This recent change in fortune has been driven to some extent by factors outside Australia’s control but Australian regulatory confusion is not without blame — the policy mess that surrounded Chinalco’s failed bid to buy into Rio Tinto is but one example.
Australia has been among the top recipients of Chinese overseas direct investment (ODI) in recent years, apart from Hong Kong and tax havens such as the Cayman Islands. The Heritage Foundation’s China Global Investment Tracker estimates that between January 2005 and December 2010 Chinese ODI to Australia was around US$34 billion, the largest single destination for Chinese ODI.
For China, the draw of Australia’s natural resources is their abundance, high quality and close geographic proximity — more than 80 per cent of Chinese ODI goes to the mining sector and nearly half of that into iron ore. ODI provides a degree of security for China’s resource-intensive development, which is not presently achieved through trade or portfolio investment. But Chinese ownership also raises security and sovereignty considerations for Australia.
Australia’s Foreign Investment Review Board (FIRB) has traditionally provided an effective way to protect Australia from foreign investments that were perceived to encroach on ‘national interests’. But in recent years, when dealing with Chinese investment activity FIRB appears to have been making up regulations as it goes along. Independently, the Australian security agencies have now put onerous business restrictions on Chinese telecommunications giant, Huawei, a growing player in the Australian market. These actions show little regard for the fact that foreign investment has played a key role in Australia’s development linking Australia to important new markets in Japan, elsewhere in Asia, and now to China. Chinese investment in the agricultural sector is now also being treated with suspicion.
Confusion over Australia’s foreign investment policy is likely to turn away future potential investors. Confusion is not only the fault of the Australian regulator; it also results from the inexperience of Chinese investors. Sino Iron’s CITIC Pacific project would have been a significant step for Australia’s budding magnetite iron ore industry, but cost overruns and delays resulted from a lack of understanding of Australia’s policy environment more broadly. A key assumption underpinning the project was the cost savings it hoped to gain from importing Chinese engineers and workers to build the mines. When standard restrictions on imported labour were discovered the budget blew out significantly, and Chinese investors have suspended all investments in magnetite projects in Western Australia as of 2011.
It is legitimate to protect the ‘national interest’, but Australia’s treatment of Chinese investors has increasingly failed the test of transparency as to which national interests are being protected and from what they are being protected.
The heterogeneity of China’s state-owned enterprises (SOEs) and the reforms sanctioned by China’s State-owned Assets Supervision and Administration Committee (SASAC) seem to be incompletely understood by Australian authorities. The reality is that commercial pressures on SOEs and their executives are mounting rapidly. For example, SASAC’s dismissal of Sinosteel’s CEO was largely due to the huge losses incurred on its Australian investment, Midwest Corporation.
Increasing household income and domestic consumption, moving up the manufacturing value chain, and mitigating environmental pressures will all be vital to China’s continuing and successful development. China’s medium-term goals require reduced resource intensity; a shift away from heavy industrialisation; and technological advancement in agriculture, manufacturing and services.
The Australian resource sector will continue to be an important component of Chinese supplies, as China is still a manufacturing superpower and its urbanisation is far from complete. But reliance on Australia’s mineral resources will decrease as other resource-rich countries emerge as alternatives for Chinese investment throughout Africa.
China’s growing ODI is no longer earmarked for Australia, and its retreat is likely to gather pace following the publicity over the treatment of Huawei — a private not a state-owned Chinese company. Australian policy naivety combined with a touch of xenophobia have undoubtedly played a role in choking back the growth and market access that sustained ODI would have otherwise brought.
In a global economy now significantly driven by China’s growth and capital exports, Australia cannot afford to miss out on its piece of the expanding Chinese ODI pie. It assuredly will unless it revisits its haphazard approach to foreign investment policy, and institutes more transparent screening and common sense in foreign investment policy formulation. Australia needs to rebrand itself, and soon, from ‘the lucky country’ to ‘the savvy country’, in all matters to do with Chinese ODI.
Luke Hurst is a doctoral candidate in economics at the Crawford School of Public Policy, Australian National University. Bijun Wang is a doctoral candidate in economics at Peking University.
To be honest, I don’t see why there is such a rush or assumed certainty to dig all the minerals out of Australia’s ground as quickly as possible.
Until I see a sound strategy of turning a resource economy into a sustainable *whatever it may be* economy, preferably by some other country first, I don’t care what inertia slows us down. I would prefer more tax but if it is regulatory confusion or xenophobia then so be it.
That may mean other economies get in first and as a result dig their resource out of the ground first but it will also see them head to the ash heap of history before us. Give me a slower bumbling economy at almost full employment with two speeds any day. Or give me the key to transforming a resource economy to a sustainable something economy and then you can let the bulldozers run free.
I don’t think that’s the strategy that is being advocated here: rather, the strategy is to dig resources out of the ground while they add more value to national product, given the capital and that can be mobilized and the technology we have, than the alternatives that are presently available. It makes us one of the very richest countries in the world. And once we’ve lifted value added (or GDP per head) in this way, there’s the where-with-all and incentive (through the pressure of the higher exchange rate) to invest in alternative high income futures as that makes sense. True a better tax take would help make more public investment in that but that’s our choice. Does Tom really want to throw 15 % of our GDP down the drain, however comfortable a life he personally enjoys? The key to transforming resource-based income into a sustainable economy is not exactly hard to find. Even the resource-poor industrial countries of Asia like Japan started as resource exporters. And the US and Canada have both been large resource exporters. There’s the added pay-off that Australia’s being the most efficient supplier of these materials in the world to our neighbours in Asia brings to regional and global security through the resource trade.
Do we really want investment from China? The way that that the mainland Chinese seem to do business, such as in importing their own labour force, seems to leave a lot to be desired. In the above scheme where does Australia benefit?
Host countries have total control over whether and on what terms Chinese investors use Chinese labour as they do over the regulation of Chinese investment more generally. In the CITIC Pacific example above it is clear that the Chinese are restricted to importing their labour force to Australia.
Australia benefits because its financial markets are not deep enough to provide the capital required to develop many of the resources to which the country owes its current prosperity and because foreign investment provides links that help to secure additional markets for Australia. The restrictions placed on foreign investment by FIRB – especially China’s state owned investment – ensure national interests are protected.
Shallow thinking like this has driven recent outcomes such as Huawei and Shenhau, and will ensure Australia doesn’t get its much needed share of China’s US$390b in ODI over the next 5 years.
Luke so the only benefit Australia receives is investment in infrastructure to dig more stuff out of the ground to sell to Chinese businesses? Luke, this is what I think is what C is getting at; the benefits appear to be only one way and importing a Chinese workforce just adds to this issue.