Rio Tinto China Managing Director Ian Bauert
presented the following speech 'China: The Journey
Ahead' in to the Australia China Business Council in Perth on 2
I am delighted to be back in Perth to give this luncheon address. I
am particularly pleased that my son, Ben, is here today in his
capacity as secretary of the ACBC Resources Committee. Ben may not
remember, but from his youngest days he had frequent exposure to
the west Australian mining industry. In 1983 when I was sent to
China to set up Rio's first office, Ben was only three months old.
Ever the optimist, I assumed the basic necessities of modern baby
care would be readily available in Beijing. Alas my wife and I soon
discovered living in a hotel room that we could not keep up with
the pace of Ben's bodily functions, and the solution that 1.3
billion Chinese had used - the slit at the back of the pants - was
rather tricky in the confined space of a hotel room. After some
vigorous encouragement from my wife, I finally had a word to my
colleagues in Hamersley Iron, and for months afterwards, Beijing
airport was greeted by the sight of big, bulky Hamersley engineers
carrying large packets of Pampers nappies in for Ben. So on behalf
of Ben, I would like to belatedly thank the WA mining industry for
its generous contribution to his early comfort!
Needless to say, today every modern consumer good under the sun is
readily available in China and, more often than not, is probably
made there. It is a small measure of how dramatically things have
progressed in recent decades. And yet, the Chinese leadership is
the first to admit they have much further to go. While China has
become the world's second largest economy, its GDP per capita is
less than one tenth that of the US. The whole thrust of the 12th
Fifth Year Plan is about change and ongoing reform. It is the
clearest signal we have seen as to where the future lies for China.
We know that China intends slowing growth to 7% per annum and shift
the economy away from an investment-led and low value-add export
model towards a more consumer-driven and higher value-add economy.
The emphasis is on the quality of growth rather than growth for its
own sake. The Plan is replete with targets addressing environmental
and energy efficiency issues, increasing incomes, raising social
welfare benefits, and reducing the gap between the rich and poor.
Considerable thought has gone into its development. While there are
many challenges to realising its goals, not least a deteriorating
external environment, it is in itself a grand statement of reform
and its aim is to ensure that China's growth is sustainable.
The reformist nature of this Plan reminds us that China is on a
journey. China is a very different country from the one I first
lived in nearly thirty years ago, having undergone, at an
unprecedented scale and pace, the most dramatic change in people's
livelihoods the world has witnessed. Australia, and Western
Australia in particular, has been one of the greatest beneficiaries
of this with demand for our commodities skyrocketing, particularly
in the last decade. At Rio Tinto our revenues from China rose from
US$400 million in year 2000 to $16.6 billion in 2010, and $9.2
billion in the first half of this year, with the bulk of this
coming from our iron ore operations in the Pilbara. And as the
structural change continues, growth in demand for our products
looks set to continue, albeit at a more sustainable pace.
There are several drivers at work that point in this direction. The
continuing urbanisation of China is anticipated to continue through
2025 or beyond, bearing in mind that Chinese cities are vertical to
preserve arable land. While the top end of the residential property
market in some Chinese cities has been oversupplied, there is still
huge unsatisfied demand for affordable housing. The Plan envisages
that some 36 million units of social housing will be built by the
end of 2015. Supporting infrastructure in China still requires
significant expansion and the plan incorporates further development
of urban subways, hospitals, schools, power generation and
transmission, water projects, and road, rail and port facilities.
Much of this activity is taking place inland under the "Go West"
policy. Additionally, the move towards higher value add
manufacturing will also be resource intensive.
Along with structural reform, many of the rules and policy settings
in China have changed and or are in a state of flux.
Back in the early eighties, when the heavy hand of the old planned
economy was still evident, a complex web of rules seemed
everywhere. Even living as a foreigner in Beijing, there was always
a reason why you could not do something. If you asked why, you were
told there was a "guiding" or "regulation" preventing it. If you
asked to see the guiding, you were told that this would not be
possible. The rules were everywhere but you couldn't see
I encountered this Catch 22 process numerous times. Only once did
these phantom guidings actually take shape physically. In 1985, my
wife and I took Ben and his sister off to the seaside resort of
Beidaihe for a week's holiday. Keeping young Ben amused was a full
time job, so we took along our video player. All went well until it
came to paying the bill when I was asked to foot an extra 70 yuan
for use of the video player for a week. Of course I protested
saying why I should pay for the rental of my own video player! The
man behind the desk said there was a guiding to this effect. "Show
me!" I demanded.
Normally at this point the shutter would come down. But to my
surprise the man disappeared into the backroom apparently intent on
finding the guiding. Ten minutes later he emerged with a pile of
documents two feet high. He spent the next twenty minutes
laboriously wading through them as I looked on, still amazed that
all these guidings actually existed.
Finally, he turned to a clause buried deep in one of the
"There!" he said triumphantly, pointing to the relevant
I read the clause out loud in Chinese: "A guest is required to pay
10 yuan a night extra if he uses a microwave".
"But this is a video player", I protested.
"Same thing," he said without batting an eyelid.
Needless to say I paid the money - if only as a reward for his
As China began reforming its economy, some rules started to fall
away and others started to change. Many people became rich by
anticipating or responding quickly to changes in these rules. When
China opened its less profitable elements of the state sector to
private investment in the 1990s, for example, smart entrepreneurs
quickly moved in and transformed these enterprises. Today they are
some of China's richest people.
This is not to say that changes to the rules always bring about the
Some years after leaving China, I remember coming back and visiting
a Chinese friend at his house in a village outside Beijing. I
noticed that every house in the village was under renovation and
expansion. I commented on the village's new prosperity. My friend
shook his head. No, he explained, all the building was in
anticipation of the village being reclaimed for a High Tech
Industrial park. The maximum compensation was based on the
individual's house being of a certain area and everyone was
expanding their house to make sure they received the maximum amount
before they were torn down!
Even today, adjustment to the rules and to policy-settings get a
lot of coverage in China. One of the reasons the leadership has so
successfully steered the Chinese economy through some nasty twists
and turns over the past couple of decades, has been its ability to
adjust the rules for changed circumstances. Someone compared this
adjustment process to a racing car driver using the sports brake,
numerous gentle taps on the brake, rather than any sudden
In this regard, it is important to note that the current slowdown
in China is policy-induced. China has been deliberately and
selectively cooling the residential property market and targeting
inflation. This has been implemented by dozens of small adjustments
to fiscal and monetary levers. By such means, China seems well on
track for a soft landing for its economy.
There appears much greater risk externally than anything going on
within China. We must be careful of woolly thinking that somehow
links China's slowdown to the sovereign debt crisis in Europe or
the budget issues in the US. China is not debt-laden. Its exports
have not driven GDP growth since the Global Financial Crisis. The
government, corporations, and individuals of China have high
Should the worst happen abroad, and the contagion spreads, China
still has a number of useful implements in its toolbox that other
countries would love to have. China clearly needs to be cautious in
how it uses those levers, but the leadership's track record in that
regard is very solid.
Next year China will embark on another great journey as a
generational shift occurs in the country's leadership. Some 70% of
the positions on the Central Committee of the Party will be
changed. Nevertheless, this is widely anticipated to be a smooth
transition. China's new generation of leaders is expected to give
further impetus to the process of ongoing economic reform.
As the economy has changed, so have the institutions that drive it.
In the early 1980s the private sector was almost non-existent.
Today it is responsible for about two-third's of China's GDP and
virtually all new job creation over the past five years. As China
slows its economy to emphasise quality of growth and develops its
services sector, the continued prosperity of the private sector
will be critical to ongoing employment growth.
The state sector too is changing. Somewhat surprisingly to
outsiders, the SOEs often compete furiously amongst themselves for
business. Importantly, the processes of governance for SOEs is
changing rapidly. A number of SOEs now have independent directors
on their Boards and their subsidiaries are listed on stock
exchanges in Shanghai, Hong Kong and elsewhere. Every year the
senior managements of these enterprises are required to undergo
training in leadership in much the same way as we do within
companies like Rio Tinto.
In Australia, we need to bear these various changes in mind as we
shape our responses to the opportunity and challenges that the
emergence of China presents. China is a very complex place and is
certainly not monolithic, as conveyed by such pejoratives as "China
Inc.' In reality there are great opportunities for Australian
companies to engage closely with individual Chinese enterprises in
innovative ways for the benefit of both.
Some of Rio Tinto's past engagement with China in iron ore is a
testimony to this.
The Channar Joint Venture which was negotiated with Sinosteel's
predecessor in the 1980s was the forerunner to a number of joint
ventures between China and Australia in the resources sector. It is
a robust model that has stood the test of time. As someone who had
some involvement in that initial deal, I was delighted that late
last year Sinosteel and Rio Tinto Iron Ore extended the joint
venture for a further period, and agreed to consider other
possibilities for cooperation.
One area of collaboration that was much less heralded but which
played a central role in opening up China to WA's iron ore supply
was the sinter testwork programs with Chinese steel mills which
Hamersley initiated in the early 1980s. This painstaking work led
by the late Jim Hammond conducted dozens of collaborative trials
with individual Chinese mills to prove that combining our Pilbara
ores with domestic concentrates gave a much better economic result
for the mills. It was this work as much as anything else that gave
the Chinese the confidence to lift their intake of Pilbara ores. A
measure of its success was that it was later emulated by our
Even the portfolio of Rio Tinto's iron ore products emerged as a
result of close dialogue with Chinese enterprises. The Pilbara
blend, as our base load products are called, was first suggested by
a Chinese steel mill executive at a Rio Tinto Iron Ore technical
forum in China in the early 2000s as a means of lowering
stockpiling costs at Chinese steel mills and reducing product
variation. This idea was taken up by RTIO. The introduction of
Pilbara Blend in 2005 achieved the aims suggested by the executive
and enabled us to reduce the number of our products from 13 to 5,
thereby extending the life of our orebodies, and creating
efficiencies throughout our production system.
As to the future, we believe our current engagement with Chinalco,
our largest shareholder, can also be potentially game-changing for
both our companies.
As many here know, finding and developing long life, low cost
resources around the globe is getting more and more difficult. Tier
One resources are hard to find at the best of times and when found,
are often challenging orebodies located in remote environments.
With increasing resource nationalism, greater stakeholder concerns,
rising costs, a shortage of skilled labor and diminishing access to
funds, mining companies are increasingly facing a complex web of
socio-political, economic and technical issues. In such
circumstances, it makes sense to find partners with complementary
strengths, where both sides can bring something to the table so as
to increase the chances of success and to lower risks.
This is the case with the two joint ventures we have announced with
Chinalco and its listed subsidiary, Chalco.
Last week we received approval from the Ministry of Commerce in
China to proceed with the establishment of our joint venture
exploration company, CRTX. This joint venture will combine
Chinalco's local knowledge and exploration expertise in China with
our experience and techniques developed through sixty years of
exploration around the globe. The idea is to find and develop world
class orebodies in China, with an initial focus on copper which
faces long term short supply and which China needs for its ongoing
In West Africa, we have teamed up with Chalco, to develop the
Simandou iron ore resource in Guinea. This project will leverage a
potent combination of our two companies' various strengths in
mining technology, infrastructure construction, sustainable
development capabilities, and access to markets and finance. Again
we are confident that through maximising our respective
capabilities in the partnership, we can develop this major global
resource rapidly and in a sustainable way.
China's journey abroad is one which is of particular significance
for Australia. There has been much discussion here about China's
"Going Out" policy and what it means for this country. Here again,
we should remember that, like most things in China, the "Going Out"
policy is a work-in-progress.
Our experience in China suggests that corporate moves under the
"Going Out" policy are driven by the enterprise itself and very
much motivated by commercial goals. While the "Going Out" policy
has the general blessing of the Chinese leadership, it is not
micro-managed. Compared to developed countries like the US and
Japan, Chinese companies are relatively new to the process of
investing abroad. Their experience, as you would expect, has been
mixed, which is leading to a growing understanding of the risks of
operating in a foreign environment. This is unlikely to slow the
push to invest overseas, but it is likely to ensure greater due
diligence and caution before Chinese enterprises commit to overseas
investments in the future. There is also a greater willingness to
take advice from in-country professionals. All this is healthy and
part of the process of China entering the world.
Investment flows between Australia and China, while starting to
grow, still remain low and Australian investment in China remains
small. China's Foreign Direct investment stock in Australia in 2009
was only A$9.2 billion out of a total of nearly A$2,000 billion.
Despite this, there has been some vocal opposition in Australia
against Chinese investment, much as there was against Japanese
investment in the 1960s. A Lowy Institute study of Chinese
perspectives of investing in Australia in June this year found that
despite moves to improve the transparency of Australian foreign
investment guidelines and repeated official welcome messages, many
Chinese investors believe that Australia discriminates against
Chinese investors, particularly in natural resources. Australia has
always relied heavily on foreign investment for growth of its
resources industry. We simply cannot afford to be perceived as
anything other than welcoming and transparent in our approach and
policies towards Chinese investment in this country.
From my little perch in Shanghai, there appears to be an assumption
in Australia that the benefits will flow to us from China's
emergence, irrespective of what we do. Much of the current public
debate here seems to be about dividing up the cake rather than
working out how to ensure the cake is properly baked. We shouldn't
get ahead of ourselves. As Rio Tinto's Chairman, Jan Du Plessis
recently said: Australia's greatest threat is complacency. It is
yet to be seen whether we can fully engage with China to maximise
the opportunity for both our countries.
While two way trade with China is now over A$100 billion annually,
it is worth remembering that in pure trade terms China means more
to us than we mean to them. 25% of our exports go to China but only
2% of China's total exports come to Australia. Australian imports
comprise about 4% of China's total. Certainly our exports are very
important to China as they constitute the basic building blocks for
a modern economy. However, we live in a competitive world and China
has choices. We need to bear in mind there are a lot of other low
cost players out there competing for those export revenues, be they
iron ore suppliers from Brazil or Guinea or coking coal suppliers
from Mongolia or Mozambique.
We are witnessing historical change in China. As China continues on
its journey, there are likely to be many challenges ahead both
internally and externally. Through positive engagement with China,
we can in some small way help shape the direction China takes.
Australia and Western Australia, in particular, are not passive
bystanders in this process. We are privileged to be very much part
The ACBC and the combined Australian Chambers in China have an
important role to play. We need to get better at conveying our
views to the people and governments of China and Australia on
issues that matter. The recent establishment of an AustCham for
Greater China is a step in the right direction. Closer links
between the ACBC and AustCham in this advocacy process would be
another. We might also consider directly connecting with some of
the excellent think-tanks on China being developed in universities
and institutes in Australia.
Engaging with China is not a zero sum game. When a Chinese company
does well in Australia, or an Australian company does well in
China, we all benefit. If political engagement between our
governments flourishes or deteriorates, businesses in Australia are
all winners or losers, as are our partners in China. In this
fast-changing environment, the people, government and businesses in
Australia are all better off by engaging closely with China as it
makes its way into the world.
I began this speech talking about a shortage of nappies in the
1980s. Having started with a bottom-up view of the past, I would
like to end by giving a top-down view of the present.
One of the most exciting things about living in China at the moment
is the sense of widely varied and purposeful momentum that you
sense everywhere. China fairly teems with life. When people first
come to a place like Shanghai, they are blown away by its
spectacular buildings. But the greatest change that has taken place
is invisible to the naked eye. If you could see inside peoples'
minds, you would be even more startled.
There is a park near where I live in Shanghai called Fuxing Park,
which was the French Park during the days of the foreign
concessions. Under the benign gaze of statues of Marx and Engels,
on any sunny weekend, the Park comes absolutely alive. Hundreds of
people pour onto its lawns and paths to play badminton, or they
sway en masse with the gentle movements of Taiqi, twirl and flip
large noisy spinning tops, play Chinese chess or cards, or dance
foxtrots on the streets.
But my favourite is the scholar who stands upright with a very long
brush, about the length of a mop, writing stories on the cement in
the most beautifully crafted calligraphy. Instead of using black
ink, he uses water which slowly fades into the concrete as he moves
down the pavement.
China is a bit like this - an ongoing story, deeply rooted in an
ancient culture, but moving inexorably down a path where the past
gradually recedes and all that matters is the work-in-progress and
the story that lies ahead.
Thank you for your attention.