We need a change of mind on China
WHEN economist Jane Golley joined the federal Treasury in 1994, she was assigned to a single-person desk overseeing China, Hong Kong, Taiwan and Korea.
It was only a few years after the collapse of the Soviet Union and the United States was at the apex of its power and influence. Francis Fukuyama, a noted American scholar, confidently predicted the ''end of history'' - a scenario where the entire world would embrace America's brand of liberal democracy and capitalism.
Fast-forward 18 years and the global financial crisis has humbled the once-mighty US. China is within striking distance of overtaking the US as the largest economy in the world and Americans are awake to the reality that China - as Hillary Clinton famously put to Kevin Rudd - is their largest banker, by virtue of the central government's multi-trillion dollar holdings in US treasuries.
It was not that long ago that China was at the receiving end of American lectures about the virtues of the Washington model.
Instead, Chinese undergraduates at Peking University mocked US Treasury Secretary Timothy Geithner earlier this year when he told his audience that China's assets were ''very safe''.
In Canberra, the single-person desk overseeing China at Treasury has now swelled into a fully-fledged unit of about 10 analysts, and still there are not enough people to keep up with the incessant demands from Treasurer Wayne Swan's office.
There is also an Asian policy unit watching over other economic heavyweights in the neighbourhood, including Japan, Indonesia and India.
By comparison, there is just the one analyst, usually a fresh graduate, responsible for the US.
Economic imperatives have forced the paradigm shift at Treasury.
With the release of the Asian Century white paper as early as this month, Prime Minister Julia Gillard is hoping the change in mindset will spread further.
The delayed release of the white paper (it was originally slated for the middle of this year) has collided with one of the more volatile periods in commodity markets.
When Gillard announced the decision to commission the Asian Century white paper on September 28 last year, iron ore was trading at near record highs of $US172.60 a tonne.
A year on, Australia's most important export earner is now trading at $US115.80 a tonne, having fallen to as low as $US86.70 last month, highlighting the potential pitfalls of Australia's role as a key resources supplier to Asia's industrialisation.
Serious questions are being asked of the sustainability of Chinese economic growth and the impact a slowdown would have on our economy.
But while on the face of it, the Asian Century white paper might appear to be about understanding our neighbours better - it is as much, if not more, about introspection.
What does Australia need to do to take full advantage of the Asian Century, or brace for the volatility that comes with it?
A key plank of the white paper is to implement a national reform agenda to lift this country's productivity - or as one government adviser involved in the drafting of the white paper put it, it was about getting ''our own house in order''.
The appointment of Ken Henry as the head of the white paper taskforce highlights the domestic focus of the exercise. Henry, while a former Treasury boss and a leading tax expert, is not particularly noted for his foreign policy expertise.
''The easing - or one may even say collapsing - terms of trade has made the task of domestic reform more urgent,'' said the government adviser, speaking to BusinessDay on condition of anonymity. ''We need to resolve the issues of infrastructure bottlenecks, more effective co-ordination between federal and state governments.''
But a tug-of-war between competing interests within government over politically difficult reform risks decision-making grinding to a halt.
Henry has expressed reservations over whether there was a coherent vision of Australia's place in the Asian Century at the highest level of politics.
''I think it starts with initiative at the very high level, the articulation of a shared vision - that is actually very important,'' he said last month.
''I don't know whether we have got it, I suspect we do, [but] that is going to be tested over the next few months.''
The idea that Australia has been profoundly shaped by Asia is not a new one.
But what has changed, Henry said, has been the ''extraordinary speed and scale'' of its current rise, and a rapidly emerging realisation that Asia is not just important for Australia, but that ''it is going to be the main game'' - not just in economic terms, but in ''almost any sense of national significance''.
Fitting hand in glove with the national reform agenda is what is expected to be a central pillar of the white paper - the development of so-called ''Asia-relevant capabilities''.
Much of the public discussion has equated that to mean focusing on mastering Asian languages, particularly Mandarin.
But there is a need for Australians to not only be more proficient in talking the talk, but also acquiring broader ''Asia literacy'' beyond language skills.
In a national strategy paper released last month, Asialink listed language proficiency as just one of 11 ''critical capabilities'' linked to business success in and with Asia.
Others included the ability to adapt behaviour to Asian contexts, work with governments, gain work experience and form relationships.
It might sound basic, but Australian companies are yet to cotton on. Large corporations, including ANZ, Rio Tinto and Leighton Holdings, describe attracting and retaining ''Asia-capable talent'' as their ''single most pressing challenge''.
While the lack of true Asia-focused talent has long been lamented, less attention has been afforded to the scarcity of depth in Asia-capability within the Australian Public Service, which is at the forefront of this country's Asian engagement and policy implementation.
''Australia's public service needs to lift its game in this respect,'' Henry told BusinessDay.
It is a view echoed by Professor Andrew McIntyre, an Asia-Pacific expert at the Australian National University, who said more people were interested in Asia but a smaller proportion had deep knowledge.
''We are fortunate to have a number of people high up in the public service who have got really good Asia expertise,'' he said. ''The trouble is, there are not many of them, and it is not clear what is coming through the ranks behind them.''
While our private sector and, to an extent, our state governments are able to seek opportunities within Asia unencumbered by strategic considerations, it is a different story for the Commonwealth government.
Spot fires flare and are hastily extinguished, but some still simmer below the surface.
The government's decision to block state-owned enterprise Chinalco from increasing its stake in Rio Tinto in 2009 is often cited as a low point in bilateral relations.
There have been numerous other lowlights since, including a perception of our continued focus on Chinese investment in resources and agriculture, and the move to block telecoms giant Huawei from bidding on national broadband network contracts.
The exclusion highlights the potential dilemma of Australia's engagement with China - the backlash from Huawei came even though evidence mounts that the security risk from the Communist Party can be substantiated. Just this week, an influential US congressional committee slammed Huawei (and fellow telco ZTE), as a threat to national security and urged American businesses not to deal with them.
Perhaps most contentious, from a Chinese perspective, has been the Gillard government's decision to allow US marines to maintain a presence in Darwin - seen by some Chinese strategists as an American ploy to contain its rise in the Asia-Pacific.
''America's misjudgments over Iraq a decade ago should have reminded Australians that we cannot always rely on it to get these things right,'' defence expert Professor Hugh White said in his recent book The China Choice. ''Still, the assumption has persisted that America knows what it's doing with China, and will do what's best.''
The director of the Australia India Institute, Professor Amitabh Mattoo, said it was wise for Australia not to have ''all its eggs in one basket''.
''While both India and Australia will not necessarily want to contain, confront or challenge China, it's always good to hedge our bets,'' he said.
Professor Tony Milner, an Indonesia expert, said the discussion around the white paper was a positive development but to change habitual thinking was a formidable challenge.
He cites blunders committed by the government when dealing with Australia's Asian neighbours including the botched refugee exchange agreement with Malaysia and the way Canberra handled Asian investment in Australia.
''When the Singaporeans wanted to take over the Australian Securities Exchange, we could have said no politely. But a number of our key politicians were absolutely insulting regarding Singapore,'' Milner said.
''If we can't easily deal with Singapore, how much are we really adapting to an Asian century?''
Professor Mattoo also echoed the growing concern that despite our common bridges of language, democracy and cricket, Australia was neglecting its relationship with India by focusing too much on China.
''If Australia is not decisive enough, it could lose an opportunity here,'' he said.
It may not end up explicitly outlined as a recommendation in the white paper, but for Henry, the transition to the Asian Century is fundamentally about a change of mindset in how Australians view our neighbours.
''It does have to start at kindergarten or the first year of school, it does require a mindset change,'' he said.
In his provocative bestseller, When China Rules the World, British author Martin Jacques makes the bold, if not entirely original prediction that Beijing would displace New York as the world's global cultural and economic capital by mid-century.
He said the Western world has overwhelmingly been trying to understand China through its own prism of views.
But he said it was a ''fallacious'' approach and he urged Australians to abandon their ingrained prejudices and think of China ''in its own terms''.
''The reason Westerners approach it like this is because we have been so dominant for the last 200 years, we think everything should be basically conformed to our way of thinking,'' he told BusinessDay. ''You just can't make sense of China in that way.''
But China has shed some of its unbridled optimism of the past and people in and outside of the ruling party have expressed concerns over the country's future.
Deng Yuwen, an editor of the Study Times, a journal of the Communist Party's central party school, delivered a damning account of problems that China faces in an essay published two months ago.
If these pressing concerns were allowed to fester unchecked, he said, they could threaten the rule of the party.
In July, Ian Watt, the secretary of the Prime Minister's Department, also sounded a note of caution about the optimism surrounding the Asian Century.
''It is important that we have a clear-eyed view of what lies ahead and don't get carried away by the rhetoric,'' Dr Watt said. ''Bold predictions have been made before and come unstuck.
''Many of us remember the projects for Japan in the late 1980s and 1990s that came dramatically unstuck.''
It is not the only comparison made with Japan, whose ''lost decade'' of near-zero growth has already stretched into its 20th year.
Observers despairing of the xenophobic overtones often present in the foreign investment debate point out that the fear of Chinese investment mirrors that of the 1980s when the Japanese began investing in Australia in a big way.
But history has a habit of repeating itself and this is unlikely to be the last time Australia will need to take stock of its place in the world.
''We must accelerate progress in domestic economic reform, to build a flexible, internationally-oriented economy that is capable of grasping the opportunities that will emerge in the decades ahead,'' said Asian expert, and a former ambassador to China, Professor Ross Garnaut, referring to the rise of China and north-east Asia in the last comprehensive review of Australia's place in the region.
It might sound as applicable today as it was when he penned those words - in 1989.