“Paranoia will get you through times of no enemies better than enemies will get you through times of no paranoia.”
Pete Granger
“In 10 years time, China will have 15 cities each with more people than the entire population of Australia and a further 22 cities with more than 10 million people. This unprecedented urbanisation drive in human history represents a tremendous challenge and opportunity for our resources sector.”
Warwick Smith, Chairman ANZ (NSW/ACT)
“No relationship is more important to the future well being of Australia than the relationship with China. It impacts on all Australians.”
Hon. Bob Hawke AC at the Australia-China Investment Forum 24/09/09
Once again Australia Day has been and gone and the country enjoyed the day off to play cricket and eat barbequed lamb amongst various other treasured traditions. And we have a lot to enjoy here in Australia, with a solid resources sector, sound monetary policy and a stock market up 46% from the March 2009 lows. Nevertheless our solid growth is unavoidably linked to the new great world power that is China.
As Alan Kohler suggests “bet on China, not America. That means bet on Australia – it is in the right place at the right time”. The source of Australia’s sustained economic growth is undoubtedly China’s insatiable demand for resources, yet as China seeks to take a more direct involvement in Australian industry, feathers are being ruffled and paranoia sets in. There has always been concern over foreign ownership of Australian-owned businesses, but there could be a serious cost to the economy through the denial of foreign direct investment (FDI).
Australia is a nation with low domestic savings, we are a net capital importer, thus if the economy is to continue to grow it is imperative that FDI is utilised and new sources of funding encouraged. With a ‘US$2 trillion war chest’ China clearly has the capacity to become a significant investor, whilst recent attempts to invest in the Australian resource sector demonstrate clear intent of China to take a larger direct stake in the domestic economy.
In the past, the UK and the US have largely been responsible for FDI flows into Australia, accounting for 24.8% and 24.3% of the 2008 total respectively. Since then the global economy has continued to suffer, and although showing signs of recovery, both the UK and US face considerable troubles, with some suggesting that America is headed for bankruptcy. Therefore new capital markets will need to be explored; and who better than China, our largest trading partner.
Unfortunately due to the fact that Chinese outward FDI is largely considered sovereign investment, it is subject to a rigorous review process by the Australian Foreign Investment Review Board (FIRB). Although FDI rules in Australia have been eased for private investment, most Chinese FDI is still subject to intense scrutiny, which has recently been criticised for causing delays that dissuade investors. Furthermore policy that seeks to limit Chinese investment in Australia could damage an already ‘fractious’ relationship.
Australia must develop a balanced approach to China, protecting Australian interests and encouraging a friendly relationship, yet this is problematic whilst there remains an obvious lack of transparency in both China’s legal and political systems that gives cause for concern. It is suggested that China has ulterior motives in securing significant interests in Australian industries.
This tension has been highlighted by the case of Chinalco’s now failed plan to inject US$19.5 billion into mining giant Rio Tinto, which would have increased the Chinese entity’s stake from 9% to 18%. Whilst the Australian government made a positive ruling on the investment, stating that Chinalco could acquire up to an 11% stake in Rio, the topic became the centre of a heated political debate. Malcolm Turnbull suggested that it would be against national interest for a firm such as Chinalco, owned by a communist regime, to have such a large stake in Australian resources. Conversely John Howard stated that FDI should come “from any source”.
A month after the deal was called off the Chinese government detained four members of Rio Tinto’s sales team, including Australian Stern Hu. Rio was accused of having acquired data that threatened China’s national security, as well as “winning over and buying off, prying out intelligence… and gaining things by deceit” during price negotiations for iron ore. Chinalco has denied a link between these events and the failed investment.
Nearly seven months later the four employees remain under arrest, awaiting the decision as to if and when the case should go to trial. It is expected that the case will be referred to the Central Committee of Political and Legal Affairs, run by the ruling communist party. It is this close relationship between business and politics in China that has Australian firms questioning the acceptance of substantial FDI.
The Australian government showed its fear in early 2009, when the Chinese state-owned China Minmetals attempted to purchase OZ Minerals. The original sale was blocked given the location of the Prominent Hill Mine within a sensitive military area. Nevertheless a deal without the mine was achieved marking a positive step in Sino-Australia investment relations. Similarly the purchase of Australian company Felix Resources by Yanzhou Coal Mining Co marks the biggest buyout by a Chinese firm in Australian history, suggesting that 2010 could begin a new era of mutually beneficial investment.
Therefore whilst a fear of China abusing its power is not to be entirely disregarded we cannot afford to cast China in the role of villain seeking world domination. It is up to the government to establish a solid framework for reviewing both sovereign and private FDI on an equal basis, ensuring no loopholes or bias. The benefits of a sound relationship would flow not only to the resource sector but provide a strong boost to the Australian economy. Kevin may even improve his Mandarin.
By Nicole Loewensohn and Emily Stewart