Swan's Unfinished Song Needs A Coda To The Effect That There'll Be No China Ban

The Age

Friday June 27, 2008

Malcolm Maiden

Today's share buying by China is what Japan's joint-venturing was in the 1960s-1980s.

THE worrying thing about Treasurer Wayne Swan's comments about his Government's attitude to foreign investment yesterday is that he didn't hose down speculation that the Government was considering a ban on state-owned Chinese corporations owning more than 50% of Australian companies.

Swan did respond to suggestions the Government was stalling an application by

state-owned Chinese company Sinosteel that 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% 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 previously, 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 take 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 that 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 affect government revenue, or affect Australia's strategic or security interests, he said at the time.

That statement gave notice that investors with sovereign connections needed to show that the sovereign connection was incidental, or beneficial.

It gave the Government a flexibility that could be undermined by the more prescriptive ownership barrier the Government is said to have floated in private recently.

A 50% barrier could not fail to be seen as being aimed at China, which is emerging as the largest single source of global investment capital - its foreign reserves have soared from about $US150 billion to $US1.7 trillion in the past decade - and which still conducts virtually all 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 joint-venture partners in projects including the North West Shelf , the Pilbara iron ore region and Queensland's Bowen Basin coal deposits.

The nature of the investments has changed: in the first wave, Australian companies took on Japanese companies as joint-venture partners, locking in not just customers once the resources project was up and running, but deep reservoirs of capital for the development of the deposits.

But even allowing for the temporary dislocation of the capital markets caused by the subprime credit crisis, more capital is now 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 the listed companies that own the resource projects.

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 current takeover offer for 100% of Midwest, or - the matter of the moment - Sinosteel's's application for clearance to acquire Murchison.

The crucial point, however, is that, as with the Japanese investment wave, China's resources sector investments are being made by enterprises that aim to buy the minerals that are produced. 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 from investing here and, just as inevitably, trade that could have flowed between Australia and China will be captured by some other country.

There are several theories about how China will develop from here. One hypothesises 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 mineral 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 investment 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. Transfer pricing bans that are enforced by the Australian Tax Office for example should prevent the sale of Australian minerals to resource project customer-owners at artificially low prices, depressing the local venture's earnings, and tax: it's a more nuanced and potentially more productive response to China investment than some sort of blanket ban would be.

mmaiden@theage.com.au

© 2008 The Age

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