More so than trade, business abroad involves significant political, not merely economic, interaction between foreign enterprises and the state — not least because China’s dominant investors abroad are state-owned enterprises (SOEs). There is growing debate globally about whether and how the role of SOEs affects the benefits that host countries gain from Chinese investment abroad, a debate that is really about the interaction between national political institutions that are ordered around different principles and political constitutions and how these institutions evolve in settings governed by market disciplines.
Many countries enjoy the economic benefit of China’s integration into the world economy, few more so than Australia. At the same time they take proactive positions in managing both their economic and political interests as they are affected by the impact of developments in China, and as these changes impact on the structure of international markets for goods, services, capital and investment.
The changes associated with China’s integration into the global economy have seen China seek to conform to established international norms and institutions (for example, through its accession to the WTO). But despite the significance of these changes and China’s increasingly important role in the world, China’s economy is one still in transition, with wide-ranging reforms still in progress, and this affects the way in which the market operates across all sectors of the economy. It also has a political system that is different from the broadly representative political systems that typify the established industrial economies.
There is no system of international governance for foreign direct investment, such as there is in the WTO for trade. In no dimension of China’s economic engagement internationally is the interaction between the economic and political systems more prominent and important than in respect of the surge in China’s overseas direct investment (ODI).
These issues have become a prominent and urgent undercurrent in popular and policy discussions around the subject of China’s investment abroad. They are endemic in the response to Chinese investment abroad, including in Australia.
As Luke Hurst and Bijun Wang argue in this week’s lead essay, the policy response to the surge of foreign investment into Australia has been far from sure-footed. An established and well-functioning foreign investment regime has been severely shaken by undercurrents of national political populism and foreign security dog-whistling.
In the past, Australia’s Foreign Investment Review Board (FIRB) provided an effective way to protect Australia from foreign investments that were perceived to encroach on ‘national interests’. In recent years, it appears to have been making up regulations as it goes along for Chinese investment activity. The ex-head of FIRB stated that the Australian government preferred that state-owned investors keep ownership below 50 per cent for greenfields projects and below 15 per cent for major producers — what a major producer is was left undefined. Independently, the Australian security agencies have now put onerous business restrictions on telecommunications giant Huawei, already a growing player in Australia. Growing Chinese interest in the food sector is also being treated with caution and is subject to more scrutiny.
Hurst and Wang argue that: ‘Confusion over Australia’s foreign investment policy is likely to turn away future potential investors. But confusion is not only the fault of the Australian regulator; it also results from the inexperience of the Chinese investor. 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 cost savings it hoped to gain from importing Chinese engineers and workers to build the mines: when standard restrictions on migrant labour were discovered the budget blew out significantly’.
Chinese investors, according to Chinese authorities, have suspended all investments in magnetite projects in Western Australia as of 2011. Australia is no longer seen as a favourable export destination by leading Chinese investors. The retreat of Chinese ODI from Australia is likely to gather pace unless Australia’s drift on foreign investment policy receives an urgent makeover.
It is legitimate to protect national interests, 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.
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’, as Hurst and Wang remind us. And it assuredly will unless it revisits its haphazard approach to foreign investment policy. Without more transparent foreign investment screening and common sense in foreign investment policy formulation this is a significant risk. On Chinese ODI, Australia needs to rely less on the deceptively comforting idea that it is ‘the lucky country’ and more on its ‘policy smarts’.
Peter Drysdale is Editor of the East Asia Forum.