Sunday, April 1, 2012

Australia’s dumb luck and Chinese investment

Australia has certainly lived up to its billing as ‘the lucky country’ over the last decade — the scramble to feed China’s appetite for minerals has pushed Australia’s terms of trade to historic highs.

But as Chinese investors face growing operational difficulties and new supply alternatives for their natural-resource demands, Australia must now work to make its own luck to attract Chinese money in mining and in other sectors. 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.

By Luke Hurst 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. East Asia Forum

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