to write this 8000 word article, for security challenges,

we thought we'd do what in my experience academics rarely do,

and that is join with John together the disciplines of economics

and strategic studies into a one discipline approach.

We were, when I asked John to join me in this,

and I don't often do joint-authored articles.

It's generally a difficult process.

But in John's case it was seamless and painless,

as far as I'm concerned.

We talked about Paul Kennedy's seminal book,

"The Rise and Fall of the Great Powers"

and Kennedy's clear conclusion

that there is a very strong connection in the long run

between an individual great power's economic rise and fall

and its growth and decline as an important military power.

But where we paused was that applying this important judgment

to Australia's foreign and defence policies

regarding the rise of China has led to strongly opposing views.

There are those, as you know, including in this university,

including some of our colleagues,

who consider that the inevitable rise of China

must result in that country

becoming the naturally dominant power

to which the United States must concede strategic space

and acknowledge China's so-called legitimate strategic interests.

There are others, including us two as authors,

who believe the China's endless, rapid rise economically

is far from inevitable and perhaps even unlikely.

And that its military power

will continue to lag seriously behind that of America.

The argument that China will emerge as Asia's preeminent power

is based on assumptions that its economic and military capacities

are expanding and improving at such a rate

that regional dominance is all but assured.

Yet the sustainability of China's rapid economic rise and capacity

to embark on the path towards becoming an advanced and resilient political economy

in addition to its ability to become a genuine military superpower,

wielding proportionate regional influence,

is widely assumed but in our experience,

rarely analysed in any depth at least in Australian literature.

In examining the factors that go towards the development of Chinese national power

and its ability to use it to achieve national objectives

predictions about a Chinese superpower

with the ability to dominate Asia would be premature,

if not improbable, in our view.

John, over to you.

-John Lee: Thank you Paul and thank you Andrew for your introduction.

As Andrew mentioned, I've come on as an adjunct at the centre.

So it's my privilege to give what I hope will be one of several lectures over time.

Thank you all as well for taking the time to be here.

I'll speak for about 20 minutes.

And then I'll hand over to Paul to speak about

some of the military and strategic aspects of this issue.

Now we obviously don't know the future.

And because we can't accurately forecast the future,

we tend to rely on extrapolations of trends,

or trend lines,

especially when it comes to predictions about material power,

that is economic power and military power in a main.

Now extrapolations of trend lines are not completely useless.

They can be useful,

but they are essentially a window into the past.

They do not tell you what will be.

They tell you what has been.

Trend lines also do not tell you much about causation.

In fact they don't really talk about causation.

They don't talk about or imply.

You cannot infer from them why something occurred

and whether something is likely to continue into the future,

or why something may change or why it may not.

Now, like all of you, I don't have a crystal ball in my lounge room.

So the approach I'm taking, and I think the approach we took in this article

was to basically analyse China in unexceptional terms.

And that is you analyse China in the way that you analyse the material power

in prospects of any other country.

We don't have any belief in things like cultural determinism.

We don't think anything is inevitable about a certain country

or a certain culture or a certain political system.

We merely look at China in the same way we look at any other country.

Now the title of our article

"Why China Will Not Become the Dominant Power in Asia"

that's the title of that article.

Paul, when I hand over, will talk about the military and strategic

challenges and limitations faced by the Chinese.

I will begin with the economic basis for why we think that this is the case.

So let me begin with the widely accepted,

I wouldn't say overwhelmingly accepted,

but the widely accepted proposition

that when it comes to economic power

and the acquisition of national capability, at least, time is on China's side.

That all China really has to do is wait a couple of decades,

as long as it doesn't do anything stupid.

And the 1.37 billion people, in their eyes

will effectively determine the course of regional history.

Now in some respects the trend lines say that this is so,

but I will rely on economic reasoning to say why I don't think this is so.

And while I'm not predicting economic disaster for China

like some others might,

the assumption that China will acquire the economic base to dominate Asia,

short of American withdrawal

which I don't think is likely or conceivable,

is pretty unconvincing in my view.

So let me begin with the basics.

As any economist will tell you,

there's basically three ways you can grow your economy.

You can add more labour inputs.

You can add more capital inputs.

Or you can use one or both of these imports more efficiently,

what economists refer to as total factor productivity.

Now can China add more labour inputs significantly drive rapid growth

or even moderate growth in the medium term?

Well, I think the simple answer is no

and I say that because of its aging demographics

which for a number of reasons

will be pretty much impossible for China to alter.

Now there is one thing we know for certain

and that is that China will be the first major country in history

to grow old before it grows rich

or before it grows even moderately rich.

Now in the 1980s during its first decade of reform,

the proportion of the working age population,

that is 15 to 64 years, was almost 75%.

It will decline to 65% in 2020 and 60% in 2035.

Now this may not sound significant or meaningful to you.

So let me put this another way.

When China began its reforms in 1979,

there was 7 working people to every 1 working retiree.

Today the ratio is about 5.5 to 1.

By 2035 there will be two working people for every retiree.

In fact 2015, this year is a significant year

because this year is the first year

that more people are leaving the workforce in China

than entering the workforce since the reform period began.

Now before I say what I'm about to say I have to apologize to Paul

who is an exception to the rule.

I'm about to articulate that the most productive years of a worker

is from their 20s to their late 50s.

That is in developing countries.

In advanced countries,

the older people tend to have it.

Now the problem for China is that by 2035 there'll be 1.5 older workers,

that is workers from 50 to 65 years

to every worker under the age of 55 years.

So by 2030 China will have the same demographics, roughly,

as a country like Norway or Amsterdam.

Incidentally, if you want a comparison,

America is the only great power

which has favourable demographics up to 2050.

India, if you want to include India as a potential great power.

Now bear in mind as well that only 1/3 of all urban residents,

which is about half the population,

urban residents are half the population

and less than 5% of rural residents

have some form of pension fund, central, provincial, or local pension fund.

And even then, the state's largely unfunded liability

is expected to be around 40% of the GDP by 2035.

And this assumes quite generously

that China will continue to grow at 6% up to 2035,

which I think is unlikely.

Now this will obviously increasingly compete with other budget items

such as national security and military spending.

Now even for those with a pension fund at least half their living expenses

will still be picked up by their family.

So whereas up to a quarter of the growth from 1980 to 2005

can be attributed in some way to this local demographic dividend,

that is a massive increase in productivity of young workers

coming into the cities with very little family responsibilities.

There will be no such prospect of a demographic dividend for China

from now on.

Now let's talk about adding capital inputs.

And this is the real problem for China's future economic resilience.

Now speaking in very generalised terms,

growth in the first decade of reform, 1979 to 1989,

was driven by genuine entrepreneurialism and dynamism.

Land reforms allowed not land owners but land occupiers

to use the land in any way they wanted.

They were allowed to sell surplus produce at market prices

and this gave birth to a wave of spontaneous and unplanned entrepreneurialism

and brought enough economic activity

and eventually arise to smaller scale industries

which was a real driver of early industrialisation in China.

Now by the mid-1990s this model was running out of steam

and what was emerging was China as a major export manufacturing country,

not just in Asia, but in the world.

So it was from the mid-1990s onwards that made in Korea,

or made in Japan, or made in America,

or made in Malaysia was replaced by made in China.

So prior to the global financial crisis or just a couple of years before that,

the major driver of Chinese growth was net exports.

Now there's nothing remarkable about this.

This was just a model that

Japan, South Korea, Taiwan, Singapore amongst others pursued.

But China took it to a much larger scale

because of the surplus pool of labour that they had.

Now export dependent models obviously need growing and consumer markets.

And this became a problem for China

when the global financial crisis hit the advanced economies

and consumption markets ground to a halt.

So China had to find a different way of generating growth

and this is what they did.

Now if you take the period from 2004 to 2014,

the Chinese economy expanded a pretty impressive 162%.

But labour inputs and additional labour inputs contributed around 6% of that,

but an enormous 136% can be attributed to capital inputs

mainly in the form of fixed investment which is basically building constructing things.

This means that only 20% of growth out of 162% over last decade

was due to using inputs more productively.

Now these are all economic numbers.

Okay. Why do they matter?

Well the enormous level of capital inputs needs to generate the growth

that China has achieved in the last 10 years

has meant that national corporate debt levels have risen from 147% of GDP

from the end of 2008 to over 250% of GDP at the end of 2014.

Now to put these numbers in context,

it increased by 9, from 9 to 10 trillion dollars US in 2008

to 20 to 25 trillion dollars US in 2014.

Now this increase represents an amount larger than the entire size

of the American commercial banking system.

Now this increase happened because in the government's determination

or some people would say, in the government's desperation

to achieve rapid growth,

the Chinese government ordered state owned banks

to lend predominately to state owned enterprises

even when there was no commercial justification for doing so.

So from 2008 to 2009, for example,

bank loans almost doubled from 750 billion dollars US

to 1.4 trillion dollars US.

The outstanding bank loan books of China's banks

expanded almost 60% in two years.

So this clearly is not due to natural economic demand.

It's the result of government driven policy