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Chinese investment in Australian resources

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In Brief

The last nine months has seen Chinese foreign direct investment in the Australia resource sector become an issue of policy interest. There are two big questions that the prospects of a significant rise in foreign direct investment (FDI) from China into the Australian resources sector have raised. Is the surge of FDI into Australian mining and energy consistent with achieving the traditional gains from foreign investment? And are there any particular problems associated with investment from foreign state-owned enterprises or state managed sovereign wealth funds?

These are among the questions addressed in a paper we presented today at a Crawford School Public Seminar (view the full draft paper here). We argue in the paper that there are no issues that cannot be dealt with under the umbrella of the established test of ‘national interest’ in managing the growth of Chinese FDI into the Australian minerals sector. Confusion has been introduced into Australian foreign investment policy over the questions of state-ownership and supplier-buyer relations in respect of Chinese investments and clarifying these issues is likely to be important to Australia’s capturing the full benefits from the growth of Chinese resources demand and longer term economic and strategic interests in China.

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The rapid rise of China caught many by surprise, although Australia has been on the leading edge of the wave. The intensification of Chinese investment activity in the Australian resource sector has also come swiftly although it had been gathering strength for some time. These developments alone do not explain the recent elevation of policy interest in Chinese investment in the Australian resource sector or the discomfit of the previous Australian government or the present government in dealing with the issue.   A series of events contributed, and they illustrate our argument as to the value of a generally applied national interest test to investments of this type. Two were of particular importance.

The first event was the high profile takeover bid by BHP Billiton for Rio Tinto which played into the question of Chinese investment in Australia. Whether it occurred to the architects of the BHP Billiton takeover strategy or not, a merger between the two largest international iron ore suppliers in the world was bound to excite interest in China, the largest iron ore market in the world.

Chinalco, already a significant investor in other mining projects around the world made its move on an initial minority stake in Rio Tinto. Here is not the place to speculate about where this corporate takeover game will end but brief comment is in order on the implications of the development for framing policy towards FDI that incorporates state-ownership. The Treasurer has approved the investment by Chinalco in Rio to 11per cent. This share is less than the ‘substantial interest’ level of 15 per cent which applies under the FIRB policy, and the Treasurer made the determination under the new guidelines applying to state-owned enterprises. Should Chinalco move to a ‘substantial interest’ in Rio Tinto, or for that matter, BHP Billiton, there would be a ‘national interest’ case to consider under Australia’s foreign investment rules. At current levels, even if Chinalco sought to increase its minority stake in Rio Tinto beyond 11 per cent but below a ‘substantial interest’, either to profit from or protect against the BHP Billiton bid for Rio, there is no case for policy interference in the matter . This intervention illustrates the type of uncertainty which we discuss in the paper.

The second event was Sinosteel’s investments in the mid west region of WA.  It had applied to take over Midwest, a Western Australian iron ore company, which was approved in November just after the Rudd government assumed office.  Sinosteel also targeted Midwest’s neighbour Murchison and it continues to wait for the FIRB ruling on its application.  Sinosteel’s interest in Murchison will have been increased by the recent WA government decision to ask a Murchison consortium to build a new port to serve the region.  It has been suggested that a wholly Chinese-owned infrastructure network in the WA mid-west might be an obstacle in delivering iron ore to other markets. Again, this issue can be dealt with by the kind of conditions that the Western Australian government has routinely imposed on other infrastructure developments. The scale and structure of these investments do not suggest any considerations of ‘national interest’, effects on competition or strategic importance that might recommend their non-approval.

These and other issues have introduced confusion into the administration of Australia’s foreign investment regime over the past year. Much of the confusion seems to relate to uncertainty about how to respond to the growth of Chinese investment interest in the Australian resources and energy sector. The issues of state-ownership of investment, competitiveness in markets and political or security matters are issues that are not appropriately dealt with through additional restrictions and tests on Chinese or other foreign investment proposals. Uncertainty around these issues already runs the risk of hindering exploitation of the industry’s potential and damaging our longer term political and security interests.
The best way to dispel the uncertainty and confusion is through

a) reassertion of the market framework within which all foreign investment proposals are examined in Australia and

b) initiation of government-to-government arrangements for routine consultation between Australian and Chinese authorities that would serve to facilitate scrutiny of competition, corporate governance, and financial transparency issues and have the practical effect of strengthening that framework over time.

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