Author: Peter Drysdale
The last few weeks have seen a surge in debate about Chinese investment in the Australian resource sector. The catalyst was the bid by Rio to alleviate its debt problem by lifting Chinalco’s stake in the company through taking higher equity and a stake in a number of Rio’s key assets, some in Australia.
Rio, of course, is not the only company lining up for a timely injection of capital from Chinese investors.
Otherwise measured commentators worry about whether we should ‘be selling the resource sector to the Chinese Communist Party’; some proclaim, through a thin veil of ignorance, on the relations between state and economic enterprise in China; with perhaps the grubbiest contribution coming from former Treasurer Peter Costello implying that our Chinese-speaking Prime Minister would be prone to let the sector be sold on whatever terms’ to Chinese investors. The financial press worked itself into a lather over the issue.
It’s time to pause, take a Bex, have a good lie down and think clearly about what our national interest is in the matter.
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Author: Christopher Findlay
The FIRB criterion for assessing foreign investment proposals is the national interest. In the context of natural resource projects, this means capturing the value of the assets for sale.
We are reminded of this in recent comments on the Rio-Chinalco deal from two different angles.
China Iron & Steel Association secretary-general Shan Shanghua said last week
The $US19.5 billion ($30 billion) deal between Chinalco and Rio Tinto announced last week strengthened China’s hand in breaking a ‘duopoly’ in Australian iron ore mining.’ (source)
Shan is saying the way to look at the deal is in terms of its impact on competition. He assumes Australian producers have market power and wants to stop them using it.
Over the longer term, it’s possible Chinalco-Rio could break the duopoly… (but) it was too early to tell if the deal would have any effect in the short term’, Shan said.
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Author: Christopher Findlay
BHP is happy, Rio still wants a higher price or to stay in business, the customers are worried and state governments have their hands out.
That’s the bottom line of yesterday’s decision by the ACCC to approve the merger of Rio with BHP.
We still have to hear from the European and other competition authorities.
The ACCC argument was that the merged entity would have no incentive to hold back (iron ore) supplies in an effort to raise prices in the domestic market.
There would be a competitive response from the global market in the short run and in the medium term if it did so.
Iron ore making looks like a business with big barriers to entry, given the infrastructure involved and the specificity of the product. But the experience of recently rising prices demonstrates the short run supply response from marginal miners, and the scope to set up new projects world wide.
There are also other big providers out there, Vale from Brazil for instance.
So BHP might be happy, but what about Rio?
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Autors: Peter Drysdale and Christopher Findlay
Graeme Dobell (link) and Mark Thirwell (link) have comments on the Lowy site on our paper last week on Chinese foreign direct investment in the resource sector.
Graeme Dobell noted:
…Professor Peter Drysdale and Professor Christopher Findlay…In their view, policy on Chinese foreign direct investment in Australian mining has fallen into confusion over the last year. Or as they pose the problem: ‘It may seem a puzzle as to how we got ourselves into this pickle over Chinese FDI.’ The Drysdale-Findlay solution is for Australia to step back from its effort to place additional hurdles in the way of Chinese state-owned firms.
Mark Thirwell says that we come to ‘pretty much the same conclusion’ as he did in anop ed in The Australian in July when we conclude that: ‘There is no persuasive case for any change in direction over control of foreign direct capital inflows in response [to] the recent surge of interest of Chinese foreign direct investors in the Australian resources sector.’ So there will be no argument from him.
That said, he ventures two ‘additional’ arguments to which we should respond.
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Author: Peter Drysdale and Christopher Findlay
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. Read more…
Author: Jane Golley
China faces huge challenges in striving for a balanced, sustainable development path, and Australia has a big role in promoting open trade and investment in China.
While China’s progress in the past three decades is striking, the Chinese leadership still faces huge challenges in steering the economy and its people towards a more comprehensive, balanced and sustainable development path, the three keystones of President Hu Jintao’s ‘Scientific Outlook on Development’. All of these challenges are substantially more difficult in light of the fact that China is still a reforming economy, with incomplete reforms in the banking sector and financial markets, labour markets and state-owned enterprises, to name a few. Read more…
Author: Peter Drysdale
Mark Thirlwell makes the latest contribution to the debate about Chinese investment in the Australian resource sector in today’s Australian. His conclusion — that it is important to keep the current debate in perspective and that, despite the policy challenges involved, China’s rise is still an economic good news story for Australia — is right.
But is his conclusion right for the right reasons? Yes, but incompletely. And in this high stakes game it is important to come to the right conclusion for completely the right reasons.
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