Monday, August 15, 2016

Getting some perspective on Australia’s relationship with China

The Chinese government-owned State Grid Corp and Hong Kong-listed Cheung Kong Infrastructure (CKI) were both bidding for a 99-year lease of Ausgrid, which supplies power to parts of Sydney, Wollongong and the Hunter region. Bids had been open to both over a long period with no previous warning that their bids were unwelcome.

National governments have a basic duty to their citizens to ensure national security. Part of this means ensuring that monopoly suppliers of essential services to households, businesses and government itself are reliable and dependable. An operator that is incapable, negligent or reckless should not receive a license to operate.

On the face of it, State Grid and CKI are both well qualified to run a reliable electricity network. The former is the world’s largest electricity company. The latter runs substantial holdings in the United Kingdom (where CKI is responsible for London’s electricity supply), Europe, Canada and New Zealand. Both are already in Australia.

The ominous reference to national security suggests not some current incapability so much as fear of some future malicious intent combined with Russian energy blackmail tactics. But given that all Ausgrid’s poles, wires and electrons are physically in Australia, such rogue behaviour would invite divestment rather than capitulation. And in extreme cases such as war, the Australian government would requisition key facilities or even nationalise alien assets. Truly critical defence assets, such as army bases or weapons ranges, should never leave government hands.

Keeping Ausgrid in Australian hands might help mitigate risks in these worst case scenarios but comes at a real cost. The integrity of critical infrastructure is an important consideration whether infrastructure assets are operated by national or foreign owners. This needs to be routinely assessed by properly qualified authorities and whatever protections against infrastructure vulnerability put in place.

The likely A$4–6 billion shortfall in Ausgrid’s final sale price is a radical underestimation of the ultimate cost of this decision. Because Australia’s foreign investment policy depends on a secretive case-by-case approach, the absence of clear principles setting out what is ‘in bounds’ and ‘out of bounds’ for global investors creates new risk in bidding for any potentially ‘strategic’ assets. Claims of strategic significance could end up putting a respectable face on the nativist protectionist instincts of some of the members of Australia’s latest parliament. Such foreign investment policy uncertainty shaves percentage points off Australia’s growth potential.

The Australian government needs to think harder about the reconciliation between being foreign investment-friendly as the economic and security needs of the nation demand and being firm but rigorous on national security.

major joint independent report on the Australia–China economic relationship that will inform this debate was released publicly today and presented to the Australian prime minister and Chinese premier for consideration by the people and governments of both countries. The Australia–China Joint Economic Report is a huge and unprecedented undertaking by leading think tanks, with support by policy analysts, governments, business and other organisations to establish common reference points in both countries in thinking about the relationship over the next decade or more. The report addresses the opportunities that this relationship presents and how the risks that have to be dealt with might be managed cooperatively.

Our lead essay this week is authored by Peter Drysdale of East Asia Forum and Zhang Xiaoqiang, Executive Vice Chairman and CEO of the China Center for International Economic Exchanges and former Vice Chairman of China’s National Development and Reform Commission, who co-led this major bi-national effort. They argue that ‘the Australia–China relationship will undergo a huge change over the coming decade. The scale and complexity of the relationship is growing because of the increased role of services and investment, as well as its political and security dimensions’.

In the Chinese policy community, they point out, there is wide understanding and clear acknowledgement of the economic and political advantages of open, secure and competitive access to Australian raw materials. As China’s economy matures and its middle class expands, China is also enjoying access to Australian agriculture, institutions and services. Australia’s open society provides Chinese investments with security in a stable and well-functioning market economy that guarantees transparent recourse to political, legal and regulatory institutions.

‘The Australia–China relationship represents an impressive achievement but with wisdom it can be taken to a wholly new level’. The Report sets out how that might be done through defining a new Comprehensive Strategic Partnership for Change, establishing an Australia–China Commission (like the Fulbright Commission with the United States) to promote intellectual, scientific and cultural in addition to policy and political-level exchanges, and embracing a negative-list bilateral investment agreement and progress through the China–Australia Free Trade Agreement and other mechanisms.

‘While fully respectful of each other’s existing relationships’, they conclude, ‘the new partnership can be a powerful force for the stability and prosperity of the region, and for the global system. It can serve as a principal vector of Australian and Chinese engagement within a rapidly changing world. Nurtured carefully and imaginatively, this deeper partnership could become one of the most strategically vital and productive bilateral relationships that either country has in the world’.

It is a report that is likely to attract attention and study not only in Australia and China over the coming months and years, but in both countries’ partners around the Asia Pacific region as well.

The EAF Editorial Group is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Ryan Manuel, Amy King and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.

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