade Agreement (ChAFTA), which comes into force in 2015, will help deepen opportunities for Australian financial providers who have struggled to access the China market and is projected to add 111,000 jobs by 2026.

Business district

Scenario two: accelerated rebalancing

“Accelerated rebalancing” is a more optimistic view where China increases its share of Australia’s exports of non-mining goods and services by 2%. This is based on analysis of China’s future growth pattern that suggests it will demand a wider variety of goods and services from Australian industry sectors than it previously has.

In this scenario, the major winner could be Australia’s healthcare and social assistance sectors, with China claiming 42-47 per cent of exports from these markets by 2026. Financial services exports would grow to 16 percent under this scenario.

According to the report: “China’s share of services exports could rise from 13.6 per cent (or A$9.6 billion) in 2015, to 24.2% (or A$40.7 billion) in ten years’ time under Scenario Two. In other words, by 2025 one quarter of every dollar earned in services exports could come from China.”

Scenario three: Accelerated Rebalancing and Capital Account Opening

Under the most optimistic scenario, as well as increasing its export share by 2%, China also increases inward-bound investment into Australia by 10%. China currently accounts for 3.5 per cent of foreign direct investment inflows into Australia. But the scenario assumes increases of .35 percentage points per annum, which is consistent with recent growth rate trends.

Here, residential construction, retail trade and construction services would directly benefit most from an increase in Chinese investment, even potentially drawing on labour demand from other industries. China-bound exports from the construction industry would make up 11-13%, creating 177,000 jobs. Financial services exports would grow to 19%.

Interim ACFS Director Professor Rodney Maddock said the research findings were very consistent across a range of different scenarios.

The Chinese economy is now so big that, even with lower growth rates, its impact on our economy gets bigger and bigger. The most likely winners are the service industries: tourism, education and health.

Rodney Maddock

Interim ACFS Director

ACBC chairman, John Brumby, who launched the report in Melbourne on Wednesday, September 5, said the rebalancing of China’s economy towards consumption and demand for services presented an opportunity for Australian businesses.

“To truly capture the opportunities presented by China, Australian business must invest in developing an understanding of customer preferences as well as developing a work force skilled for operations in an international arena,” he said.

Read the report

The report was authored by ACFS Research Officer Martin Foo and former ACFS Director Amy Auster.

Thanks to Victoria University's Dr Janine Dixon, Senior Research Fellow at the Centre of Policy Studies at Victoria University, for her detailed work and advice on computable general equilibrium (CGE) modelling of the Australian economy.