Are China and Australia at a Breaking Point?

2017 was the 45th anniversary of bilateral ties between the People’s Republic of China and Australia. It was not an ideal celebration of the relationship. Over the past year there has been heated discussion within Australian media and political circles about Chinese influence in the country, and its role in the world more broadly. Australian politicians have been public in their critique of China as a threat. China has reacted strongly, both at the official and unofficial levels. Much Chinese media has been scathing in its coverage of Australia.

It is fair to say that the bilateral relationship is at a very low point. But are bilateral relations set for a major break?

Things started to go dramatically downhill in the Australia-China bilateral relationship in mid-2017, when the issue of Chinese influence in Australia exploded into the national consciousness. A special joint investigation by the Australian Broadcasting Corporation (ABC) and Fairfax Media, aired on the popular “Four Corners” investigative reporting program, promised to uncover “how China's Communist Party is secretly infiltrating Australia.” The program traced the stories of various individuals and their ties to China and concluded that Australians must all be more careful of “covert Chinese actions taking place on Australian soil.” Following that, Australian media, think tanks, and politicians, as well as other analysts, experts, and commentators have been intensively investigating the issue of Chinese influence in Australia. The impact is not just rhetorical. Former Senator Sam Dastyari lost his seat over the issue, and legislation directed at foreign influence is being introduced.

In December, Australian Prime Minister Malcolm Turnbull cited “disturbing reports about Chinese influence” in introducing legislation that would ban foreign political donations. Turnbull said foreign powers were making “unprecedented and increasingly sophisticated attempts to influence the political process.”

In response, over the past few months, Chinese officials have urged Australia to “abandon its prejudice towards China and perceive China and the China-Australia relationship objectively.” The Chinese ambassador to Australia called the claims made in the ABC/Fairfax report “groundless” and “an attempt to whip up a “China panic,” while China’s Foreign Ministry said the reports were “unfounded and extremely irresponsible.” In other statements, the Chinese Foreign Ministry lodged an official complaint expressing shock at Turnbull’s concern over Chinese influence, saying he had “poisoned the atmosphere of China-Australia relations” and deeming reports from the Australian media “irresponsible,” “without principle,” and “full of bias against China.”

Official Chinese media was initially fairly reserved. Mainstream papers reflected the Foreign Ministry’s line. To begin with, even the Chinese-language version of the generally sensationalist Global Times only went as far as describing the “Four Corners” program as being “based entirely on speculation.” However, over time the heat has increased.

Coverage in the People’s Daily has tended to suggest that Australia’s attitude toward China is irrational and inaccurate. For example, articles such as “Australia must perceive China on a basis of facts and reality” lament that Australia does not have a “sunshine attitude towards China.” In Xinhua’s English-language reportage, directed at an international audience, there is a sense of a thinly veiled threat, a feeling that Australia should stop criticizing China, or else. For example, in a piece entitled “It's time for Australia to decide what kind of relationship it wants with China,” the author argues that the “great economic complementarity between China and Australia is still there,” but that this is at risk if “Australia continues to undermine bilateral political trust and poisons the people-to-people relationship.”

A mid-December editorial in the Chinese-language Global Times argued that Australia’s exaggerated vigilance toward China is reminiscent of McCarthyism. It described how Australia was one of the Western countries that had benefited most from China, but also one of the countries in the “Western camp” to proactively find fault with China, therefore making Australia “a bit like bubble gum stuck to the soles of China’s feet.”

In addition to media and official views, anecdotal evidence suggests that public sentiment toward Australia, insofar as average Chinese people think about Australia at all, has cooled. Many Chinese I have spoken to increasingly feel that Australia is out to get what it can from trade and investment with China, but at the same time, takes any opportunity to publicly scold and shame it. I have argued in the Canberra Times that most Chinese have been made aware of how Australia sees China and it does not endear Australians to them. The result in China is a sense that Australia is duplicitous and untrustworthy – as one Chinese person described it to me, “grabbing with one hand, and slapping our face with the other.” This is a big shift even from a year ago, when many Chinese associated Australia with kangaroos and koalas, and, occasionally, former Prime Minister Kevin Rudd.

It should be noted that these changing views toward Australia reflect a broader trend of growing anti-foreign sentiment in China. President Xi Jinping is staking his and the Party’s legitimacy on the project of “the great rejuvenation of the Chinese nation.” This fundamentally means shaking off what is broadly understood in China as over a hundred years of humiliation at the hands of Western powers. For the Chinese Communist Party, what that means in practice is less important than symbolic success in the eyes of the domestic population. That is to say, the Party needs Chinese people to believe that China is stronger, greater, and more respected than it has been since it was thrown from what it sees as its rightful place in the world in the mid-1800s. The flipside of this is that the West, characterized as being the cause of China’s weakness and vulnerability for so long, must be seen as no longer offering anything necessary for China to re-emerge. The internal Party communique from 2013 known as “Document 9” sets out this rejection of the West in clear terms. Xi’s concept of “the four self-confidences,” that is, that the Chinese should have total faith in “socialism with Chinese characteristics,” reiterates to the Chinese people that they no longer need to tolerate what they see as being looked down upon or bullied by the Western world, including Australia.

The Contours of the China-Australia Relationship

When speaking of the impact on the bilateral relationship between Australia and China, it is worth examining what could potentially be impacted, that is, the nature of the various interactions between the two countries. In the simplest terms, bilateral ties can be categorized as political, economic, and people-to-people. None of these elements exist independently. From the Chinese point of view, these elements are in fact very tightly intertwined because of the power and reach of the Party-state.

The economic connection is usually seen as the strongest. This view is built on an understanding that Australia’s economy depends on China. China is Australia's largest trading partner in terms of both imports and exports. Australia is China's sixth largest trading partner; it is China's fifth biggest supplier of imports and its tenth biggest customer for exports. Twenty-five percent of Australia's manufactured imports come from China; 13 percent of its exports are thermal coal to China.

Education is a topic at the center of much of the recent debate about China in Australia. There has been an increase in the number of international students overall, but the largest group, around 30 percent, are from China, leading some to argue that Australia’s economy is increasingly dependent on this source of income. According to some reports, there is a financial risk to universities if overseas student intakes falls, since, as they argue, almost a quarter of university revenue comes from international student fees.

According to Tourism Research Australia, Chinese tourists have for the past few years accounted for almost a quarter of Australia’s total international visitor spending. At present, only a small proportion of China’s total population hold passports, so both the overall number of tourists and the amount they contribute to Australia’s economy have the potential to increase dramatically. Indeed, in the five years between 2010 and 2015, the total number of Chinese visitors to Australia more than doubled. While Australia currently receives only around 1.5 percent of all Chinese tourists, these visitors have substantially contributed to recent record inbound tourism numbers. Chinese tourists are projected to add AU$13 billion (US$10 billion) to the Australian economy by 2020.

These all add up to a broadly held belief that Australia should be careful not to annoy its “banker.” However, despite these apparently impressive figures, we must be cautious of overstating Australia’s reliance on China. Other researchers argue that in fact the United States plays an equally important role in Australia’s economic wellbeing – although these researchers perhaps have a vested interest in challenging the view that Australia needs to do everything it can to keep China happy for the economy to flourish. For example, a report from the U.S. Studies Center argues that “no single country plays a larger role in Australia's economy than the United States.” It notes that “the United States is not only Australia's second largest trading partner, it is by far the largest investor in Australia and an unparalleled provider of the capital required to fuel our economy.” Similarly, research conducted by the Australian National University’s National Security College argues that “perceptions of Australia’s vulnerability to Chinese economic pressure are exaggerated. Some individual sectors are more vulnerable than others but this does not extend to the economy as a whole.”

Additionally, Australia should be aware that the structure of China’s economy is changing as it moves from a manufacturing model based on export-led growth to one increasingly driven by consumption and services. This in itself already has implications for Australia, without even considering potential punitive actions by Beijing. It is predicted that as China’s economy develops, demand will shift from raw materials to the manufacturing, services, and expertise sectors. While Australia has some advantages in supplying these, they are not the clear advantages of the resources sector. In particular, few other countries had Australia’s quantities of iron ore, and the infrastructure in place for efficient transport (transport costs are up to 10 percent of the value). However, many developed countries have the education and technical expertise to meet China’s future demands. Australia must certainly be ready to adapt itself to this enormous structural shift in China’s economy. Canberra can and should use this moment as an opportunity to ensure Australia’s interests are diversified and not overly reliant on any single partner.

Given the heat around the issue of Chinese students, the contribution they make to the Australian economy should be carefully examined. While some reports have quoted potential losses to Australia’s export income of almost $24 billion, these fears may be overstated. Australian Bureau of Statistics data shows that the sum total of all international students is just over AU$28 billion (US$22 billion). China certainly makes up the highest proportion of students, but even so, after subtracting the costs involved in supporting students, the contribution to Australia’s GDP is something like 0.35 percent. It is true that certain Australian universities rely more heavily on revenues from Chinese students than others. For example, around 20 percent of Murdoch University’s revenue comes from Chinese students. Most of the “G8” universities, however, have a far lower proportion. For example, the University of Sydney earns 6.4 percent of its revenue from Chinese students, and the Australian National University earns just 4.5 percent. This reflects their more diverse sources of external funding. As such, even if the Chinese government did take the dramatic step of cutting off all students coming to Australia, while some universities would certainly suffer, the economic impact as an aggregate across the country may not be as dramatic as has largely been assumed.

As can be seen, it is difficult to be certain about how economically dependent Australia actually is on China, or how a cooling of the bilateral relationship could affect the Australian economy. It is certainly worth considering that while China is a large economy of great importance to Australia, it is not Australia’s only source of economic strength and security. As Peter Robertson put it for ABC, China “still has a long way to go before it can match the sheer economic weight” of the United States. And, regardless of challenges in the relationship, Australia needs to be aware of – and responsive to – the changing nature of China’s economy itself and how that might affect Australia.

Sanctions With Chinese Characteristics

Given this lack of certainty, the next question is then: would Beijing take action to retaliate against what it sees as unfair and inappropriate behavior by Australia? And if so, what could that look like, and how long might this retaliation last?

We have seen “sanctions with Chinese characteristics” before. China, like many other countries, uses political control over economic relationships to target and attempt to influence the behavior of other countries. In 2010, China cut off exports of rare earth minerals to Japan after the Japanese coast guard arrested a Chinese fishing boat captain near disputed East China Sea islands. Relations with Norway were frozen in 2010 after the Nobel Peace Prize was awarded to Chinese poet and political activist Liu Xiaobo. Despite Norway’s numerous attempts to mollify China, relations were only normalized six years later. In mid-2012, China imposed an import ban on Philippine bananas after Manila persevered with a case over China’s claims in the South China Sea at the international tribunal in The Hague. In response to South Korea’s decision to host the U.S. Terminal High Altitude Area Defense (THAAD) missile defense system in 2016, Korean pop culture, cosmetic products, and Chinese tourism to the country were restricted – albeit for the most part unofficially. Most recently, new fees were imposed on Mongolian commodities at a major border crossing between China and Mongolia after Ulaanbaatar welcomed the Dalai Lama for a visit.

However, China’s use of its economic strength to exert influence differs from formal sanctions used by other countries in an important way: China does not call them sanctions. This is because China, officially at least, opposes sanctions, especially unilateral ones. China instead claims its economic coercion is a result of standard enforcement of regulations, or the spontaneous outburst of patriotism among Chinese consumers. And the latter certainly occurs. During my time living in China, I saw plenty of outbursts of patriotism, including boycotts of products from other countries that were seen to be behaving in ways inimical to China’s interests.

A recent and well-known example of what Beijing characterized as nothing more than the passionate disapproval of the Chinese people was the case of South Korea and THAAD. According to publicly promoted information, Chinese tourists simply chose to boycott travel to South Korea because of their nationalist anger over THAAD. However, it is now known that Chinese authorities gave verbal instructions to tour agencies to restrict travel to South Korea. Indeed, one anecdote runs that a cruise ship of Chinese tourists would not allow passengers to disembark in South Korea, despite them wanting to. China’s Foreign Ministry, meanwhile, maintained the public rhetoric that China remained “open and positive” about Sino-South Korean ties – but called on Seoul to “listen to the voice of the [Chinese] public.”

China’s approach has advantages; because of the power of the media and propaganda in China, it is possible to quickly influence Chinese people to change their consumer choices in line with official interests. Chinese propaganda is adept at shifting direction, seemingly able to turn on public sentiment when politically expedient, and turn it off again if it looks in danger of boiling over and out of control. This is not to say that Chinese people are automatons – far from it – but a decades-long patriotic education campaign has powerfully instilled the social contract wherein people know not to question official lines when it comes to politics. This allows Beijing to deploy its “people-led” economic coercion quickly and flexibly, adjusting the pressure to suit the particular situation and its priority. Formal sanctions, in comparison, are slow to build and to dismantle, because they require legislative approval and/or allies’ buy-in. However, as Yanmei Xie, China Policy Analyst at Gavekal Dragonomics, explains, in order to maintain plausible deniability, Beijing loses the ability to openly link policy objectives to its economic statecraft. Its actions have poor enforceability and durability, as they rely partially on public sentiment. Its refusal to own up to them also makes Beijing’s deeds seem underhanded, rendering it even more unpalatable for the targeted state to capitulate under pressure.

Like other countries, Beijing is selective in its targets. It seems to spare those who are capable and willing to resist. For example, the Chinese reaction to South Korea for hosting THAAD was very different from that toward the United States for providing the missile defense system. Beijing also appears more ready to take action against its Asian neighbors than countries farther away. We saw this when Mongolia received swift economic retaliation for hosting the Dalai Lama, one of the most egregious possible insults in China’s eyes. When Britain hosted the Dalai Lama, however, the response was a more mild diplomatic cooling.

This discrepancy in China’s response can be partially explained because neighbors tend to have more and closer economic ties with China for Beijing to exploit. However, there is also a psychological component. As it has been explained to me by Chinese interlocutors, China feels its relationship with its neighbors is less one of abstract state-to-state relations among equals than it is like a family, with China as the strict but benevolent father figure. As such, there are associated expectations about obligation and behavior that do not apply outside of the region – at least from China’s perspective.

Will China Kill the Chicken to Scare the Monkeys?

So, if China’s political elites decide to punish Australia by limiting trade or investment, they could. Likewise, if Beijing wants to dramatically cut people-to-people ties, it could. But will it?

This is the great unknown. There are some reasons to imagine that China would choose to do so. It has done so before. It could choose to take action to try and nip what it sees as dissent in the bud, and demonstrate to other countries of similar global standing to Australia that crossing Beijing’s vision of the world will not be tolerated. There is a well-known saying in Chinese: “kill the chicken to scare the monkeys.” Beijing may not be averse to taking that approach with Australia.

However, there are also reasons to think that China would not do so. For one thing, China sees the degree of perceived insult and injustice in graded terms. Mongolia is not the United States or the United Kingdom; South Korea is not Australia. China largely expects Western countries to push back against it; indeed, it is a central tenet of China’s powerful humiliation and victimization narrative. It does not expect its Asian neighbors to do so, and is far less tolerant of perceived misbehavior when they are seen to step out of line. In addition, not all insults are equal. The response to the Nobel Peace Prize being awarded to Chinese dissident and activist Liu Xiaobo shows how extremely sensitive China is to anything that it perceives as a real risk to stability and Party legitimacy. Only a deep understanding of China would allow an external analyst to realize that Liu was seen as more of a threat than the Dalai Lama.

And of course it is true that at this stage, China needs Australia too, both politically and economically. This suggests that current tensions may not last long. For example, in 2008, a series of events including Tibet riots in March, disruptions to the Beijing Olympic torch relay in countries including Australia, and negative coverage of China’s “coming out party,” the Olympic Games, caused significant tension between the West and China. However, these sentiments passed in due course and strong trade, economic, and people-to-people ties resumed. Further back, in 1999, after the accidental U.S. bombing of the Chinese Embassy in Belgrade, Chinese sentiments toward the United States and NATO countries hit a profound low. However, it did not take long to restore normal relations. The current negative sentiment around Australia could be switched off as quickly and as easily as it was switched on, should the need arise.

Additionally, while “scaring” Australia may influence other countries to take a more mollifying approach to China, it is also very possible that it could backfire and galvanize them into taking more action to balance and constrain China. This could well have economic implications. Also on the economics side, Australia is the most logical source of resources like iron ore for China. If supplies were cut without an alternative source being readily available, it would impact China’s domestic economic development, and undermine the implicit social contract via which the Party derives its legitimacy. China needs at least some friends. Beijing – or more accurately, the Party – would need to feel an extreme sense of risk to its core domestic interests before it would undertake such potentially destabilizing actions.

China would also presumably have noticed that its efforts at “unofficial” economic coercion so far have not been entirely successful. Just as when the West pushes hard against China, the result of such pressure can be counterproductive. While China has engaged in “sanctions with Chinese characteristics,” they have rarely been successful in achieving a shift toward Beijing’s preferred behavior or policy. Out of a number of cases, only Mongolia promptly surrendered on the issue at stake – hosting the Dalai Lama – and promised not to host him again. This is likely because for Mongolia a withdrawal of economic engagement by China is close to an existential issue. In Australia, the last six months have seen a hardening in sentiment toward China in much of the policy community. China’s increased efforts at influence appear to have backfired.

This is not to say China’s approach to economic coercion, however, is a failure. China plays a long game, and even if countries do not immediately rescind their position, China’s show of strength can be effective in the longer term by asserting dominance and establishing deterrence. Countries learn their lesson. For example, on a 2016 trip to Beijing, Philippine President Rodrigo Duterte announced a “separation” from the United States, a long-time ally, and a realignment with Beijing in exchange for economic favors. After years of China boycotting Norwegian salmon exports after Liu Xiaobo was awarded the Nobel Peace Prize, Norway pledged that it would “not support actions that undermine” China’s core interests and major concerns. While South Korea may not change its mind about THAAD, it may search for other ways to mollify China and show reverence in the future. In this regard, it is up to the leadership of the countries being targeted to decide how to respond.

So what will China choose to do? While obviously what Australia says and does matters, the domestic circumstances in China are also critically important. Much depends on where Xi sees himself, the Party, and the success of the domestic nation-building project. What other countries are doing regarding China is also relevant, and which countries are doing what. Even China cannot afford to cold shoulder too many other countries at once, and certainly not to the same degree.

On the one hand, China may want to send a clear message to Australia that certain rhetoric or behavior is not deemed “appropriate.” However, this is most likely to involve small measures that will not set the tone for the whole bilateral relationship. Given Australia’s position as a Western middle power, aligned with the United States and outside China’s “familial obligation” expectations, we are likely to see, at least in the near future, a continuation of hot rhetoric along with diplomatic cold-shouldering.

The probability that any punitive measures would be low level and short term is further compounded by the very real fact that China does need Australia, both economically and politically. For its own continued development and growth – the central pillars of the Communist Party’s legitimacy – Beijing needs a peaceful region that respects it and is willing to engage and do business with it. Australia, of course, does not control how other countries in the region or the world view China, but a serious rift between the two countries could run the risk of “scaring the monkey” away altogether.

As is always the case, even if China did decide to deploy its very harshest measures as punishment for Australia, it is entirely up to Australia to decide how to react.