Dragon's Tail

In the sunlit residence of the Australian Embassy in Beijing, on a mild and clear afternoon in August 2008, the ambassador’s staff were preparing a banquet for the prime minister. The mini-tornado that precedes every prime-ministerial event was swirling around them: security guards checking cars, advisers finalising briefing notes, minders arriving early to jostle their boss’s name-card closer to the centre of the table, and chefs preparing the West Australian rock lobsters flown in for the occasion.

The Beijing embassy was designed to weave together Chinese and Australian architectural traditions. Viewed from the street, the chunky grey walls capture the hutong character of the ancient capital’s networked alleys and courtyard residences. But once visitors pass through the entrance, they are drawn into a grassy interior quadrangle that evokes the relaxed openness of suburban Australia. The lawn hosts frequent summer barbeques and the embassy bar offers a reliable year-round supply of Australian beer and good cheer.

If embassy buildings are architecture as diplomacy, a physical expression of bilateral relations, then Australia’s Beijing mission sends a mixed message. Though the thick concrete edifice captures the spirit of old Beijing, it also betrays a sense of guarded isolation. Constructed in an era of diplomatic tension – after the Tiananmen tragedy, but before the economic renaissance under Jiang Zemin – the embassy is built for security. Diplomats live in an autonomous compound topped with spikes of gleaming metal around a fortified perimeter. If the building exhibits a distinctive “Australianness,” it is that of a wary tourist decked out in sunglasses and cargo shorts, cash and passport tucked away in a concealed money pouch.

As the prime minister arrived at the banquet, the guests were already seated and trading staccato pleasantries across the table through translators. Australia’s mining titans lined up on one side of the table: BHP’s Marius Kloppers, Rio Tinto’s Tom Albanese and Fortescue’s Andrew Forrest. Facing them were China’s metal moguls, including Xu Lejiang of Baosteel, Huang Tianwen of Sinosteel and Xiao Yaqing of Chinalco.

Collectively, the men in this room were responsible for the rivers of iron-rich red dirt that flow inexorably north across the ocean from Australia’s desolate ancient landscapes to China’s teeming new megalopolises. Australia’s resources have been China’s bounty and salvation, raising cities from the ground, lifting tens of millions of people out of grinding poverty and allowing the government to build a new system of ports, highways, airports, railroads, bridges, buildings and tunnels. As one of the world’s largest exporters of both iron ore and coal, Australia supplies China’s life force, the juice in its machine.

One year before the meeting, this symbiosis had been ruptured. As China’s hungry steel mills masticated ever-larger quantities of iron ore, Australia’s miners seized a once-in-a-generation opportunity for profit. Abandoning the convention that had set global iron-ore prices for more than thirty years, BHP and Rio demanded a huge one-off 85 per cent price increase.

The Chinese were furious. They feared that if costs for steel producers rose, this would in turn push up costs for a wide range of companies, from car-makers to construction firms, and damage China’s entire steel-centred economy. The Chinese media accused the Australian miners of acting like a “cartel.”

The pall of this conflict hung in the room. But the Chinese guests hadn’t come to the banquet today to reopen the wound. They were focused on the future. Twenty years ago, Deng Xiaoping, the architect of modern China, had cautioned his people to build their global power patiently: “Hide your brightness, bide your time.” Now China’s time had come. China had leaped from emerging economy to global superpower. But to realise its ambitions, it needed a reliable supply of fuel for its economic engine. Access to resources was no longer a commercial matter – it was a strategic imperative.

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According to the version of history popular among the Chinese elite, their country is emerging from a “century of humiliation.” For a hundred years China was degraded, bullied and torn apart by foreign imperialists. The British demanded punitive concessions after their victory in the Opium Wars; the French seized control of territories that now make up northern Vietnam; and Macau was lost to Portugal in the Treaty of Peking. The deepest wounds were inflicted by the Japanese during the decades that stretched from the annexure of Taiwan to the rape of Nanking and the ferocious policy of Sanko Sakusen (“kill all, loot all, burn all”) that led to the deaths of millions of Chinese civilians towards the end of World War II. Remembrance of this period serves as a focal point for Chinese nationalism. The Chinese Communist Party uses the sense of victimisation to bolster support, crediting itself with pulling China out of the century of humiliation and deriving its own legitimacy from a national narrative of loss and redemption known as fuxing or “rejuvenation.”

If the Chinese needed a galvanising symbol of fuxing – and they did – they could not have asked for a better one than hosting the Olympic Games. On the day of the banquet, the streets around the Australian Embassy were full of athletes and spectators from around the world. International visitors could not help but be impressed by the new Norman Foster–created Capital Airport and the Olympic Park with its dramatic Herzog and de Meuron–designed “bird’s nest” stadium. Gone were the grimy Soviet-style apartments, ramshackle courtyard houses and defoliated streets, replaced now by broad boulevards, skyscrapers and luxury flats. The Games were testament to China’s rejuvenation. “The glow of the Games,” wrote the China Daily, “should have dispelled any lingering bitterness from the humiliating defeats China suffered at the hands of imperialist aggressors in the past century.”

Just as China’s athletes had their role in fuxing, so did the businessmen at the banquet. The next step in their nation’s progress was to exert influence abroad – what the Chinese call the policy of “going out.” One of the first priorities of “going out” is to secure the raw materials the economy needs. China’s domestic reserves can meet demand for fewer than half of forty-five strategic minerals. By 2020 it will have a sufficient supply of only six. “Based on its current industrialisation trajectory, China has no choice but to move upstream in the resource industry,” wrote the Chinese financial newspaper Caijing. “At stake is the long-term sustainability of an economy with an immense appetite for resource inputs.” Acquiring such assets gives China security of supply and some influence over prices. To put the purpose of “going out” bluntly: as China’s economy grows, it doesn’t just want to trade Australian resources, it wants to own them.

The Chinese guests at the banquet were the front line in this advance. Xiao Yaqing, president of the massive metals conglomerate Chinalco, had spearheaded the campaign. Months earlier he had launched a daring midnight raid on Rio Tinto, splashing $11 billion to buy a 10 per cent stake in the company. It was the largest foreign investment ever undertaken by a Chinese company.

Xiao’s raid on Rio Tinto wasn’t a business decision; it was geopolitical conflict with commercial weaponry. In taking a stake in Rio Tinto, he was acting for the Chinese government as it sought to strengthen its position in the global iron-ore market. For more than a year, there had been talk of BHP and Rio Tinto combining forces to create an iron-ore behemoth. Pushed by its new CEO, Marius Kloppers, BHP planned to gobble up Rio and thereby gain unprecedented power over the supply of raw materials to the world. The prospect of a combined BHP and Rio struck fear into the hearts of Chinese officials, who worried the merged entity would force their steel industry to pay even higher prices.

A member of the Central Committee of the Communist Party as well as a captain of industry, Xiao Yaqing personified China’s blurry line between politics and business. He was the perfect instrument to thwart BHP’s ambitions. Xiao’s raid came on 1 February 2008, just four days before Kloppers was expected to put forward his bid. “Chinalco’s purchase has successfully prevented the merger of Rio Tinto and BHP,” boasted the government-controlled Global Times, “broken the monopoly of multinational giants, and protected our nation’s core interests.” Following the raid, Xiao was hailed as “a national hero for promoting overseas acquisitions.”

Xiao was flanked at the banquet by other pioneers of China’s “going out” strategy. Huang Tianwen had recently launched a hostile $1.2-billion takeover of the Australian iron-ore producer Midwest Corporation and was now building a stake in a second iron-ore company, Murchison Metals, with a view to building a huge hub in central Western Australia. Also at the table was Wang Tianpu, president of the Chinese oil giant Sinopec, which had spent $600 million to buy Australia’s Puffin and Talbot oilfields in the Timor Sea. Beside him, Lou Jiwei, China’s former vice minister of finance, had been tasked with the establishment of the China Investment Corporation, a fund to invest the Chinese government’s vast wealth abroad. Australian resources companies were at the top of Lou’s shopping list.

All in all, there had been twenty-six Chinese proposals to acquire Australian resources companies in the previous year. The sudden deluge of applications was generating concern in Australia. “The Australian government would never be allowed to buy a mine in China,” declared the Nationals senator Barnaby Joyce in a television ad. “So why would we allow the Chinese government to buy and control a key strategic asset in our country?” Spooked by the publicity, the Australian government began to back-pedal, announcing it would take steps to ensure that Chinese government–backed “investment and sales decisions are driven by market forces rather than external strategic or political considerations.” That statement, and its implied accusation, ricocheted around Beijing. The Chinese guests had come to the banquet today to hear the Australian prime minister clarify his position on their investment proposals.

Kevin Rudd bounded into the room and took his place in the centre of the table. From what the Chinese knew of him, Rudd was the perfect prime minister to help them. He was their Manchurian Candidate – the man who could bring Australia into China’s orbit, navigating around the political barriers to a closer economic relationship.

Rudd sat down at the table and greeted the guests warmly in fluent Mandarin. Not understanding a word, one of the Australian businessmen joked, sotto voce: “Is he on our side or theirs?”

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In Chinese philosophy, natural contrasts – such as light and dark, high and low, hot and cold, fire and water, life and death – are interconnected. It is impossible to talk about one without reference to the other because they are bound together as parts of a whole. There cannot be a flower without seeds, nor seeds without a flower: one reaches its zenith, then dies back to make way for the other. There cannot be a society with only men or only women: the interaction of the two gives birth to further generations. No country is more intertwined with China’s economic rise than Australia. Now joined together, we will rise and fall as one. We are yin and yang.

As microhistory, the embassy banquet was an allegory for the kindred journey of the two nations. For three decades Australia and China had come together in a confluence of history and geography, in which China’s vast demand for raw materials was perfectly complemented by Australia’s extraordinary natural endowment. Despite that history, this essay argues that China’s economic relationship with Australia is still poorly understood.

Australians have a tendency to look at our national issues through an insular domestic lens. Our national debates are frequently partisan and parochial. For example, if you are on the right, you know that the budget is now in deficit because Labor wasted money; if you are on the left, you know that a deficit was necessary to save hundreds of thousands of jobs. On the right, you know that Australian manufacturing jobs are disappearing because we are uncompetitive with our Asian neighbours; on the left, it’s because Australian industry doesn’t receive the same subsidies that those of other countries enjoy. On the left, you would argue that the global financial crisis was caused by greed and lax regulation of financial markets; on the right, you might point the finger at excessive government debt. If you are on the right, you know that Australia pulled through the financial crisis because John Howard left Australia with a strong surplus; on the left, it was because of Kevin Rudd’s economic stimulus. On the right, you know that productivity growth is low because powerful unions disrupt workplace efficiency; on the left, it is because Australia hasn’t invested sufficiently in skills and infrastructure.

These positions are easily digestible and often self-serving. But they are all either wholly wrong or drastically incomplete because they overlook the events beyond our borders that have shaped us. In this essay we will discover that much of Australia’s current situation is due to finding ourselves in the jaws of a once-in-a-century economic circumstance. China’s industrialisation is perhaps the most significant economic event since the Industrial Revolution that transformed Britain in the eighteenth century and laid the framework for the modern world. And China’s industrialisation has occurred 100 times more quickly and on a scale 1000 times larger than Britain’s Industrial Revolution.

Few nations have been affected more by China’s transformation than Australia. China helps explain why Australia has experienced two decades of unprecedented prosperity, why our house prices have soared, why we survived the financial crisis. And China also helps explain many of our challenges, why so many of our manufacturing businesses are struggling, why the dollar is so volatile, why our competitiveness is slipping, why the budget is in the red.

The economic state of Australia today can only be explained in the wider context of our region; and, most importantly, only by thinking in that wider context can we create a path to future prosperity.