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China and Australia's foreign investment regime

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In Brief

The surge in Chinese investment abroad is the latest development in China’s integration into the global economic and political systems.

Australia is the largest single ultimate destination for Chinese direct investment, bigger than the US and as big as all of Europe or any other single country in the world.


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Though Australia is a relatively small economy, it is likely to remain one of China’s largest foreign investment destinations for a while to come. At the same time, the scale and pace of growth in Chinese direct investment has led to populist reactions that have challenged the open investment regime in Australia and, in particular, raised policy questions about whether investments by state-owned enterprises (SOEs) need to be treated differently from private investment.

More so than trade, business abroad involves significant political, not merely economic, interaction between foreign enterprises and the state. This is particularly the case with China, as its main investors abroad are 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. But these countries are also taking active positions in managing both their economic and political interests as they are affected by the impact of developments in China, and as these changes affect the structure of international markets for goods, services, capital and investment. Not all the reactions are considered or well-judged.

The changes associated with China’s integration into the global economy have seen China seek to conform to established international norms and institutions, including through its accession to the WTO. But despite the significance of these changes and China’s increasingly important role on the world stage, China’s economy is still in transition, with wide-ranging reforms in progress, and this affects the way in which the market operates across all sectors of that economy. China also has a political system that differs greatly from the broadly representative political systems that typify the established industrial economies.

There is no system of international governance for foreign direct investment, as there is in the WTO for trade. And in no dimension of China’s international economic engagement is the interaction between the economic and political systems more prominent and important than in respect of China’s overseas direct investment (ODI).

In a number of countries Chinese investment has become a prominent target in popular commentary. In Australia, for example, the policy response to the surge of Chinese foreign investment has been far from sure-footed and an established and well-functioning foreign investment regime has been severely shaken by undercurrents of national political populism and foreign security dog-whistling.

Australia’s Foreign Investment Review Board (FIRB) has introduced new investment guidelines to deal with the rush of Chinese SOE investment, but this occurred on a largely ad hoc basis. New foreign investment guidelines single out proposals from SOEs for special scrutiny. The delay in considering Chinalco’s bid to buy into Rio Tinto during the global financial crisis, for example, saw the bid fall over commercially, and raised questions in China about Australia’s investment regime. The Australian security agencies have recently restricted the business dealings of telecommunications giant Huawei Technologies, a big player internationally and increasingly in Australia, too. Whatever the issues, this is an extremely strange and ham-fisted interference in economic policymaking processes. And with Chinese investors reportedly suspending all investments in magnetite projects in Western Australia and the suspension of further investment activities by leading miner Shenhua, it seems that China is re-assessing Australia as a favourable investment destination. The retreat of Chinese ODI from Australia is likely to gather pace unless Australia’s drift on foreign investment policy receives an urgent makeover.

Both the element of populism in Australia’s response to the rapid growth of Chinese ODI and the particular ownership characteristics of large Chinese investment projects have acted as sources of political confusion in Australian policy development and in Chinese perceptions of Australian policy. Some of the confusion relates to uncertainty about how to respond to the rapid growth of Chinese investment interest in the Australian resources and energy sectors. The issues of state-owned investment, market competitiveness and other political or security matters are not being appropriately dealt with through ad hoc introduction of additional restrictions and tests on foreign investment proposals. Some of the uncertainty has also been introduced by interested commercial and political parties in play around the market. Uncertainty around these issues runs the risk of hindering the industry’s potential and damaging Australia’s longer-term political and security interests.

The best way to dispel the uncertainty and policy confusion that now pervades would be, first, to re-assert the market framework within which all foreign investment proposals are examined in Australia and, second, initiate government-to-government arrangements for routine consultations between Australian and Chinese authorities on the issues that are arising. Arms-length treatment and incomplete engagement are not a satisfactory response to circumstances that are evolving very rapidly. This would help to facilitate scrutiny of competition, corporate governance and financial transparency issues related to investment by SOEs. The details of this sort of initiative would need to be the subject of discussion and joint study.

Australia cannot expect to capture new Chinese markets without the links that Chinese ODI provides. And without more transparent foreign investment screening and common sense in the formulation of foreign investment policy, Australia is likely to damage its foreign investment standing more broadly.

Peter Drysdale is Emeritus Professor and Head of the East Asia Forum and East Asian Bureau of Economic Research at the Crawford School of Public Policy, Australian National University. A version of this article appeared in the most recent edition of the East Asia Forum Quarterly, ‘China’s Investment Abroad’.

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