economics@

Presentation toPresentation to

AustraliaAustralia--China Business CouncilChina Business Council

China’s resources needs and Australia’s resource trade

China’s resources needs and China’s resources needs and Australia’s resource tradeAustralia’s resource trade

Intercontinental HotelIntercontinental HotelBeijingBeijing

2323rdrd October 2006October 2006

Saul EslakeSaul EslakeChief EconomistChief EconomistANZANZ

www.anz.com/go/economicswww.anz.com/go/economicswww.anz.com/go/economics

economics@2

Metal prices are at record highs in nominal terms though below previous peaks in real termsMetal prices are at record highs in nominal terms Metal prices are at record highs in nominal terms though below previous peaks in real termsthough below previous peaks in real terms

Nominal and real metal prices

0

50

100

150

200

250

300

56 61 66 71 76 81 86 91 96 01 06

Index: 2000 = 100

Nominal terms

Deflated byUS CPI

Source: IMF International Financial Statistics;Economics@ANZ.

economics@3

China is now the major influence on global demand for base metals and steelChina is now the major influence on global China is now the major influence on global demand for base metals and steeldemand for base metals and steel

1993-2002 2002-2005

Contribution to growth (%) of

Contribution to growth (%) of

Other EMs* China

9

15

15

-11

11

16

10

48

51

110

87

54

86

113

World consum

-ption growth†

World consum

-ption growth† China

Other EMs*

Aluminium 3.8 38

43

42

12

38

34

42

7.6 9

Copper 3.5 3.8 41

Lead 3.0 4.3 -7

Nickel 4.4 3.6 -11

Steel 3.4 9.2 8

Tin 1.3 8.1 2

Zinc 3.4 3.8 7

† % pa * Emerging Markets (India, Russia, Brazil and Mexico)Source: IMF World Economic Outlook, September 2006 Table 5.3.

economics@4

Base metal consumption in developing countries is likely to grow strongly over timeBase metal consumption in developing Base metal consumption in developing countries is likely to grow strongly over timecountries is likely to grow strongly over time

Base metal consumption and GDP per capita, 2004

0

10

20

30

40

50

60

70

80

0 5 10 15 20 25 30 35 40

Tons

GDP (at purchasing power parities) per capita

Base

meta

l co

nsu

mption p

er

capita

US$000

US

Canada

Australia

Japan

Germany

Korea

UK

FranceSpain

Russia

Sth AfricaBrazil Mexico

Taiwan

China

India

Thai-land

Malaysia

Indo-nesia

Italy

Sources: ABARE Australian Commodities 2006; IMF World Economic OutlookSeptember 2006; Economics@ANZ.

economics@5

Per capita consumption of base metals and steel typically rises with income up to US$15-20,000 Per capita consumption of base metals and steel Per capita consumption of base metals and steel typically rises with income up to US$15typically rises with income up to US$15--20,000 20,000

China

Korea

EU

US

0

5

10

15

20

25

30

0 10 20 30 40

Kgs

Real GDP (at PPP) per capita

Alu

min

ium

con

sum

pti

on p

er c

apit

a

US$000Japan

Aluminium

China

Korea

EU

US

0

100

200

300

400

500

600

700

800

900

1000

0 10 20 30 40

Kgs

Real GDP (at PPP) per capita

Ste

el c

onsu

mpti

on p

er c

apit

a

US$000

Japan

Steel

Sources: IMF World Economic Outlook September 2006; (Figure 5.7); Economics@ANZ.

economics@6

Metal supply has responded more slowly to the acceleration in demand than in earlier cyclesMetal supply has responded more slowly to the Metal supply has responded more slowly to the acceleration in demand than in earlier cyclesacceleration in demand than in earlier cycles

Mining companies have to some extent been surprised at the strength of the upturn in demand

– industry views on the outlook for prices were generally pessimistic in the aftermath of the Asian economic crisis

The mining industry globally is more consolidated than in previous cycles

– companies are more conscious of the impact that an increase in their own production may have on prices

Mining companies now have alternative ways of spending windfall cash flows

– expanding exploration or production is no longer the first instinct

– takeovers, ‘special dividends’ and share buybacks are now much more common-place among mining companies

economics@7

Strong demand combined with muted supply increases have driven metal stocks to low levels Strong demand combined with muted supply Strong demand combined with muted supply increases have driven metal stocks to low levels increases have driven metal stocks to low levels

02468

10121416

65 75 85 95 05

Weeks' consumption

Aluminium

Copper

Nickel

Zinc

02468

101214

65 75 85 95 05

Weeks' consumption

0

5

10

15

20

85 95 05

Weeks' consumption

02468

101214

65 75 85 95 05

Weeks' consumption

Sources: ABARE; AME Mineral Economics; Economics@ANZ.

economics@8

Nickel and copper prices now very high relative to production costs – should prompt increased supplyNickel and copper prices now very high relative to Nickel and copper prices now very high relative to production costs production costs –– should prompt increased supplyshould prompt increased supply

Aluminium

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1985trough

1988peak

2002trough

2005up-turn

2006cur-rent

Ratio

Nickel

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1985trough

1988peak

2002trough

2005up-turn

2006cur-rent

Ratio

Copper

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1985trough

1989peak

2002trough

2005up-turn

2006cur-rent

Ratio

Ratio of price to cash operating cost of least efficient 10% of producers – selected base metals

Sources: Brooke Hunt Metal Consultants; International Monetary FundWorld Economic Outlook September 2006 Table 5.5.

economics@9

Modest increases in global production of most major mineral commodities now in prospectModest increases in global production of most Modest increases in global production of most major mineral commodities now in prospectmajor mineral commodities now in prospect

% change from previous year

1999-2004*

2005 (e)

2006 (f)

2007 (f)

Coal 5.0 7.4 2.2 2.2

Iron ore 5.9 10.3 11.7 9.2

Alumina 5.0 6.1 11.7 4.4

Copper 1.7 5.7 3.6 4.6

7.0

11.8

5.8

6.3

0.0

Aluminium 4.7 5.0 4.8

Lead 1.7 6.6 3.7

Nickel 3.3 4.7 3.0

Zinc 4.0 6.9 0.9

Gold (mine) -0.6 0.0 4.0

* Average annual rate. Sources: ABARE, Australian CommoditiesSeptember quarter 2006; Economics@ ANZ.

economics@10

200

400

600

800

1000

1200

1400

01020304050607080910

US¢/pound

LME

50

75

100

125

150

0102 0304050607 080910

US¢/pound

LME

2025303540455055

01 02 030405 06 070809 10

US$/tonne

NY Mercfutures

Prices of most energy and metals expected to ease Prices of most energy and metals expected to ease from recent peaks from recent peaks –– but only graduallybut only gradually

Thermal coal Gold

Copper

Aluminium

Zinc

50100150200250300350400

0102 0304050607 080910

US¢/pound

LME

Nickel

200

300

400

500

600

700

0102 0304050607 080910

US$/oz

Comex

25

50

75

100

125

150

175

0102 0304050607 080910

US¢/pound

LME

Note: Futures contract prices as at 12 October 2006.Source: Datastream; Bloomberg; Economics@ANZ.

economics@11

Oil prices have been at elevated levels for some time now, and seem likely to remain soOil prices have been at elevated levels for some Oil prices have been at elevated levels for some time now, and seem likely to remain sotime now, and seem likely to remain so

Nominal and real oil prices

0

10

20

30

40

50

60

70

80

90

100

70 75 80 85 90 95 00 05 10

US$ per barrel

Oil price incurrent dollars

Futurespricesas at

12 Oct2006

Oil price in2005 dollars

Note: Oil price is West Texas Intermediate. Shaded periods indicate ‘oil shocks’. Source: Thomson Financial Datastream; Bloomberg; US Bureau of Labor Statistics; Economics@ANZ.

economics@12

High oil prices aren’t hurting growth as much as in the 70s/80s because it’s a different type of shockHigh oil prices aren’t hurting growth as much as in High oil prices aren’t hurting growth as much as in the 70s/80s because it’s a different type of shockthe 70s/80s because it’s a different type of shock

World oil supply and demand

45

50

55

60

65

70

75

80

85

90

70 73 76 79 82 85 88 91 94 97 00 03 06 09

Mn barrels ofoil per day

Demand

Supply

Note: shaded areas denote ‘oil price shocks’. Sources: BP Statistical Review of World Energy 2006; ABARE Australian Commodities September Quarter 2006.

economics@13

Developing countries now account for over threeDeveloping countries now account for over three--quarters of world crude oil demand quarters of world crude oil demand

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

90 93 96 99 02 05

Developing economies

Advanced economies

Millions of barrels per day

Growth in worldoil demand

Oil consumption

15

20

25

30

35

40

45

70 75 80 85 90 95 00 05

Millions of barrels per day

'Advanced'economies

Developing oremerging economies

Note: ‘advanced economies’ are the US, Western Europe, Japan, Canada, Australia and New Zealand. Sources: BP Statistical Review of World Energy 2006; Economics@ANZ.

economics@14

Developing country demand for oil is likely to grow rapidly as incomes riseDeveloping country demand for oil is likely to Developing country demand for oil is likely to grow rapidly as incomes risegrow rapidly as incomes rise

Oil consumption and GDP per capita, 2005

0

5

10

15

20

25

30

0 5 10 15 20 25 30 35 40 45

Barrels

GDP (at purchasing power parities) per capita

Oil

consu

mption p

er

capita

US$000

USCanada

Australia

Japan

Germany

Korea

UKFrance

Spain

Russia

Sth AfricaBrazil

Mexico

Argentina

Taiwan

ChinaIndia

Thailand Malaysia

Indonesia

Sources: The Economist ‘Survey of the World Economy’ 16 September 2006 p. 20; BP Statistical Review of World Energy 2005; IMF World Economic OutlookSeptember 2006; Economics@ANZ.

economics@15

China will become a major consumer of most forms of primary energyChina will become a major consumer of most China will become a major consumer of most forms of primary energyforms of primary energy

China’s share of global primary energy (%)

2003 2020 (f)

2030 (f)

Coal 28.1 40.8 44.0

Oil 7.0 11.2 12.7

Natural gas 1.3 3.4 3.8

Hydro & other renewables 8.9 13.4 12.2

Nuclear 1.7 5.5 9.2

Source: Energy Information Agency (2006).

economics@16

Higher oil prices aren’t (thus far) leading to higher inflation and interest ratesHigher oil prices aren’t (thus far) leading to Higher oil prices aren’t (thus far) leading to higher inflation and interest rateshigher inflation and interest rates

Oil prices and inflation Oil prices and interest rates

0

10

20

30

40

50

60

70

80

90

100

70 74 78 82 86 90 94 98 02 060

2

4

6

8

10

12

14

16US$ per barrel(2005 prices)

Real oilprices

% per annum

G7 3-mth interest rates(right scale)

`

0

10

20

30

40

50

60

70

80

90

100

70 74 78 82 86 90 94 98 02 060

2

4

6

8

10

12

14

16US$ per barrel(2005 prices)

Real oil prices

% change fromyear earlier

G7 consumer prices (right scale)

Sources: Datastream; OECD; Economics@ANZ.Note: Shaded areas denote “oil price shocks”

economics@17

China’s resource needs and Australia’s resource endowments are remarkably complementaryChina’s resource needs and Australia’s resource China’s resource needs and Australia’s resource endowments are remarkably complementaryendowments are remarkably complementary

Australia’s share of

world exports

(%, 2004)

China’s share of

world imports

(%, 2004)

Metallurgical coal 53.6 3.5

Steaming coal 19.7 3.0

Zinc† 27.3 7.5

Lead† 32.9 17.8

Uranium * 30.3 na

Iron ore 36.0 31.6

Aluminium 8.5 5.6

Nickel* 14.1 9.8

* Production and consumption, respectively. † Ores & concentrates.Sources: ABARE, Australian Commodity Statistics 2005 and Australian CommoditiesSeptember 2006.

economics@18

Resources trade has propelled China to Australia’s #2 trading partnerResources trade has propelled China to Resources trade has propelled China to Australia’s #2 trading partnerAustralia’s #2 trading partner

Australia’s merchandise trade with China

0

2

4

6

8

10

12

14

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

% (12-month moving average)

Imports from Chinaas a % of total

Australian imports(ranked #2 in 2006)

Exports to Chinaas a % of total

Australian exports(ranked #2 in 2006)

Australia’s merchandise trade balance with China

-8

-7

-6

-5

-4

-3

-2

-1

0

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

A$bn (12-month moving total)

Sources: Australian Bureau of Statistics; Department of Foreign Affairs and Trade.

economics@19

China’s rapid growth and industrialization is a particularly & uniquely ‘Good Thing’ for AustraliaChina’s rapid growth and industrialization is a China’s rapid growth and industrialization is a particularly & uniquely ‘Good Thing’ for Australiaparticularly & uniquely ‘Good Thing’ for Australia

Long-term price changes for Australian exports and imports

-6

-4

-2

0

2

4

6

8

1960s 1970s 1980s 1990s 2000s

Export prices

Import prices

% per annum (real US$ terms)

Ratio of Australian exportprices to import prices

60

70

80

90

100

110

120

130

140

150

160

170

50 55 60 65 70 75 80 85 90 95 00 05

2004-05 = 100

Korean Warwool boom

Mid-1970scommoditiesboom

Keating's'BananaRepublic'

Chinaboom

Note: the ‘terms of trade’ is the ratio of export to import prices; it is a measure of the international ‘purchasing power’ of Australia’sexports. Sources: ABS; US BEA; Economics@ANZ.

economics@20

‘Terms of trade’ gains since 1999 have been worth $2,844 pa to each Australian, on average‘Terms of trade’ gains since 1999 have been ‘Terms of trade’ gains since 1999 have been worth $2,844 pa to each Australian, on averageworth $2,844 pa to each Australian, on average

Note: Gross domestic income (GDI) is GDP adjusted for changes in the terms of trade (ratio of export to import prices). Sources: ABS; Economics@ANZ.

0

1

2

3

4

5

6

7

00 01 02 03 04 05 06

% change from year earlier(trend) Real gross

domestic income (GDI)

Real grossdomestic

product(GDP)

Real gross domestic productand income

38

39

40

41

42

43

44

45

46

47

00 01 02 03 04 05 06

A$ 000 (at annual rates;trend; 2004-05 prices)

GDI per capita

GDP per capita

-$1,783

$1,062

Real gross domestic productand income per capita

economics@21

Higher commodity prices have prompted a surge in resources-related investment …Higher commodity prices have prompted a surge Higher commodity prices have prompted a surge in resourcesin resources--related investment …related investment …

Export-oriented infrastructure investment

Capital expenditure bythe mining industry

0.0

1.0

2.0

3.0

4.0

5.0

6.0

00 01 02 03 04 05 06

A$ bn (current prices,annualized rate)

Railways

Harbours

Electricity

0

2

4

6

8

10

12

14

16

18

20

00 01 02 03 04 05 06

A$ bn (constant prices,annualized rate)

Sources: ABS; Economics@ANZ.

economics@22

Coal, iron ore, LNG and alumina export volumes have been rising – but oil exports have fallenCoal, iron ore, LNG and alumina export volumes Coal, iron ore, LNG and alumina export volumes have been rising have been rising –– but oil exports have fallenbut oil exports have fallen

180190200210220230240250260

02 03 04 05 06 07

Mt

Coal

Volume of exports of mineral and energy commodities

150

175

200

225

250

275

300

02 03 04 05 06 07

Mt

Iron ore

12

13

14

15

16

17

02 03 04 05 06 07

Mt

Alumina

180

190

200

210

220

230

240

02 03 04 05 06 07

Kt

Nickel

6

8

10

12

14

16

02 03 04 05 06 07

Mt

LNG

6

11

16

21

26

02 03 04 05 06 07

ML

Crude oil

Source: ABARE, Australian Commodities, September 2006.

economics@23

The ‘resources boom’ has arrived at a time when the economy is bumping into capacity constraintsThe ‘resources boom’ has arrived at a time when The ‘resources boom’ has arrived at a time when the economy is bumping into capacity constraintsthe economy is bumping into capacity constraints

4.5

5.0

5.5

6.0

6.5

7.0

7.5

00 01 02 03 04 05 06

% of the labour force

Actual

Trend

Lowest in30 years

Unemployment rate

Labour shortages

0

5

10

15

20

25

00 01 02 03 04 05 06

%

Businesses reporting labour shortages as aconstraint on output

Highest in historyof survey (since 1989)

`

CBD office vacancy rates

456789

101112

00 01 02 03 04 05 06

%Sydney

Rest of Australia

78

79

80

81

82

83

84

00 01 02 03 04 05 06

%

Actual (seas. adj. by ANZ)

Trend

Capacity utilization

Sources: ABS; National Australia Bank; PropertyCouncil of Australia.

economics@24

-2

-1

0

1

2

3

4

5

6

7

8

00 01 02 03 04 05 06

Real % change from year earlier

Domestic production(GDP)

Domesticfinal demand

Real domestic spendingand output

So, increasingly, strong demand is not being met by increased domestic productionSo, increasingly, strong demand is not being met So, increasingly, strong demand is not being met by increased domestic productionby increased domestic production

Note: ‘Final demand’ is the sum of domestic final demand (consumption and fixed investment) and exports. It is met by a combination of increased domestic production (GDP), running down stocks and imports. Source: Australian Bureau of Statistics;Economics@ANZ.

-1

0

1

2

3

4

5

6

2002-03 2003-04 2004-05 2005-06

Domestic production Stocks Imports

% point contribution tochange in final demand

How final demand has been met

The economy is near the point in the cycle where the seeds of previous recessions have been sownThe economy is near the point in the cycle where The economy is near the point in the cycle where the seeds of previous recessions have been sownthe seeds of previous recessions have been sown

Allowing wages to grow faster than justified by productivity in a tight labour market

– much less of a risk now that centralized wage fixation is (almost) dead

Failing to allow the Reserve Bank to raise interest rates before inflation has begun to accelerate

– not a serious risk now that the RBA is ‘independent’

‘Giving away too much’ of the revenue dividend in spending increases and tax cuts

– still a significant risk (as demonstrated in recent years)

In some important respects the Australian economy is at a similar stage to where it was in 1960, 1973, 1981 and 1989 – just before each of the past 4 recessions

Three policy mistakes have traditionally been made at this stage of the business cycle -

economics@25

economics@26

Each year, the Government collects tens of billions of dollars more than originally forecastEach year, the Government collects tens of billions Each year, the Government collects tens of billions of dollars more than originally forecastof dollars more than originally forecast

180

190

200

210

220

230

240

250

260

2004-05 2005-06 2006-07 2007-08 2008-09

2002-03 Budget 2003-04 Budget 2004-05 Budget 2005-06 Budget 2006-07 Budget

$bn

Financial years

Successive Budget estimates of total tax revenues

Sources: Budget Papers 2002-03 through 2006-07.

$13bn

$22bn$26bn

$18bn

$6bn

economics@27

Much of these windfall revenue gains have come from company taxMuch of these windfall revenue gains have come Much of these windfall revenue gains have come from company taxfrom company tax

30

35

40

45

50

55

60

2004-05 2005-06 2006-07 2007-08 2008-09

2002-03 Budget 2003-04 Budget 2004-05 Budget 2005-06 Budget 2006-07 Budget

$bn

Financial years

Successive Budget estimates of company tax revenues

Sources: Budget Papers 2002-03 through 2006-07.

$8bn

$16bn

$19bn$13bn $8bn

economics@28

0

5

10

15

20

25

30

35

40

45

50

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

'Parameter variations' 'Policy decisions'

$bn

Financial years

Cumulative impact of:

Net ‘bottom line’ impact of ‘parameter variations’vs ‘policy decision’ (tax cuts or spending increases)Net ‘bottom line’ impact of ‘parameter variations’

vs ‘policy decision’ (tax cuts or spending increases)

The Government has had a $263bn windfall over the past 4 Budgets – and ‘spent’ $248bn of itThe Government has had a $263bn windfall over The Government has had a $263bn windfall over the past 4 Budgets the past 4 Budgets –– and ‘spent’ $248bn of itand ‘spent’ $248bn of it

Sources: Budget Papers 2002-03 through 2006-07 andEconomics@ANZ calculations.

economics@29

The government is saving almost none of the windfall gains produced by the resources boom The government is saving almost none of the The government is saving almost none of the windfall gains produced by the resources boom windfall gains produced by the resources boom

-20

-15

-10

-5

0

5

10

15

20

70 75 80 85 90 95 00 05 10-5

-4

-3

-2

-1

0

1

2

3

4$bn

As a % of GDP(right scale)

$ bn(left scale)

%

Commonwealth ‘underlying’ cash balance

Forecast surpluses smaller as a % of GDP than at previous cyclical

and commodity price peaks

Sources: 2006-07 Budget Paper No. 1, Statement 13, Table 1(and previous issues).

economics@30

It’s likely that there will be at least one more rate increase before the middle of next yearIt’s likely that there will be at least one more rate It’s likely that there will be at least one more rate increase before the middle of next yearincrease before the middle of next year

4.0

4.5

5.0

5.5

6.0

6.5

01 02 03 04 05 06 07

% pa

90-daybill yield

Cash rate

Shaded areas denote forecasts.Sources: ABS; RBA; Economics@ANZ.

Interest rates In its most recent Statement on Monetary Policy, the Reserve Bank raised its forecast for ‘underlying’ inflation to 3% - the top of its ‘target range’It also raised its forecast for economic growth to 3½% - at the top of the range of estimates of Australia’s ‘potential’ growth rate, at a time when idle resources are becoming increasingly scarceWith another pre-election Budget likely next May, the clash between monetary and fiscal policy will continue …… creating a situation where further increase(s) in interest rates are likely

economics@31

The resources boom is keeping the A$ stronger than it otherwise would have beenThe resources boom is keeping the A$ stronger The resources boom is keeping the A$ stronger than it otherwise would have beenthan it otherwise would have been

Economic influences on the value of the A$

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

01 02 03 04 05 06-100

0

100

200

300

400

500US¢

Australia-US 90-day

interestrate spread,

forward 1 year(right scale)

Basis pointsA$-US$

(leftscale)

Interest rate spreads

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

01 02 03 04 05 0680

100

120

140

160

180

200

220US¢

RBA commodityprice index (in US$)(right scale)

2002-03 = 100

A$-US$(left scale)

Commodity prices

Sources: Datastream; Reserve Bank of Australia.

economics@32

Commodity prices and interest rate differentials have been working in opposite directions on the A$Commodity prices and interest rate differentials Commodity prices and interest rate differentials have been working in opposite directions on the A$have been working in opposite directions on the A$

If commodity priceshadn’t risen since June 2001

Alternative hypothetical scenarios for the A$

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

01 02 03 04 05 06

US¢ A$ predicted by model ifAustralia-US interest rate

spread had remained atJuly 2004 level

Actual

A$ as predictedby ANZ model

If the interest rate spread on the A$ hadn’t narrowed since July 2004

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

01 02 03 04 05 06

US¢

A$ predicted bymodel if commmodity

prices had remained atJune 2001 level

Actual

A$ as predictedby ANZ model

Sources: Datastream; Reserve Bank of Australia; Economics@ANZ.

economics@33

These factors will continue to work against one another – but from opposite directionsThese factors will continue to work against one These factors will continue to work against one another another –– but from opposite directionsbut from opposite directions

Economic influences on the value of the A$

0.50

0.55

0.60

0.65

0.70

0.75

0.80

01 02 03 04 05 06 07 0880

100

120

140

160

180

200

220US¢

RBA commodityprice index (in US$)(right scale)

2002-03 = 100

A$-US$(left scale)

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

01 02 03 04 05 06 07 080

50

100

150

200

250

300

350

400

450

500US¢

Australia-US 90-day

interestrate spread

(right scale)

Basis points

A$-US$(left

scale)

Interest rate spreads

Shaded areas denote forecasts.Sources: Datastream; Reserve Bank of Australia.

Commodity prices

economics@34

Two unusually complementary economies – but both face medium-term risksTwo unusually complementary economies Two unusually complementary economies –– but but both face mediumboth face medium--term risksterm risks

The economies of China and Australia are remarkably complementary to one another

– China’s ‘peaceful rise’ is extending Australia’s record-breaking run of continuous economic growth

– A bilateral free trade agreement would help to cement this relationship

China needs to ensure that it avoids ‘bubbles’ emerging in sectors of its economy

– an indirect risk of its FX policy (as it was for Japan in the second half of the 1980s)

Australia needs to ensure that it does not ‘blow’ this new-found prosperity

– as it has nearly always done at the same stage of previous commodity price cycles