The respective endowments of human labour and natural resources make for a highly complementary trade and investment relationship: Australia exploits its comparative advantage in agriculture, iron ore and energy commodities – China reciprocates with its comparative advantage in exporting labour-intensive manufactured goods. Given these complementary strengths, and the differing levels of broad based development relative to one another, trade between China and Australia has hugely benefited both countries.

The personal and cultural links between the two also continue to grow stronger. Some 700,000 people of Chinese descent live in Australia. In 2008, 400,000 Chinese tourists visited Australia (and 600,000 Australians visited China) and 130,000 Chinese students were engaged in study across the country. Approximately one official Chinese government delegation arrives in Australia each day.

The commercial dimension of the relationship is captured by trade and investment activity. The value of Australia-China trade now exceeds $76 billion per annum. The arrangements surrounding many of the resource off-take contracts contributing to this trade are long-term (that is 20 plus years) contracts describing strategically dependent partnerships.

Since the turn of the century Chinese foreign direct investment (FDI) has increased at a compound rate of 60 per cent per annum and reached some $US 56 billion in 2008. This investment growth is driven by China’s policy of ‘going out’ to acquire strategic resources, new markets, organisational capability and global brands, all made possible by the huge current account surpluses created by its export led economy.

It is the State’s ownership of these enterprises that is the core of public debate on Chinese inbound investment. State ownership runs contrary to the prevailing Western paradigm, which advocates for an economy run by private interests in which the State’s role is confined to setting purely legislative boundaries.

Three observations are important in this connection. First, in order to be successful, the West’s decision to engage China must be comprehensive and non-discriminatory across all aspects of the relationship. It must accept that our different socio-political systems will continue to evolve through mutual engagement. Second, the last thirty years of inbound investment has given Australia an enviable regulatory system, which successfully balances the immense value of FDI to the economy with wider national interest considerations. Finally, appropriately structured investments can use Australia’s established domestic laws to ensure commercial outcomes from asset management irrespective of ownership.

Chinese companies have been learning through the process of testing the boundaries of what is possible in Australia. Australia’s Foreign Investment Review Board (FIRB) has in turn clarified how legislation is applied whilst balancing the legitimate discretion required by the State to protect national interests and the full-transparency desired by investors. A number of high profile deals have been configured to comply with FIRB’s specific qualifications, and the size and sophistication of these deals continues to increase.

Given recent announcements that China’s State owned foreign exchange reserves have topped $2.6 trillion, and that any future liberalisation of its capital account could potentially open up a further $6 trillion in private and corporate savings, China’s outward bound investment can be expected to continue to grow rapidly. With the right checks and balances Australia is ideally placed to benefit from these investments, though it should not take this position for granted.

The Australia China Business Council (ACBC) has been calling for bilateral investment to be reciprocal and balanced both ways. Apart from a few notable exceptions, Australian investment into China has been languishing at around $ 6 billion for some time. Given the current Chinese focus on increasing domestic consumption, it’s important that the huge potential afforded by a Chinese domestic market is accessible to Australian firms.

China maintains restrictions on investment in areas such as mining, agriculture, banking and financial services, telecommunications and media – all of which are of potential interest to Australian firms. Other factors related to bureaucracy, transparency and complexity can deter or frustrate investment. The ACBC supports the view that a bilateral investment framework could be usefully included in an FTA, and that the effectiveness of investments should be monitored over time.

With fundamentally differing political systems and overarching socioeconomic architecture, it seems inevitable that China and Australia will continue to clash over some of these issues in the future. But China’s proximity to Australia means the bilateral relationship is important to both countries, and a renewed energy and political will around a potential free trade agreement is welcome. Australia’s push to complete the Doha round of negotiations, along with consummating bilateral trade agreements with key trading partners like China, is both aspirational and pragmatic. While there is a hard economic benefit that flows to China and Australia from completing a fully comprehensive free trade and investment agreement, there is also an important reputational and symbolic dimension associated with its delivery.

Given Australia’s broad based and long standing relationship with China, and the unquestionable complementarity of the two economies, there is every reason to feel optimistic about the long-term bilateral relationship.

A longer version of this article can be found here.

Frank Tudor is chair of the Australia-China Business Council.