SYDNEY - China will escape the middle income trap over time as it deals with the "hangover" of stimulus measures introduced to combat the global financial crisis, former Australian Prime Minister Paul Keating said.

China is currently unwinding overcapacity in the industrial sector, funding inventories and dealing with the overleveraging that came out of the fiscal stimulus post the global financial crisis but it's a balancing act, Keating, who is an advisor to the China Development Bank, told an audience at the University of Technology, Sydney (UTS) on Tuesday night.

"The Chinese are now quite mechanically working their way through the overhang of the (global financial crisis)," Keating said in a conversation with eminent Australian journalist Kerry O'Brien, hosted by the Australia-China Relations Institute (ACRI).

"These sorts of changes are important on the pathway to the higher order economy.

"I think they'll get there. It may be messy, it may be a bit slower, but they'll get there."

Keating said China will become a tertiary economy, a research and development economy not based on Western technology, as evidenced by the e-commerce platforms spurring the consumer economy.

"We're going to see a massive shift from state owned enterprises to private enterprise in China by way of the connectivity of the internet and open sourcing," Keating said.

Australia has the ability to maximize the opportunities afforded by China's consumption economy, Keating said.

Keating said China's rise as a strategic power is in a context where it wants an international political system that isn't exclusive.

"What China wants to see is a new international economic and political order which is not part of the order produced by the victors of World War II," Keating said, adding China is not seeking hegemony but a "democratization of the international system" where it is not managed by any one state.

"The Chinese are smart enough to know there can never be one power in the world ever again."

Thus Australia needs a nuanced foreign policy to manage its strategic position and not get caught up in the U.S. ambition to maintain hegemony in the Asia Pacific, Keating said, adding becoming a member of the Association of Southeast Asian Nations (ASEAN) would be important.

"(Australia's) membership of ASEAN would make a great difference to ASEAN, and would give us a home," Keating said.

"It's in (Australia's) interest to see ASEAN succeed," Keating said, adding membership allows Australia to maintain its waning influence while preserving the opportunities afforded in Asia.