Good Afternoon Ladies and Gentlemen

It is a great pleasure for me to address you today. The topic of this address is Chinese Investment in Australia and to put it in perspective it is well to recall that Australia’s economy has been built on the back of overseas investment.

The UK has always been a large source of foreign direct investment and since the Second World War there have been waves of interest from the US, Japan, South East Asian countries and more recently China.

Each surge in foreign investment has received an ambiguous reception.

Was Australia just a quarry for the rest of the world? Was Australia selling the farm? Was Australia losing control of its destiny? Somehow, despite this alarm, Australia has welcomed this overseas capital and prospered from it.

Now Australian companies hold significant assets overseas, usually providing great benefits to their shareholders.So why the consternation about China now?

There is a quaint old expression in English known as “burning the midnight oil”, which means working overtime, far into the night. There has been a lot of midnight oil burnt in one corner of the Federal Treasury building in Canberra over these past fifteen months or so, as officials at the Foreign Investment Review Board (FIRB), have tried to cope with an unprecedented volume of new applications from Chinese corporations for their particular slice of the Australian action.

Although those new to the process may find the rigour of the FIRB approvals procedures rather demanding and tiresome, it is definitely not the case, I’ve occasionally seen reported in the media from Chinese sources, that the Australian Government has deliberately initiated a “go-slow” policy in evaluating Chinese applications. The fact is that, in the first six months of the Rudd Labor Government, Australia received more investment applications from Chinese entities than during the entire eleven years of the preceding Howard Government. The pace has continued accelerate since then.

There has been investment interest from a wide range of sectors of the Chinese economy, as well as from cashed-up individuals with new-found freedom to spread their wings. The real estate area has been one of the busiest, with affluent Chinese families setting up their student children in accommodation which they aim to make the second family home in years to come, as business migrants.

Today I want to concentrate on a more detailed analysis of trends in Chinese investor interest in Australia’s minerals and energy sectors, especially since the eruption of the global financial crisis last September. Many of Australia’s smaller mining enterprises, denied their normal credit facilities, have been driven to their knees, while even the “blue chip” performers on the Australian Stock Exchange have found themselves in very hard times with their shareholders.

China has not, of course, as you all know better than I do, managed to remain immune from the effects of plunging world markets for products which it is used to exporting in big volumes.We won’t speak today about food and other consumer exports sold in the world’s supermarkets, which represent another complex chapter. Particularly relevant to our discussion, however, is the global metals market, where demand for a wide range of more durable consumer products in the world’s developed economies has slumped dramatically. Chinese steel mills are feeling the crunch from this as well as from their own economy’s flagging demand for steel in the construction industry. Look out the window in many parts of Beijing and skeletons of half-finished buildings with not a worker in sight will meet the eye.

There was a relatively brief period of about a month last year from early October to early November, when my GRA Asia colleagues reported a complete shut-down of access to key Chinese financial institutions, while they and their government digested the sequence of cataclysmic events elsewhere in the world and formulated a policy response to the implications of this for their own economy. The Chinese Government’s own massive, infrastructure-focussed domestic stimulus package, unveiled a little later, has received most attention internationally, along with the downturn in production which this stimulus was designed to counteract.

It did not take China long, however, to implement another, more opportunistic strand of its policy response: the so-called “Three 30 percents” strategy for minerals procurement abroad. This strategy involves sourcing 30 percent of China’s needs from foreign mines where a Chinese equity interest has been acquired; 30 percent from long-term supply contracts; 30 percent from the commodities market. In November China pressed forward with a number of “first 30 percent” initiatives, to take advantage of an opportunity to obtain or strengthen equity positions within Australian mining enterprises, both minerals and coal, at historically low prices. These prices reflected a combination of share price collapse flowing from a drop in demand for and lower price of minerals and effectively a devaluation of the Australian dollar by up to 30 percent against the Chinese Yuan. At the globally significant China Mining Conference in Beijing in mid-November a Chinese official, fielding questions after a related presentation, stated publicly that responding quickly to such opportunities offered by financially weakened minerals and metals suppliers around the world was not only clearly in the interests of individual Chinese firms but was also “their national duty”.

At home, the intervening three months have been punctuated by excitable reports about the changing landscape in the Australian mining industry, with particular emphasis on the greater power which China could now exert on the up-coming price negotiations. This excitement clearly exaggerates the true position, as Chinese investment in the minerals or any other sector remains quite small. As well, lower prices for ore will only lower returns to investors.

But this reaction does underscore the politically sensitive nature of this development and the consequent public attention it receives.

The FIRB now has had plenty on its plate. One extremely significant recent decision gave approval to the Chinese smelter Zhongjin Lingnan to buy a majority stake in the thoroughly distressed Broken Hill zinc and lead miner, Perilya. This is the first key decision since the financial crisis began involving a Chinese investor. At least one analyst’s opinion of this outcome is that it is quite “doubtful whether the FIRB would have approved what is in effect a takeover without a control premium, if economic conditions had been better: they seem to have softened their approach in the case of Perilya. They perceive it is a better option to have it 50.1 percent owned by the Chinese than to have the operation closed and all those jobs lost.” The key question is whether this can now be regarded as a firm precedent for other complex deals with work-force implications, especially one announced just last week involving China’s Chinalco and Rio Tinto in minority stake agreements in mines and convertible notes, in which the FIRB will definitely become involved. The US$19.5 billion dollars (A$32.2 billion) involved represent the biggest ever Chinese investment in a foreign company.

Since I left Australia last Friday the proposed acquisition by Minmetals of OZ Minerals has been announced. And just today the proposal was announced by Hunan Valin to take a stake in FMG.

The MinMetals proposal is a fairly straightforward acquisition of the kind which we have seen many times before. The purchase of Mt Isa Mines by Xstrata and that of Portman Mining by Cleveland Cliffs are just two that come to mind.

However, the close coupling of the Minmetals deal with that of Chinalco led to some colourful headlines on Monday.

In The Australian: “So, those deep-pocketed poachers from China Inc have turned their acquisitive attention from Rio Tinto to an even more distressed miner.”

"China has made another grab for Australian resources assets with a state-owned company announcing a $2.6 billion takeover offer for the struggling OZ Minerals."

And even the more sedate Financial Review: “China swoops on stricken OZ Minerals”

The headlines today with the FMG deal are even more colourful. This kind of media reaction is nothing new but that does not diminish its immediate effect on the political environment in which FIRB recommendations are made and passed to the Treasurer for decision.

In the last Labor Government I sat in the office that Wayne Swan now occupies and had to deal with a number of such cases. One involved the acquisition of a leading newspaper and the other, believe it or not, a biscuit factory—but both managed to inflame passions across the community.

In many major acquisitions complex questions arise.

For instance, if the new owner is a competitor, will the acquired business be closed down?

If the new owner is also a major customer, will product prices be artificially depressed or maybe manipulated to transfer profits from Australia to a lower tax environment?

Will ownership in an industry be concentrated to the extent of reducing competition?

These are some of the reasons why the Treasurer reserves the discretion to weigh his decision on the basis of his view of the national interest. The fact that the “national interest” is not amenable – deliberately – to precise definition does not diminish its importance. It is another way of saying that key acquisitions will be decided on the overall balance of advantage to Australia.

This is a concept not unique to Australia – nor is it a concept unknown in China when foreign investment approval is sought.

In all the cases that I dealt with I resisted the pressure to capitulate to confected xenophobia or self-interest – so too have my successors. Very few applications are rejected.

But curiously that only inflames the opponents and the political opportunists. Every high-profile decision has its own character and nothing should be taken for granted. While rejections are rare, given the likely volume and complexity of proposals, I would not rule them out. The proposed acqusition of Woodside by Shell was one of very few rejections.

What is certainly the case is that, as the next election approaches, the sensitivities will be magnified.

Over the next 12 months I expect even more activity, as investors position themselves for the upturn which must surely emerge.

Perhaps during this time the acquisition proponents will have a new, powerful argument that in the wake of the global financial crisis it will only be through foreign investment that projects can find the capital to proceed, creating activity, jobs and export income.

So let me now address our Chinese friends in the audience when I urge you never to accept the bald, unqualified idea that Australians and the Australian Government are opposed to foreign investment. We all know that it plays a vital role in key sectors, especially in the resources and energy areas. Without such investment, the pace of national economic development would be less than optimal and the current account in Australia’s balance of payments would be seriously affected. There are, nevertheless, certain recurring sensitivities surrounding this subject, not unheard of in other countries, I might add, which require the development and careful tailoring of local strategies, preferably involving local expert knowledge and advice, in order to circumvent potential controversies in securing the investment goal.

Over the past year or so, debate about foreign investment has begun to focus on China. Chinese decision-makers need constantly to be aware that our minerals and energy resources are regarded by the general public, and hence by successive Australian governments, as nothing less than Australia’s economic backbone. Although their leverage has been severely weakened by other factors of late, large Australian mining companies have also had a tendency to regard growing foreign investor attention to their industries as threatening their interests and their ability to negotiate favourable prices on the international market.

Chinese investment applicants should therefore carefully prepare their campaigns and documentation, taking into consideration all political and policy-based sensitivities. In selecting their Australian advisers, the Chinese side should consider how well connected and up-to-date such firms are and how useful are their insights into and knowledge of how politics works. Currently many Chinese entities aspiring to invest in the Australian minerals and energy sectors have tended to use Australian or Hong Kong law or accountancy firms to file and present their FIRB applications. There have been instances where such enterprises have not approached this task comprehensively enough, unfortunately resulting in requests to withdraw and re-present their applications.

There is no doubt that all those applications have legal, financial, accounting and other aspects requiring expert advice but a vital and early consideration of at least equal weight is the need to manage the wider political environment, because in the final analysis, foreign investment approvals involve an administrative process culminating in a Ministerial decision.

Precisely how do the FIRB and the Australian Federal Treasurer work together in addressing foreign investment proposals? There is a strict procedural requirement that every proposal over A$100 million requires a formal application to the FIRB, which in turn advises the Treasurer (an elected politician) in the exercise or waiving of his discretionary power to approve or block or impose conditions on the investment.

One issue attracting particular public and overseas attention during 2008 and also this year has been the way in which the Rudd Government has formulated policy regarding investment by State-owned corporations and “sovereign wealth funds”. The Treasury has issued special guidelines, noting that, while all investment proposals, whether emanating from the private sector or a foreign government, are assessed on the same basis, with national interest implications assessed on a case-by-case basis, “the fact that these investors are owned or controlled by a foreign government raises additional factors that must also be examined…Investors with links to foreign governments may not operate solely in accordance with commercial considerations and may instead pursue broader political or strategic objectives that could be contrary to Australia’s national interest.”

The most relevant of the national interest criteria (deriving from the still fundamental 1975 Foreign Acquisitions and Takeovers Act) is the requirement that an aspiring investor’s operations “be independent from the relevant foreign government”. In determining this, the FIRB will look, in particular, at the extent to which the prospective foreign investor “operates at arm’s length from the relevant government” and “whether (that) investor’s governance arrangements could facilitate actual or potential control by a foreign government (including through the investor’s funding arrangements)”. Under the criterion requiring “observance of common standards of business behaviour”, the FIRB would be charged, in the case of a sovereign wealth fund, with going beyond examining corporate governance practices and “would also consider the fund’s investment policy and how it proposes to exercise voting power in relation to Australian companies”.

These considerations relate to the sovereign wealth funds of the oil-rich states and countries such as Singapore as much as they do to similar funds in China.

But because of the relevance of the new State-owned Enterprises policy to applications from China, some additional arrangements have been established to improve the liaison between the Australian and Chinese authorities.

These arrangements are designed to improve information flows in both directions and generally ensure a better understanding of each Government’s position.

However useful this development might be, there is a tendency to believe this is a substitute for giving proper attention to the way applications are presented and managed through the process.

I do not believe that it is a substitute and those who proceed in this way do so at their peril.

Finally, I want to touch upon a much broader bilateral and ultimately multilateral issue. In a country with a fiercely free and active media and a public which knows very well how to make use of media channels, the Australian Government and its various agencies must also take account in their policy-making of the broader picture of two-way investment flows. They are committed, as I was in public office and remain in my present capacity, to continuing progress towards a non-discriminatory international framework for increasing business flows. A framework which encourages mutual “give and take” is seen as essential for the reasonable governance and administration of bilateral investment. Put more bluntly, if Australian investors in China (or anywhere else in the world) are vocal about difficulties which they might be experiencing in enjoying normal business standards there, it simply makes the Australian regulators’ job of dealing with inward investment applications from within that same country politically more complicated.

Last April Australian Trade Minister Simon Crean divulged to the public, in the context of the protracted and still today unfinished Free Trade Agreement (FTA) with China, that Beijing had requested that investments from there be permitted, as they have been from the United States under our FTA with them since 2005, up to A$1 billion at a time without having to seek FIRB approval (a 10-fold level of relaxation of the current restriction). He indicated that this request was under consideration but that “This is a two-way thing. We also have interests in freeing up restrictions on Australian investments into China.”

I will leave the last thoughts for this luncheon to Premier Wen Jiabao, who clearly needs no convincing of the desirability for China to continue, throughout and beyond the present global economic turmoil, to promote an open, balanced approach in its economic, commercial and not least cultural interaction with the outside world. In a speech at Cambridge University at the beginning of this month he remarked:

"In the 21st century, economic globalisation and the information network have linked us all together. Different cultures live together and influence each other. No culture can flourish in isolation. How much a country or a nation contributes to the culture of humanity is increasingly determined by her ability to absorb foreign cultures and renew herself. That is why China will remain open and receptive, value her own traditions while drawing on others’ successful experience, and achieve economic prosperity and social progress in a civilised and harmonious way.”

Thank you

John Dawkins

February 19, 2009

*Based in Adelaide, John Dawkins is a director with Government Relations Australia. Previously, John served for 18 years in the House of Representatives for the Australian Labor Party. From 1983 to 1994, John was a member of the of Bob Hawke and Paul Keating governments and served as Finance Minister, Trade Minister, Employment Education and Training Minister and finally Treasurer.