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Sydney: Australia hailed a free-trade agreement with China that it says provides unparalleled access to the services market of the world’s second-largest economy.

The deal, once signed in 2015, will mean 85% of Australian goods exports to China will be tariff free, rising to 95% when fully implemented, Prime Minister Tony Abbott said. Tariffs will be removed from some resources and energy including aluminium oxide and coking coal, and phased out on thermal coal over two years.

The deal “will add billions to the economy, create jobs and drive higher living standards," Abbott said on Monday in a statement. “It greatly enhances our competitive position in key areas such as agriculture, resources and energy, manufacturing exports, services and investment."

Australia is the most China-dependent developed economy in the world, with exports to the nation accounting for 5.3% of gross domestic product, according to Commonwealth Bank of Australia, as two-way trade reached about A$150 billion ($132 billion) in 2013. Policy makers want to rebalance growth drivers from resources to other areas like services, which account for 70% of GDP but just 17% of exports.

“This should help to support Australia’s great rebalancing act," said Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney and a former central bank economist. “Although mining will continue to be an important part of Australia’s export basket, dining is also expected to support Australia’s growth. Australia’s FTA with China should help support a dining boom as the mining boom comes to its end."

Best-ever access

Australia’s exports to China need to adjust as the government in Beijing engineers a transition to consumption-led growth from fixed investment. That will require Australia to market its services to China rather than relying on resources dug up from the ground.

“The Australian government has secured the best-ever market access provided to a foreign country by China on services, with enormous scope to build on an export market already worth A$7 billion," Abbott said.

The China-Australia Free Trade Agreement was announced on Monday in Canberra, where President Xi Jinping addressed the nation’s parliament.

The deal will ease investment rules for Chinese private companies in Australia by raising the Foreign Investment Review Board’s (FIRB) screening threshold in non-sensitive areas to A$1.08 billion from A$248 million. The new level is the same as that for Japan and South Korea, which also signed free trade agreements with Australia this year.

Investment screening

Abbott said the government will be able to screen proposed investment from China in agricultural land valued from A$15 million and agri-businesses from A$53 million. FIRB will continue to screen proposed investments by Chinese State Owned Enterprises regardless of value, he said.

The Chinese government estimates total outbound investment of $1.25 trillion over the next 10 years.

“A key feature of ChAFTA is a built-in mechanism to allow for further liberalization and the expansion of market access over time, including a first review mechanism within three years," Abbott said. “This places Australia in a strong position to secure additional gains as China undergoes further economic reform in the future."

Real estate

Australia boosted imports of Chinese products by 14% to a record A$4.8 billion in September from August, with its biggest purchases comprising electronics, toys and clothing. Chinese buyers are helping fuel a jump in Australian house prices and overtook Americans to become the biggest purchasers of real estate in the year through June 2013, official data show.

Negotiations on the trade deal began in 2005 and languished under the previous Labor government. Abbott, elected in 2013, imposed a target to sign it by the end of this year.

Tariffs will be abolished for Australia’s A$13 billion dairy industry and on beef and sheep exports. Tariffs on Australian wine of between 14% and 30% will be phased out within four years, according to the statement.

“The bottom line, over time, should be a narrower goods and services trade imbalance for Australia, and increased net investment flows into Australia," said Stephen Walters, JPMorgan Chase & Co.’s Sydney-based chief economist in Australia. “Both of these imply a higher long-term value for the Australian dollar, other things equal. Government officials say the agreement could boost Australian GDP by A$18 billion over the next few years." Bloomberg

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