The Kingdom and the Quarry: China, Australia, Fear and Greed

By David Uren

China has rapidly become Australia’s most important trading partner. It is also the rising power in our region. In The Kingdom and the Quarry David Uren takes us inside the high-stakes world of the two countries’ relationship. From resource grabs to cybersurveillance, this is an authoritative and news-breaking book that investigates us inside key political and business events of recent times and tells us what really happened.

Uren paints vivid portraits of new billionaires like Twiggy Forrest and Clive Palmer seizing their chance, of BHP and Rio Tinto playing off Chinese interests and the Australian government, of Kevin Rudd feuding with China’s leaders, and of a new world of spies, security, investment and opportunity. Above all he gives an unparalleled sense of fear and greed in the corridors of power.

‘David Uren brings the last 40 years of Australia – China relations to life, with entertaining stories of many Australians and Chinese building today’s interdependence and prosperity, and of others stumbling as China grew. An informative start to understanding Australia’s interaction with China as it emerged as a great power.’ —Ross Garnaut

• Language: English
• Publisher: Black Inc. Books
• Release date: May 31, 2012
• ISBN: 9781921870620

David Uren

David Uren is economics editor of The Australian. With more than 30 years’ reporting experience, he is a former editor of Business Review Weekly and the author (with Lenore Taylor) of Shitstorm: Inside Labor’s Darkest Days.

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Copyright

Published by Black Inc.,

an imprint of Schwartz Media Pty Ltd

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Collingwood VIC 3066 Australia

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Copyright © David Uren 2012

All Rights Reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means electronic, mechanical, photocopying, recording or otherwise without the prior consent of the publishers.

ISBN for eBook edition: 9781921870620

National Library of Australia Cataloguing-in-Publication entry (for print edition):

Uren, David.

The kingdom and the quarry : China, Australia, fear and greed / David Uren.

ISBN for print edition: 9781863955669 (pbk.)

Australia - Politics and government - 21st century. China - Politics and government - 21st century. Australia - Foreign economic relations - China China - Foreign economic relations - Australia.

337.94051

Designed by Peter Long

Contents

FUTURE TELLERS

The visions of China’s future that are shaping our economic and geo-political strategy have strong echoes in history

LURE OF THE WEST

Hu Jintao jets into Perth in late 2007, the seventh Chinese leader to have made the trip. Few provinces in China have received such attention. Hu believes a great era of cooperation awaits

WHITLAM’S FOOTSTEPS

Kevin Rudd has ambitions to shape the rise of China for the rest of Asia, building on a rich history of Labor leadership, starting with Gough Whitlam’s 1972 diplomatic recognition

QUICK BILLIONS

Spectacular individual wealth is generated by Chinese demand for Australian resources, which sparks a wave of entrepreneurial capitalism in both countries

THE CHINESE ARE COMING

Chinalco’s shock raid on Rio Tinto pushes the policy boundaries and provokes a sharp response from the new Labor government

COLLIDING VISIONS

Between BHP’s dystopian view that the Chinese are out to exploit Australia and Rio Tinto’s goal of building partnerships with the rising world power lies the dilemma for Australia’s foreign investment regulation

WRESTLING A GIANT

Rudd abandons the equivocation of the Howard government, resolving to strengthen Australia’s military alliance with the United States as a hedge against malign forces taking control of China

A CRITICAL FRIEND

Public denunciation of human rights abuses in China brings a deterioration in the relationship. The alternative of private dialogue on human rights issues is acceptable because it is not threatening

TAKING PRISONERS

Contract negotiations between Australian iron ore miners and Chinese steel mills break down acrimoniously. The entire Rio Tinto marketing team in China is arrested and charged with espionage and corruption. BHP successfully imposes market-based pricing of iron ore

A GLOBAL CITIZEN

The prospect of a new Asia-Pacific Community and new agreements on climate change test China’s goodwill as a global citizen. China takes the initiative to resolve problems in its relationship with Australia

THE PERSONAL TOUCH

The Chinese community in Australia achieves unprecedented political influence in the 2007 battle for Bennelong, but the influx of Chinese students, settlers and investors brings a backlash, with echoes of the 1800s

RESOURCE SECURITY

China’s desire for a secure supply of resources has implications for Australia. A strengthened ANZUS alliance carries risks as well as reassurances. Australia needs to do more to assure China that it is a reliable supplier

ACKNOWLEDGEMENTS

ENDNOTES

1.

FUTURE TELLERS

Australia’s first ambassador to the People’s Republic of China, Stephen FitzGerald, wanted his new prime minister, Malcolm Fraser, to understand the potential for China to transform not only itself but also Australia. Writing in mid-1976, he said: If it could be assumed that the Chinese economy and China’s trade with Australia were to expand in the last quarter of the 20th century in the way the Japanese economy and trade with Australia did in the third, by the year 2000 China would have a dominant role in the expansion of the Australian economy. China was still an impoverished country with a GDP by conventional measures only 50 per cent larger than Australia’s and less than a tenth the size of the United States’. But the briefing paper envisaged the economy growing at a pace of 10 per cent a year over 25 years, enough to lift output ten-fold.

The Australian ambassador’s despatch arrived to a sceptical audience at the Department of Foreign Affairs. A measure of wishful thinking here, was the pencilled note in the margin alongside the claim that China would develop greater institutional flexibility. The acting secretary, Peter Henderson, advised the embassy to give more careful consideration to ensuring its own credibility with the department and with the embassy’s readership generally. While they might think that China was the centre of the world, others did not necessarily share this view.¹

In mid-1976, China was still in the grip of the Cultural Revolution that had run for a decade. Zhou Enlai had died in January and the elderly Mao Zedong was nearly on his deathbed, leaving power concentrated in the group known as the Gang of Four. These were the ultra-leftists, including Mao’s wife, Jiang Qing, who had spearheaded attempts to expunge all trace of Confucian tradition and real or imagined bourgeois traits from Chinese society. Yet FitzGerald looked to a future beyond them, predicting the emergence of a new leadership that takes China away from dogmatic self-reliance and Marxist-Leninist purity towards greater economic (and thereby political) flexibility.

He predicted that China would emerge from its stagnating, centrally planned economy and rediscover for itself the dynamism apparent in other Asian societies which have their roots in Chinese culture. If these assumptions held, there would be little question that the Chinese economy would be a major influence in the world economy and particularly in the region of Asia and the Pacific.

Thirty years would elapse before Treasury officials started charting the data that had informed FitzGerald, mapping the rise in China’s output per person against that of Japan, South Korea and Taiwan in the last half of the twentieth century. The charts told a powerful story. Although China’s rapid growth had by then been underway since the late 1970s, its average standard of living relative to the advanced nations was still only where Japan was in the 1950s. China’s catch-up growth could last for decades more, with India not far behind.

This had profound implications for Australia. The biggest leaps in commodity prices had previously been caused by Korean and Arab–Israeli wars and were very short-lived. Australia now faced the prospect of a boom in demand for its raw materials that would last a generation. In the 2007–08 budget, Treasury thought it would take ten years for resource prices to decline by 20 per cent. By 2011–12, this had stretched out to 20 years.

The global economy is undergoing a transformation unprecedented in the last 100 years. Geo-strategic and geo-economic weight is moving, inexorably, from the Western advanced economies towards the emerging market economies. And the pace of this transformation is faster than many anticipated, the Treasury Secretary, Martin Parkinson, explained in 2011.² If booming commodity prices were a flash in the pan, there would be a case for government to come to the aid of industries hurt by what would be no more than a temporary jump in the exchange rate. But if they were going to last for decades, then everyone would have to get used to it. Businesses that couldn’t compete would simply have to be let go, as part of the endless creative destruction that sees 300,000 new businesses arise in Australia every year and a similar number disappear.

Parkinson said the rise of China and India has only just begun to revolutionise our economy and transform our place in the world: The resource boom and the global trends in manufacturing are merely the early, but probably the most obvious, manifestations of Asia’s rise. The risk facing us today is that, because of the immediacy of the challenges, our attention is forced away from the long-term horizon towards the ground at our feet.³ By 2020, China could have a middle class that surpasses the United States’ in number while by 2030, if India follows suit, there could be 3.2 billion middle-class consumers – two-thirds of the global total – in the Asia-Pacific region.

China’s promise has transformed Australia’s economic policy. Until 2004, Treasury was pessimistic about the outlook. The ageing of the population would plunge the budget into perpetual deficit and create an inter-generational crisis, as ever fewer workers were left to pay for the retirement of ever more of their parents and grandparents. But over the last two years, an era of plenty has beckoned, if only we play it right.

FitzGerald’s vision of what China might become has echoes through much of Australia’s history. In 1893, a former member of Victoria’s parliament, Charles H. Pearson, wrote a book that electrified the world. National Life and Character: A Forecast predicted that within 50 years, China would be among the world’s great powers. Does any one doubt that the day is at hand when China will have cheap fuel from her coal-mines, cheap transport by railways and steamers, and will have founded technical schools to develop her industries? Whenever that day comes, she may wrest the control of the world’s markets, especially throughout Asia, from England and Germany.⁴ Nothing but socialist tariffs could prevent it, but would the Hindoo still cheerfully buy English muslins if he can get a better article at half the price from Canton? Allied with the Africans, the Chinese would conquer the world:

The day will come, and perhaps is not far distant, when the European observer will look round to see the globe girdled with a continuous zone of the black and yellow races, no longer too weak for aggression or under tutelage, but independent, or practically so, in government, monopolising the trade of their own regions, and circumscribing the industry of the European … We shall wake to find ourselves elbowed and hustled, and perhaps even thrust aside by peoples whom we looked down upon as servile, and thought of as bound always to minister to our needs. The solitary consolation will be, that the changes have been inevitable.

Pearson’s book won plaudits from US President Theodore Roosevelt and British Prime Minister William Gladstone. The idea that the British empire faced eclipse was as popular then as declinism in the United States is today. In fact, there was a genre of nineteenth-century books prophesying Chinese invasion. The labour activist and journalist William Lane (who later established a utopian socialist settlement in Paraguay) contributed one in 1888, White or Yellow? A story of the race war of A.D. 1908, which imagined a world in which the Chinese had overrun Australia. They sat in Parliament, directed State departments, and one had even place upon the bench. Already white migration was slackening as Australia became more and more distasteful to the Caucasian peoples.⁵

At the heart of the China futures business is always the incomprehensible power of large numbers. Through the nineteenth century, the thought was that the sheer force of population would spread south through Indonesia and into North Queensland, then spread downwards and out.

The gravitational metaphor proved durable, applying for the first half of the twentieth century to Japan and then, with the Cold War, once again to China, where the downward thrust of militant communism became the rallying cry for Robert Menzies. In justifying sending the first Australian battalion into Vietnam, he said that, The takeover of South Vietnam would be a direct military threat to Australia and all the countries of South and South-East Asia. It must be seen as part of a thrust by Communist China between the Indian and Pacific Oceans.⁶ China’s support for North Vietnam and for Communist organisations in Cambodia, Thailand, Malaysia and Indonesia was a product of the Cultural Revolution; however, Western fears of the Chinese threat also rested on the lack of awareness of China’s split with the Soviet Union, which began at the end of the 1950s.

The 1970s brought the election of a Labor government led by Gough Whitlam, diplomatic recognition of China in December 1972 and the end of the Vietnam War. For a time, the future belonged to the men of commerce, and the aim was to build deeper relations through political, educational and cultural exchange. For much of this period, the West was in a tactical alliance with China against the Soviet Union, and Australia’s trade with the middle kingdom grew and grew. But the rise of China over the last decade has set the drums beating again.

Ross Babbage is one of Australia’s leading strategic thinkers. He was head of the Australian National University’s Strategic and Defence Studies Centre and is founder and chair of the Kokoda Foundation, a defence and security think-tank. He advised the defence minister during the preparation of the 2008 defence white paper and has close connections with the US defence establishment. He believes China is set on a course of military expansion. His thinking about the threat has been expressed in a number of papers, most recently a document on Australia’s defence strategy. In it, Babbage contends that within two decades, Chinese missiles, aircraft and navy will be in a position to exert much greater influence on Australia’s sea lanes, airspace and military facilities, including Pine Gap. The PLA’s emerging capabilities should not be viewed by Australia’s national security planners as a challenge in a forward theatre, but rather as a rising challenge to the direct defence of Australia itself.⁷ And well before this point is reached, China will be a political force throughout the Asia-Pacific region:

Because the People’s Republic of China continues to be an authoritarian communist state, the extension of Beijing’s strategic and political influence in the Western Pacific will likely undermine propagation of the liberal democratic values that the Western allies hold so dear. Australia’s and its close allies’ interest in encouraging and fostering these liberal democratic values is most unlikely to weaken in coming decades and so there is the prospect that Southeast and East Asia, the South Pacific and other adjacent regions will experience a more intensive ideological struggle in coming decades.

A powerful concept in Chinese military thinking, Babbage says, is shashoujian or assassin’s mace: a short club readily hidden in the folds of ancient Chinese clothing that could take an enemy by surprise, crush an enemy’s skull or assassinate an important leader. The use of the term in modern military thinking implies the use of surprise to strike in an asymmetric manner to cripple or disable a superior enemy at the very beginning of a struggle.

According to Babbage, the People’s Liberation Army strategy for the Western Pacific potentially involves four steps. First, blind the US surveillance and reconnaissance systems and damage command, control and communications networks with cyber, missile and space attacks. Then launch large pre-emptive attacks on US and Japanese bases and forces with missiles, aircraft and special forces raids, possibly extending to facilities in Australia. Simultaneously, there would be multiple missile and submarine attacks on US naval vessels. Finally, PLA units would aim to destroy more distant support forces from Hawaii to Alaska, Singapore and Australia. The PLA’s strategy appears to assume that the United States and its Western allies would be confronted by the prospect of a stark defeat, and they would be forced to negotiate a regional withdrawal and accommodation with Beijing. He says that PLA strategy is very similar to that pursued by pre-war Japan.

The strategy for Australia would be to build its own asymmetric power that, although inevitably very small compared to the might of China, would be able to inflict enough damage to make it think twice about attacking us. "It would contain a careful mix of capabilities that could, in extremis, ‘rip an arm off’ any major Asian power that sought to attack Australia."

These are the two Chinas in the Australian mind: the bottomless market and the menacing other. The first creates the overnight billionaires of Andrew Twiggy Forrest, Gina Rinehart and Clive Palmer. It shapes the economic policy of Treasury and the Reserve Bank. It transforms Australia’s place in the global economy, and the influence of the global economy on Australia.

The second breeds plans to spend $35 billion buying a dozen submarines equipped with cruise missiles capable of reaching Tiananmen Square and binds Australia ever more tightly in military alliance with the United States. The distrust of an alien state also seeps into the economic sphere, influencing the management of investment in resources, agricultural land and housing.

Over the last seven years, during which the size of China’s economy has doubled, each idea has tugged at our policy towards our great northern neighbour. There is a reservoir of goodwill and common sense that both sides have tapped into to soothe tensions and steady the relationship. There is much that draws the two nations together: the beat of commerce; the bond of travel as people from leaders to students and tourists discover each other; and, above all, a rich history in which each nation has made unique contributions to the place of the other in the world. But, as Australia makes its choices, an uneasiness has entered the relationship.

2.

LURE OF THE WEST

It was a motley gathering on the tarmac at Perth airport to greet President Hu Jintao. Hu was travelling to Australia for the 2007 APEC leaders’ meeting in Sydney – one of about two-dozen world leaders making the trip – but had arrived a few days ahead of the event, making Western Australia his first port of call.

Prime Minister John Howard couldn’t be there but sent his education minister and West Australian Julie Bishop to welcome him on his behalf. Governor-General Michael Jeffery and the state governor Ken Michael both sent their secretaries along. With the support of an enthusiastic crowd of red flag–waving Chinese Perth residents, organised by the local consulate, it was the WA state premier, Alan Carpenter, who was left to be the official greeter and to squire China’s president around Perth for two days.

Most of the rest of Australia has got no idea what’s going on in this state. They probably don’t quite understand why the President of the People’s Republic of China has come to Western Australia first. He’s come here first because Western Australia is the most important part of the nation of Australia to the Chinese,⁸ Carpenter declared after a state dinner attended by 500 of the state’s business community.

Indeed, Australia’s West has received an extraordinary flow of visitors from China’s senior leadership, starting with Party General Secretary Hu Yaobang in 1985, followed by Premier Li Peng in 1988 and Vice Premier (and soon to be Premier) Zhu Rongji in 1997. Hu Jintao’s Premier, Wen Jiabao, visited the state in 2006, and Vice Premier Zeng Peiyan and National People’s Congress Chair Wu Bangguo in 2011.* It is heavy traffic for a state that, though a quarter the physical size of China, has a population roughly that of Lanzhou, China’s thirty-fifth biggest city. Few of China’s provinces have received such attention.

* China’s political system has had an opaque quality at various points over the last 30 years. Deng Xiaoping, for example, was paramount leader but held neither of the key titles of president or general secretary of the Communist Party. Over the last few successions the pattern has settled, and the president has also been the general secretary of the Communist Party. This is followed by the chair of the Standing Committee of the National People’s Congress and the premier of the State Council.

Hu Jintao responded with a toast to his hosts, praising the friendly cooperation between China and Western Australia, which he said extended beyond the massive resource and energy projects under construction. Our cooperation in culture, science and technology and education is going profusely and has a bright future, he said.⁹

Carpenter recounted to parliament the following day that he’d enjoyed a two-hour conversation with the president of China, which is an unusual privilege, noting that he appeared very knowledgeable about Western Australia. He was inquisitive and appreciative of the musicians, particularly the didgeridoo played by Richard Walley.¹⁰

Hu’s first visit to Australia had been almost 20 years earlier, in the mid-1980s, when he was the new young secretary of the Communist Party in remote Guizhou in China’s south. Prime Minister Bob Hawke had asked Hu Yaobang who would be the influential leader in China in 20 years’ time that Australia should be cultivating. Hu Yaobang nominated Hu Jintao, and soon after that Australia’s ambassador to China, Ross Garnaut, was dispatched to Guizhou (where he was obliged to eat cat) to hand-deliver an invitation to visit Australia.

Hu Jintao became general secretary of the Communist Party in 2002 and president in the following year as the product of China’s fourth leadership transition since Mao Zedong. He portrayed his mission as fostering a harmonious society, as distinct from legitimising the pursuit of wealth in the manner of his predecessor, Jiang Zemin. His style was technocratic rather than charismatic.

Hu Jintao’s next trip to Australia – now as leader – was in October 2003. The Chinese had suggested the visit, with Hu flying on directly after the APEC leaders’ summit in Bangkok. The Howard government was pleased and arranged for Hu to visit Canberra on the Thursday. But then US President George W. Bush said that he, too, would like to visit Australia after APEC, nominating the Thursday as his preferred time. Howard’s office suggested that Hu spend the Thursday in Sydney and then come to Canberra on Friday.

The protocol issues got worse. The last two US presidents to visit, George H. W. Bush in 1992 and Bill Clinton in 1996, had been asked to address a joint sitting of parliament, the only foreign heads of state to have been extended this honour. George W. Bush would expect the same privilege. It would be a slight to the Chinese if Hu were not also invited to speak. But the tradition in the British House of Commons was that only an elected representative could be given the floor. What to do? The Howard government took a pragmatic decision, with the result that the two leaders addressed parliament on successive days.

It took some stage management. The United States had invaded Iraq a few months before, so there was a strong protest movement against Bush. Both the Tibet independence movement and the religious group Falun Gong planned demonstrations against Hu. The Greens were opposed to both visiting leaders, with senators Bob Brown and Kerry Nettle interjecting during Bush’s address and refusing orders from the speaker to vacate the chamber. The Chinese were rattled, notwithstanding the fact that the two Greens had been banned from taking their seats for 24 hours and thus could not interrupt proceedings. Early on the