Australia may grant market-economy status to China and will begin talks on a free-trade agreement as early as next year, says Australian Foreign Minister Alexander Downer.

Downer said progress on "a very ambitious proposal" for a China-Australia free trade agreement was faster and smoother than expected.

Completion of a feasibility study scheduled for October 2005 is now expected by the middle of next year, Downer said.

He said he was "pretty optimistic" that the study would conclude that an FTA was mutually beneficial.

He said a bilateral FTA would bring further stimulus to economic and trade links between the two countries.

"It would also be a clear sign of the seriousness of our mutual regard," Downer said in his speech delivered at Tsinghua University Tuesday.

"It would be an opportunity to further strengthen the strategic framework of the relationship for the long term, building stronger government-to-government links and giving the broader relationship support and room to grow."

He said free trade agreements provide an opportunity for trading partners to spur economic growth and trade liberalization.

"I can say now there is a high level of interest in this (FTA negotiations) in Australian business, with many recognizing that what we face is not a question of whether or not to further integrate with China but rather, it is a decision on how best to integrate with China," said Downer.

China last year overtook the US to become Australia's second largest export market.

Australia had a US$1 billion trade surplus on US$13.56 billion of trade with China in 2003 because of increasing demand for Australian copper, petroleum and iron ore.

A free trade agreement between Australia and China would be the first China had done with a developed economy, Downer said.

Since October 2003, officials from Australia and China have been examining the difficulties and benefits of a free trade deal.

The talks were based on a framework, which was signed by Australia's Trade Minister Mark Vaile and China's Vice-Minister of Commerce Yu Guangzhou in the presence of Australia's Prime Minister John Howard and Chinese President Hu Jintao on October 24, 2003.

The framework includes a commitment to undertake a joint feasibility study by October 2005 into a possible FTA between Australia and China.

Downer said a key remaining sticking point was the recognition of China as a market economy.

Downer, who has met senior Chinese leaders including Premier Wen Jiabao, Foreign Minister Li Zhaoxing and Commerce Minister Bo Xilai in Beijing, leaves for Pyongyang later today. He said both sides agreed that Australia needed to recognize China as a market economy before an FTA could go ahead.

Although the European Union recently rejected China's request for market economy status, Downer said Australia would make its own evaluation. Australia has started a feasibility study on China's market status scheduled to be completed by March or April, he said.

Chinese Foreign Minister Li Zhaoxing and Downer yesterday agreed that the two countries should enhance political mutual trust, strengthen their economic and trade ties and increase communication and co-ordination in dealing with international and regional affairs.

(China Daily August 18, 2004)