Tension between Australia and China has been growing despite record bilateral trade. Two events stand out: Australia taking the lead in boycotting Huawei and its call for an international inquiry into the origins of Covid-19. Regardless of Australia’s conviction on those issues, it would have made more strategic sense for it to be a follower than a leader. Principled or impetuous, Australian leaders should have known the implications of their stance, yet they acted against the country’s national interests. The wounded pride on both sides will be difficult to repair. Australian Prime Minister Scott Morrison’s recent overture of dialogue with China was promptly rebuffed – with good reason. While he said Australia was “committed to engaging with China”, this statement was preceded by highlighting Australia’s participation in the Quadrilateral Security Dialogue and the Five Eyes intelligence alliance. From a marketing perspective, Morrison’s speech could not have been more successful – if its purpose was to further alienate rather than seek rapprochement. It also provided proof that Australia would not be heeding the presumptuous advice of New Zealand Trade Minister Damien O’ Connor, who had just signed a free-trade agreement upgrade with China when he said Canberra should “follow us and show respect”. In any case, China knows its own game too well and is looking for concrete policy turns, not empty words. Beijing is watching to see how eager Australia is to be part of the potential upgrading of the Quad. Australia has many complementary interests and few inherent conflicts with China compared with Beijing’s great power rivalry with the US or historic animosity with Japan. And Australia is too distant geographically and self-sufficient in resources to be geopolitically threatened. So why does it have such a bad relationship with China? While some of China’s actions clash with Western values, most countries’ responses have been more restrained. Crude remarks or provocative tweets by Chinese diplomats are a result of deeply felt grievances. Their threats could be seen as fair warning that was poorly delivered. Is the current downward spiral in relations merely a result of Australian politicians’ unwise choices and China’s forceful reaction? Or are there deeper structural forces at work in Australian society? Compared with the US, UK and Canada, Australia has made little progress on diversity in government, business and the media. Beneath the social values of maintaining “the Australian way of life and culture” lies anxiety about a rapidly changing world – at home and abroad. American influences have replaced Britishness as a pervasive force in Australian society. The US has long displaced the UK as the dominant overseas force in the Australian economy. As the country’s top foreign investor, it represents more than a quarter of all foreign investments. China comes in at No 9, with just 2 per cent of foreign investment – less than a tenth of the US level. With new foreign investment legislation apparently targeting China, any potential investments are subject to much greater scrutiny. Hedging on China’s rise: lessons from Australia and New Zealand Australia has rejected proposed mainland Chinese and Hong Kong investments in infrastructure, construction and technology. For example, China withdrew its bid for South African-owned Australian construction firm Probuild when it was advised the deal would be rejected in a foreign investment review. US-based investors are the majority owners of 15 of the top 20 Australian companies. These include BHP, Rio Tino and all four major Australian banks. Accepting US ownership to such an extent, while rejecting Chinese investments, reveals Australia’s world view and double standards. While Australia is dependent on China for trade, it is enmeshed with the US in important cultural, economic and political spheres. In a bipolar world, this dichotomy means there are inherent tensions. One way out is for Australia to diversify its trade away from China. To achieve that, Australia may need to become like a combination of Israel and Singapore. To maintain their high standard of living, Australians would have to work harder and smarter. Australia is not alone in having to balance between two great powers – in many ways, South Korea and Singapore , perhaps even Japan, have been more successful in balancing between the US and China. Why the Quad doesn’t spell the future of Asia’s relationship with China The Australian public seems more clear-eyed than their politicians about their national interests. In a Pew survey , more Australians viewed China as having a positive (rather than negative) influence and the US a negative (rather than a positive) influence on their economy. This could be a reflection of feelings about the US-China phase one trade deal: the US pressuring China to buy more American agricultural products was at Australia’s expense. Clearly, Australia needs to do some soul searching to decide where its national interests lie. In applying economic pressure on Australia, China hopes to elicit responses from a rational actor. Beijing has just issued another warning to its students against studying in Australia before the start of the school year. Its real purpose is to squeeze Australia’s higher education sector, where Chinese students have been a key source of income. China has been signalling loud and clear, even as Australian trade officials have been frustrated at the “silence” of their Chinese counterparts. Beyond trade, China is looking at a whole-of-country relationship which includes investment and diplomacy. Australia cannot have it both ways by saying, “I want your money for trade, but not for investment”. Australia is lucky to be in the right place at the right time in terms of its energy resources to feed the appetite for commodities from an industrialising East Asia. Yet, while it is economically (and geographically) in the Asia-Pacific, it remains culturally in the Atlantic. How Australia develops an independent national identity – truly embracing multiculturalism in a multipolar world – will shape its long-term success in the Pacific century. Australia has enjoyed good relations with China for decades, initiated by Bob Hawke who cultivated strong personal relationships with Chinese leaders. Kevin Rudd is also an astute and thoughtful observer on China. Australia needs to look to some of its past leaders for insights into how to sustain a win-win relationship with a most important economic partner. Winston Mok, a private investor, was previously a private equity investor