Last Friday night at Shanghai’s Kakadu Bar in the heart of the city’s foreigner-friendly district, the party was swinging hard and early at Christmas drinks for the Australia’s Chamber of Commerce and Industry.

As the flowing liquids loosened lips with their usual, unerring efficiency, upbeat answers to questions from Crikey about the economic mood and business opportunities in China were quickly replaced by whispered confidences relaying concerns (widespread) about the lack of knowledge about China, much beyond the headlines, in Australian government and business circles (and, um, plenty of those present).

On December 20, the China-Australia Free Trade Agreement (ChAFTA) will take effect a decade after talks began.

It’s wearying to keep having to say this, but as the government prepares to unveil $5 billion in savings in tomorrow’s Mid-Year Economic and Fiscal Outlook, Treasurer Scott Morrison and his boss, who has a far superior grasp of economics, had better turn their attention to the ever-growing revenue hole: unfortunately for them, ChAFTA is only an itsy-bitsy piece of the puzzle.

As government and business suits slap each other’s backs about ChAFTA and its promise of a position on the start of what is apparently to China’s next boom — the “services economy” — the party, at least as we know it, is well and truly over.

ChAFTA comes amid the final and fatal round of smashed iron ore prices, from which there will be no return for some years. On Friday night, iron ore closed at US$37 per tonne and is heading further south, having lost 60% in just 12 months. It hardly matters where the price lands now; junior miners are on speed dial to corporate undertakers and Fortescue Metals Group has started to bleed cash.

Coal, Australia’s second-biggest export, had its path to extinction confirmed by the Paris climate change talks despite the shrill, embarrassing efforts from the world’s largest per-capita emitter (that’s Australia, not China). Julie Bishop would have had a better chance barking at the moon.

For all the tariff reductions and market access gained in ChAFTA, the sectors being spruiked by the governments are niche, at best. Live cattle, green buildings, agriculture technology, kindergartens: they are important, but even if these industries were storied successes, they would only ever be a rounding error on monthly iron ore figures — even at these prices.

The main sectors being promoted as the next wave of Australian exports to China are tourism, education and the mysterious “services”. Yes, the news is good, but frankly education and tourism will owe little, if anything, to ChAFTA, and the government must ensure sustainability over pure quantum as it begins a fresh panic about the gaping resources budget hole that was estimated last week at a cool $15 billion.

International education, Australia biggest export outside resources, is hardly a new market — in fact, it’s reasonably mature. While there is still some Chinese growth in secondary education, numbers in tertiary institutions are already pushing the boundaries of diversification, with Chinese students making up about 25% of the international cohort. Depending on exchange rates, the sector has been estimated at $15 billion to $18 billion in recent years — that’s $4 billion to $5 billion from China, or one-tenth of China’s iron ore imports from the Pilbara.

International education should have learned some lessons after it was allowed to grow unfettered by the Howard government as universities were forced to plug ever-diminishing taxpayer funding, resulting in over-reliance by some institutions and an unacceptable degree of ghetto-isation of Chinese students.

Tourism is on the tear, but again the numbers are only a fraction of bulk commodities. And tourism, insanely unprepared for surging Chinese numbers, has already institutionalised a certain degree of its own ghetto-isation that the Chinese tour-group model brings to every country it touches: short trips, buses, cheap hotels, standard sights, Chinese restaurants, shopping.

Then there is “services”. It’s an increasingly convenient catch-all phrase used by promoters of various economies to say “don’t worry, there’s lots of growth in the services sector”.

The dishonest thing the government has done is to pretend that education and tourism are not part of this services sectors for Australia and China. Australian firms have neither the scale, language skills nor risk appetite to attempt to crack health or financial services in China. In truth, education and tourism are the bulk of it: the rest are mug’s games, as Australian banks can attest.

Then there’s agriculture. Apparently the driest (inhabited) continent on Earth, increasingly racked with extreme climate events that are the farmers’ and graziers’ worst enemies, will become Asia’s (green) food basket. Pull the other one. Six-years lows that are battering soft commodities markets provide even further disincentive for investment.

Then there is investment overall: last year, China finally pulled past the US to be Australia’s biggest single foreign investor. It’s likely, for now, to be a one-off. In China, consultants have confirmed in the most emphatic terms that the resources deal flow is as parched as most of Australia this summer, and that drought won’t end until the bottom-feeding vultures flap in to pick up debt-laden assets at fire-sale prices.

Adding further uncertainly for Australian companies, there is growing nervousness about choosing the right Chinese business or investment partner as President Xi Jinping’s anti-corruption campaign pulls focus on the nation’s financial hub, Shanghai.

Last but not least, the harsh reality the government won’t tell businesses about dealing with China: the risk of never being paid or having your business or IP confiscated or copied as you choke you way to and from trips or work each day in a country with a legal system not worth a hill of beans (the horror stories are endless). And in Shanghai these days, one pays $7 for a cup of coffee.

China now pretty much has what it wants from Australia: low resource prices, the craven pretence that Taiwan is not an independent country, and a free pass on investments up to $1 billion, which it will likely use to pick up portfolio of Australian mines for a song.

Perhaps the most galling, telling illustration that the China salad days are at an end was the response to the xenophobic decision by Scott Morrison to stop the bovines by blocking a Chinese bid for S. Kidman and Co, Australia’s largest private landowner and cattle producer, last month. During the China heyday, this would have brought the usual campaign of confected outrage from state media as well as diplomats and politicians called in at all hours to please explain.

Two weeks ago, the silence from Beijing was deafening; the Chinese have ceased caring. Welcome to Chapter 2.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey