(Bloomberg) -- When Chinese Premier Li Keqiang visited Australia in March 2017, he had a clear message for policy makers: There’s no need to pick sides between Washington and Beijing.
More than a year later, that’s becoming ever harder for Prime Minister Malcolm Turnbull. A slew of recent media reports showed that China’s Communist Party was covertly meddling with media, universities and lawmakers, prompting a public outcry.
Turnbull responded by backing new legislation to clamp down on foreign interference in politics and business, which may be put to a vote in the coming weeks. In December, he used broken Mandarin to paraphrase a quote attributed to Chairman Mao Zedong during China’s founding, saying “the Australian people stand up and assert their sovereignty.”
The heightened tensions have unleashed a debate in Australia over the societal costs of increased economic dependence on China. The foreign interference bill will test the willingness of Australia’s politicians to sacrifice business opportunities to make a stand for a rules-based world order underpinned by its military alliance with the U.S.
Over the past decade, China has become Australia’s top trading partner, biggest provider of foreign students and largest source of tourism revenue. China accounted for 29 percent of Australia’s two-way commerce in 2016, nearly double from a decade earlier, as it snatched up Australia’s iron ore and coal to feed a construction boom.
Mandarin is now Australia’s second-most spoken language, seen by traffic signs on tourist roads that feature Chinese characters. Celebrations for Chinese New Year, once confined to the Chinatowns of major cities, are now a common feature in suburban centers and regional towns.
“China understands it can use economic leverage to get us to shift our foreign policy and turn down our rhetoric,” said Malcolm Davis, a senior analyst at the Australian Strategic Policy Institute and a former adviser to the government on defense policy. “Everyone has long understood what China is about; the difference is, now we are starting to fight back.”
On a visit to New Zealand this week, former U.S. Secretary of State Hillary Clinton called China’s efforts to gain influence in foreign countries “a new global battle.” She said Chinese interference in domestic policy was apparent in Australia, New Zealand and the U.S., the Guardian reported.
China fired back on Tuesday, with foreign ministry spokesman Geng Shuang saying statements about Beijing’s “so-called political interference” have been “floating around for quite some time.”
“China is opposed to interference in another country’s affairs and we will not do that,” Geng said. “Such statements are nonsense, groundless and are meant to stir up trouble.”
In many ways, it’s natural for a rising China to expand its influence in the region as the U.S. questions the benefits of a global leadership role. And some unease is to be expected, particularly with China’s increasingly strong economic and military clout.
Still, the business community is concerned. Patrick Hutchinson, chief executive of the Australian Meat Industry Council, said he’s worried the mounting tensions are to blame for delays in a deal Li signed last year paving the way for more than $300 million of annual Australian beef and lamb exports to China.
“Everything was signed, and we moved forward -- now we’re seeing the protocols are taking far longer than expected,” said Hutchinson. “It’s like a marriage -- occasionally you say the wrong thing, and you pay for it.”
Australia’s government declined to give a reason for the holdup, with the Department of Agriculture and Water saying “market access negotiations are confidential, complex and do take time.”
Other industries are also on edge. Universities in Australia, where about a third of all overseas students are Chinese, flinched when Beijing’s embassy in Canberra in December warned of “a rising number of insulting incidents” against the 231,000 students in the country. That came after the head of Australia’s intelligence agency said authorities needed be “very conscious” of foreign interference in universities.
China has overtaken New Zealand to become the largest source of international visitors. Tourists from China soared 14 percent last year, adding A$10.4 billion into Australian coffers.
“I’m worried about my business in China if the relationship continues to deteriorate,” said Kevin Zhang, chief executive officer of Australia’s Argyle Hotel Group, which has most of its dozens of hotels in the Asian country. “The economic and trade relations between the two countries cannot be separated from politics.”
Tensions began to escalate last year when Senator Sam Dastyari, an opposition lawmaker, resigned over close ties with a Chinese-born businessman. Dastyari asked the businessman to pay a $1,200 travel bill, and warned that his phones were being tapped by Australian intelligence agencies.
Turnbull cited that “betrayal” in introducing his foreign-interference laws, which if passed will ban foreign political donations and require people or organizations acting in the interests of overseas powers to register and disclose their ties.
China has pushed back, with its foreign ministry rebuking Turnbull for helping “poison” the relationship. A survey conducted by the Communist Party-backed Global Times in December showed 60 percent of respondents believed Australia was the least friendly country to China, with the newspaper saying Chinese students and executives "have been depicted as spies or government agents.”
“Certain people in Australia have failed to discard the zero-sum mentality and are unable to look at and handle its relations with China in a correct way,” Foreign Ministry spokeswoman Hua Chunying told reporters on March 23.
Australian media outlets have run stories on a diplomatic freeze, with reports saying China canceled a planned visit to Beijing by Turnbull in March. The two nations are trying to work through “complex and difficult issues,” Frances Adamson, the head of Australia’s Department of Foreign Affairs and Trade, told a parliamentary hearing in March.
China stands ready to use its trade leverage to hit Australia if ties deteriorate further, said Gao Zhikai, a former diplomat and the director of the China National Association of International Studies in Beijing.
"China can easily find a replacement for Australian products, but Australia cannot find a market with a size like China,” he said.
Upon taking power in 2015, Turnbull toughened up Australia’s stance against China by criticizing its expansionist policies in the South China Sea. Five months later his government cited the growth of “China’s national power” to bolster defense spending.
Still, Turnbull has sought to strike a balance. Australia has resisted President Donald Trump’s request to join the U.S. in naval patrols testing China’s territorial claims in the South China Sea.
At a February briefing in Washington with Trump, Turnbull said that he sees China’s rise as “overwhelmingly a positive” while imploring it to follow a rules-based system where “big countries can’t push around little countries.”
Australian exporters are praying for a speedy resolution, said Doug Ferguson, KPMG’s Sydney-based deal adviser who lived in China for a decade.
“There’s no other market that can compare or can fill the gap if we don’t get our long-term strategy right with China,” he said.
©2018 Bloomberg L.P.