Swan And Co Tread A Fine Line In The China Shop Of Progress
Sydney Morning Herald
Friday June 27, 2008
The worrying thing about Wayne Swan's comments on foreign investment yesterday is that he didn't hose down speculation that the Federal Government was considering a ban on state-owned Chinese corporations owning more than 50 per cent of Australian companies.
The Treasurer responded to suggestions that his Government was stalling an application by the state-owned Chinese company Sinosteel which would enable it to acquire a West Australian iron ore middleweight, Murchison, should it decide to try.Sinosteel applied in January to give itself the option, but is now focusing on taking over Murchison's neighbour, MidWest, where it has moved to a 43.6 per cent stake in the face of a rival proposal from Murchison.Swan said yesterday that the Foreign Investment Review Board had merely created a formal 90-day timetable for a decision on the Murchison application - as it had done in 2005, for example, when it considered and cleared Xstrata's eventually unsuccessful takeover bid for WMC. He went on to say that Australia welcomed foreign investment from anywhere, including China, but would apply decisions on a case-by-case basis in the national interest.That was consistent with his February statement, that the FIRB and the Government would ensure investment proposals from government agencies including sovereign funds and state-owned enterprises were commercial, and not intended to advance "broader political or strategic objectives".Issues included whether the state-connected investor operated at arm's length, and whether the investment would hinder competition or have an effect on Government revenue, or Australia's strategic or security interests, he said at the time.The February statement gave notice that investors with sovereign connections will need to show the sovereign connection is incidental, or beneficial. It gave the Government flexibility that could be undermined by the more prescriptive ownership barrier the Government is said to have floated in private recently.A 50 per cent barrier could not fail to be seen as being aimed at China, which is in the process of emerging as the largest single source of global investment capital - its foreign reserves have already soared from about $US150 billion ($157 billion) to $US1.7 trillion in a decade - and which still conducts virtually all of its overseas investment through state-owned or state-influenced vehicles.China is targeting Australia's mineral commodities because it needs them, and we have them in abundance. In the 1960s, '70s and '80s, Japanese companies invested heavily in Australia for the same reason, and they continue to be significant partners. But the nature of the investments has changed: in the first wave, Australian firms took on Japanese companies as joint-venture partners, locking-in not just customers once the resources projects were up and running but also deep reservoirs of capital for the development of the deposits.But even allowing for the temporary dislocation of the capital markets caused by the sub-prime credit crisis, there is now more capital available, and more sources. So there is less reason to adopt joint venture structures, which tend to operate like committees and produce similar decision-making headaches. Instead of investing directly in resources joint ventures, Chinese companies have been buying into listed companies that own the resource projects, and they are likely to continue to do so.Their acquisition of listed shares makes them more conspicuous investors: the presence of, say, Mitsui, Nippon Steel and Sumitomo as part-owners of Rio Tinto's Robe River iron ore assets, or of Mitsubishi and Mitsui as joint one-sixth owners of the North-West Shelf LNG project, is less obvious than Sinosteel's takeover offer for 100 per cent of the West Australian iron ore hopeful Midwest, or its application for clearance to also acquire Murchison.The crucial point, however, is that, as with the Japanese investment wave, China's resources sector investments are being made by enterprises such as Sinosteel that aim to buy the minerals that are produced, and in that sense, barriers to Chinese investment also threaten to be a barrier to the development of trade between Australia and China. Inevitably, Chinese companies will invest elsewhere if they are blocked here, and just as inevitably, trade that could have flowed will be captured by some other country.There are several theories about how China will develop from here. One proposes that Beijing's grip will gradually loosen as the economy opens up to market forces. Another speculates that the same forces will culminate in a political crackdown, and a reversion to more overt centralised control. A third argues that the existing model is steady-state.It is in everybody's interest that the first theory prevail, and Australia's minerals wealth gives it an ability to subtly influence the outcome: judiciously applied on a case-by-case basis as outlined by Swan in February, an investment policy that gave better access to investors that were independent of Beijing, or headed in that direction, could both encourage economic liberalisation in China and cement what undoubtedly will be Australia's most important 21st century trading relationship.Such a policy would be buttressed by existing laws. It's a more nuanced and potentially more productive response to Chinese investment than some sort of blanket ban.
© 2008 Sydney Morning Herald