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| Fair play | | Print | |
| Sep / Oct 2008 | |||
 Are Australia's foreign investment laws too strict on Chinese investors? Rowan Callick looks at the ramifications.The big controversy in the Australia-China business world this year has been about investment. Some of the many people who expected the new government of "Zhongguo tong" (China expert) Kevin Rudd to usher in a new era of especially close relations have become perplexed. But this is a controversy that has become overblown by people who haven't looked at what is actually happening on the ground - or who themselves have substantial amounts at stake, and require rapid approvals. Treasurer Wayne Swan introduced new guidelines in February, which don't change the previous investment rules significantly but do make the situation more explicit. He has kept repeating that they are non-discriminatory, but some Chinese resource sector players and government officials continue to claim that the rules are aimed clearly at them. Every foreign investor seeking more than 15 percent of an Australian firm needs to apply for Foreign Investment Review Board approval, but state-controlled entities - including sovereign wealth funds like Singapore's Temasek, or the China Investment Corporation - need approval, however small their intended stake. "As a new government, we thought it important to have complete transparency," Swan said. Foreign state-owned investors will need to demonstrate they have clear commercial objectives, and that they operate at "arm's length" from their government. The guidelines were introduced almost immediately after China's aluminium giant Chinalco bought 9 percent of Rio Tinto - whichwas widely believed to have been a move tohelp block BHP-Billiton's takeover bid for Rio, that would present China's steel mills with a single massive source dominating iron ore supply from Australia. The guidelines say the board and funding arrangements of the investor will be assessed, on a case by case basis, over whether they would allow "actual or potential" control by aforeign government. Melbourne Business School's Paul Kerin said that the new guidelines helped, because they would only allow the Treasurer to veto investments if they were breached. "Until now, Treasurers have been able to veto deals simply to please domestic political lobbies, including threatened boards and unions, and yet pass the decision off as in the national interest." But Treasurers are still not required, under the new guidelines, to give detailed explanations for a veto, beyond that it is in "the national interest," which remains undefined in order to give decision-makers maximum freedom in handling applications. The process involves the Treasurer receiving a recommendation from the Foreign Investment Review Board, which comprises senior Treasury officers, at present John Phillips, Lynn Wood, Chris Miles and Patrick Colmer. Background grumbling about the rules among Chinese officials and state-owned resource companies did not let up, however, and this must have caused the Treasurer sufficient concern during his visit to Beijing in June, to make a major speech on the subject, to the Australia-China Business Council in Melbourne early in July, aiming to clear up misconceptions. He said that since he became Treasurer, he had approved one Chinese bid to invest in Australia every nine days. The national interest test would be toughened to ensure that substantial stakes in resource companies did not make the investors "price makers." The implication is that those mines with the same owner, essentially the Chinese government, as the companies to which they sell most or all of their output, might insist on lowering the price, to Australia's disadvantage. Swan said: "Our predisposition is to more carefully consider proposals by consumers to control existing producing firms. We usually welcome and encourage some participation by the buyer, because that offers the buyer some security of supply and the seller some stability in the market. But we need to ensure that investment is consistent with Australia's aim of ensuring that decisions continue to be driven by commercial considerations, and that Australia remains a reliable supplier in the future to all current and potential trading partners." In 2006, China's investment in Australia totalled only a meagre A$3.5 billion. In 2007, that tripled. This year, it has tripled again - to about A$30 billion. But there has been no parallel surge in Australian investment in China, which in 2006 totalled a similar amount to Chinese investment in Australia - about A$3.5 billion. This is in part because China remains effectively closed to investment in the resources sector, and does not allow investment of more than 20 percent in another sector comprising Australia's leading expertise and capital - financial services.  The latest round of free trade agreement talks, in Beijing in June, were the most positive in more than three years, said the Australian negotiating team. China presented Australia with a sweeping series of requests on investment, while Australia already had on the table a long list of investment issues. No breakthroughs have occurred yet in that area, one of the most difficult in the whole FTA panorama.Swan announced during his Beijing visit, that Australia would however become an even more common destination for Chinese capital. For Australia became during his visit, the sixth approved-investment destination under China's Qualified Domestic Institutional Investor scheme. It thus becomes eligible for direct investment from Chinese entities regulated by the China Banking Regulatory Commission, whose chairman, Liu Ming Kang, Swan met. Investment and Financial Services Association chief executive Richard Gilbert responded: "This is a landmark announcement for the Australian financial services industry. Australian fund managers are now ideally placed" to help Chinese institutional investors diversify their portfolios. Overall Chinese funds under management, $US118 billion at the end of 2006, are expected to reach $US720 billion by the end of this year. Melbourne-based Robin Chambers, one of Australia's leading legal advisers to Chinese resource investors, told Swan at the AustCham Beijing breakfast function at which the Treasurer spoke, that he had waited for 98 days earlier this year for an answer to an application for a routine variation of an investment by a state-owned enterprise, but that after emailing a complaint it was processed 38 minutes later. Swan replied that the volume of proposed investments from China "has gone through the roof," and because of that, as well as the complexity of some proposals, "processing has taken a little longer, because they need to be examined. But there's no change of approach." At the end of May, the extent of excitement in China about getting involved in the Australian mining boom was underlined by the success of a packed conference in Beijing -consummately compered in Chinese by the event's chief organiser, Paul Glasson - about opportunities for Chinese companies in infrastructure for resources development in Western Australia. Duncan Calder, a KPMG partner and the Australia China Business Council's Western Australia president, said: "The emergence and growth of China is without doubt the most important global strategic trend of our time. The world has benefited, Australia has benefited, and in particular Western Australia has benefited and will continue to do so. "Now is not just the time to build those relationships. Now is also the time to work together to build bridges in Australia as well as to build port, rail, heavy equipment, power stations, downstream processing and, ultimately, steel mills." The Western Australian Planning and Infrastructure Minister, Alannah MacTiernan, said when asked about special deals for investors, that WA had none, "partly because we have a product that everyone wants, but also because it's not in anyone's interests." Australia played a major role in Japan's rise as the world's second largest economy. To this day, Japan remains a far larger investor in Australia than China is. But that's probably still not enough. It would have been to the benefit of both economies and societies, if the links had gone deeper, had developed in a more lively way. We should not miss the boat with China. China is eager to invest more overseas in its "go global" drive. Not all of its companies are ready. But some certainly are. They have the experience, the products and increasingly access to the more flexible funding arrangements now becoming available out of China. They still, however, need to gain a tick from the central government, usually from the National Development and Reform Commission, which was represented at the WA infrastructure conference in Beijing by Kong Linglong, director of the foreign capital utilisation department. The Chinese participants included people from the sovereign wealth funds, policy banks and engineering, construction and resource houses. For them Australia - and today especially WA - offers the chance, after a series of rebuffs and flops in North America and elsewhere, to build a record of achievement in a developed country, and to learn from collaboration with Australian firms. This is a different form of complementarity from the rather distant one usually touted, of Australia shipping it and China receiving it, transforming it into fridges, say, and shipping it back. Given the recent pattern of hostility to investment proposals in other developed countries, it is inevitable that, as Chinese firms express ever-closer interest in Australia, they will also become more anxious about the prospect of further rejection. But Deacons law firm partner Michael Wilton told the conference that China would probably overtake the US to become the largest foreign investor in Australia by the end of 2009 - on an annual basis. Such figures will ultimately speak louder than any hurt words - amplified in Australia more than in China itself - that in part reflect China's residual culture of foreign victimization. ■ *Rowan Callick is The Australian's Beijingbased China correspondent
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