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Back Issues
| China's investment in Australia | | Print | |
| Sep / Oct 2008 | |||
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Seamus Cornelius and Stuart Mengler, Partners at Allens Arthur Robinson in Beijing, outline the trend of investment by PRC companies offshore. Since the late 1990s, companies in the People's Republic of China have increasingly sought investment opportunities overseas. Investment of a strategic nature is generally encouraged by the PRC government and Australia is an important beneficiary of that policy, particularly in the energy and resources sector. However, there are a number of factors that PRC companies and their potential Australian investment partners need to consider when managing investment deals into Australia so that appropriate commercial, legal and regulatory strategies for completing deals are put in place. DRIVING FACTORS The PRC has sustained significant economic growth rates for many years, and this is widely expected to continue into the foreseeable future. With this growth comes the need for significant infrastructure and the raw natural resources and energy sources to build that infrastructure. Natural resources are therefore a strategic industry for the PRC and accordingly Australia, with its wealth of natural resources and relatively small population, is a country of interest for investment opportunities. The consequences of the PRC's economic growth and increasing need to secure natural resources to fuel continued growth can be seen in many small and large policy changes, which most obviously manifest themselves in two broad trends connected to the PRC's inbound and outbound money flows. (a) Inbound - recent changes to the PRC's foreign investment policies in general do not promote foreign investment in PRC resources projects (the latest version of the Foreign Investment Guidance Catalogue published in 2007 is evidence of this). There is an increased focus on allowing the PRC's domestic companies to develop local resources with foreign investment relegated to less strategic, more difficult or more marginal projects. (b) Outbound - capital outflow from the PRC into foreign resources/energy investments is now encouraged. Key PRC government agencies involved in approvals for such investments - the National Development & Reform Commission, the Ministry of Commerce and the State Administration for Foreign Exchange - are making it easier for PRC companies to invest in energy and resources offshore. In addition, these companies (particularly those undertaking large strategic investments overseas) may, in some situations, have access to preferential loans to assist with financing the investments. CHALLENGES Even with a relaxing of approvals at the PRC end, PRC companies still face deal management challenges when investing in Australia. These challenges are not particularly unique to PRC companies; many Australian companies who have sought or made investments in the PRC and other countries outside their ‘home base' will find them familiar to their own experience. These issues can be summarised as follows: (a) Lack of familiarity with, or understanding of, local conditions - there is a steep learning process regarding not only the foreign investment laws, but related laws such as the takeovers law, property laws and, in the resources sector, the impact of native title laws. This requires a significant investment in time and personnel in terms of understanding the framework and how it applies to the particular deal. (b) Incorrect assumptions regarding the relative importance of the key components of what can be described as the broader legal/political environment. These components include law, policy, politics and relationships (guanxi). These components exist in one form or another and in varying degrees in most jurisdictions, but each jurisdiction is unique and experience in one's home base rarely transfers neatly to another location. These matters are not obstacles to investment but rather aspects that require careful management during the investment process. In particular, many companies in the PRC experienced in dealing with foreign investment in the PRC are aware of the process new foreign investors must go through to understand the legal and regulatory environment. As a result, they tend to understand the need for an education process themselves when seeking their own investment opportunities in Australia. Below we briefly outline Australia's foreign investment policy environment and the approach of PRC companies. AUSTRALIAN LAW AND GOVERNMENT POLICY (a) Approvals required As with most jurisdictions, any substantial investment in Australia by foreign individuals or entities usually requires foreign investment approval. The approvals required will depend on the nature of the transaction. (b) Foreign investment approvals Australian Federal Government policy generally encourages foreign investment. This is, however, balanced against national interest considerations and the Australian Federal Government has expressly stated that it will look at each application with those considerations in mind. Recent moves by the Australian Federal Government to outline the principles that it will consider in reviewing investment applications from foreign governments and their agencies are intended to increase transparency. Given this, it is important for any foreign company investing in Australia to carefully consider how it will approach the approvals process. In relation to foreign investment approvals, under the Foreign Acquisitions and Takeovers Act 1975 (Cth), transactions that may see foreign persons controlling Australian business or assets are subject to government screening. Essentially, the FATA provides that the Australian Federal Treasurer (currently Wayne Swan) may block such transactions on national interest grounds. The Treasurer usually relies on the advice of the Foreign Investment Review Board, the government agency responsible for receiving and reviewing foreign investment applications. While the FATA is the underpinning legislation, it must always be read together with the Australian Federal Government's foreign policy. The policy applies to all foreign investors; however, the extent to which a foreign investor company is owned, controlled by or closely associated with a foreign government will be relevant in the decisionmaking process. In the context of the PRC, this means that State-owned or Statecontrolled enterprises and sovereign wealth funds should carefully consider the policy. The factors that the Federal Government will consider when examining proposed investments by companies associated with foreign governments are:
UNDERSTANDING THE ISSUES Against this backdrop, PRC companies are keenly interested in Australia's foreign investment policy. This is moving beyond simply relying on an understanding of media and public reaction to ‘headline' transactions such as the recent investment by Aluminium Corporation of China (with Alcoa) in Rio Tinto, to understanding the principles which underpin the policy. PRC companies are undertaking a sophisticated and cautious approach to understanding the legal and policy impacts on their proposed transaction. On several occasions in recent weeks, when talking with various people in Beijing, it has been confirmed to us that the powers that be in Beijing are well aware of Australian policy and the media discussion surrounding this topic. We have no doubt that the PRC's investment approach will be improved and modified. ■ *Seamus Cornelius is a partner of Allens Arthur Robinson and is one of the most experienced foreign lawyers in the PRC. Seamus specialises in the PRC energy and resources sector and is fluent in Mandarin. Stuart Mengler is a partner of Allens Arthur Robinson specialising in mergers and acquisitions and foreign direct investment.
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