As the negotiation of the Australia–China Free Trade Agreement (FTA) moves into what is hopefully its final phase, there is intense focus on how the investment chapter of the FTA will treat the access of Chinese state-owned enterprises to the Australian investment market.
Currently all investment proposals by state-owned enterprises (SOEs) are subject to screening by Australia’s Foreign Investment Review Board (FIRB), no matter what their scale or country of origin.
But there being no country of origin specifications, these guidelines were introduced explicitly after China opened the door to large scale SOE investment abroad and after there was a huge surge of interest by Chinese firms in investment in the Australian resources sector at the height of the minerals boom.
Over this period, Australia — rather than the US or any other country in the world — became the largest single ultimate destination for Chinese direct investment. Chinese investment in Australia was as big as in all of Europe.
Australia’s ranking as a Chinese investment destination has since slipped. Competition for investment in the resource industries has also become keener and Chinese investment in Australia has retreated with the retreat of the minerals boom.
But the slip in Australia’s ranking as a Chinese investment partner was also, in part, a result of uncertainties in China about the treatment of investment in Australia. The scale and pace of growth in Chinese direct investment led to populist reactions that challenged the open investment regime and, in particular, questions about whether investments by SOEs needed to be treated differently from private investment proposals.
The current Australian guidelines are a blunt instrument for dealing with whatever issues were supposed to arise from SOE investment in Australia.
In our lead this week, Paul Hubbard and Patrick Williams point out that the first step in understanding Chinese investment is the distinction that we need to make between the giant, central SOEs dominating strategic industries from Beijing and the tens of thousands of provincially and locally owned SOEs.
‘China’s largest companies are almost all central SOEs and state-owned banks. Of the top 50 firms in 2011, central SOEs control 72 per cent of the total revenue, with other central financial enterprises and the post office making up a further 17 per cent’, they explain, while ‘Sinopec’s 2011 gross revenue was only marginally below that of the Australian government’. The senior executives of these companies are appointed by the Communist Party and are listed among the top officials in the country. ‘Central SOEs and the banks control more than half of the revenue of China’s top 500 firms’.
The overwhelming majority of SOEs operate in a very different environment from these central SOEs. Provincial SOEs operate in a highly fragmented market, with supervision spread across 36 provincial-level asset management commissions and 442 sub-branches. Hebei Iron and Steel, for example, China’s largest steel producer, accounted for less than 6 per cent of national steel output, while Japan’s Nippon Steel produced 45 per cent of Japan’s total in 2013.
These local SOEs collectively control more state equity than central SOEs. They are more likely to be competing against each other as well as with private firms. They are also under local political pressure to be more profitable, rather than being loss-making ‘national champions’. This competitive environment occurs across all sectors of the Chinese economy with various degrees of state ownership.
While SOEs remain a prominent feature of the Chinese economy, they now account for only 30 per cent of industrial output and even the huge central SOEs are supposed to run at arm’s length from the state — an issue that is currently a focus of China’s Third Plenum reform agenda despite the continuing commitment to SOEs. Market competition and the corporatisation and the privatisation of many loss-making SOEs in the 1990s have seen the environment in which they operate change dramatically.
There is no logical basis for treating the vast bulk of Chinese SOEs or similar investors from other states any differently from other potential investors in Australia, comply as they must with Australian laws and corporate and other regulations.
And there is legitimate expectation, both in China and among the Australian business community, that the FTA with China will ease access to Chinese investors (both SOEs and private investors) in a way that reflects the treatment of other partner investors under similar FTA arrangements in return for major concessions from China on agricultural and services trade access as well as investment treatment. Australia’s FTAs with the United States, New Zealand, South Korea and now Japan exempt foreign investment proposals valued up to $1 billion from FIRB scrutiny and approval.
Australia still has the potential to remain one of China’s largest foreign investment outlets and, as global sources of foreign investment have shrunk since the global financial crisis, China is a large and promising source of new investment for Australia and other countries.
Australia cannot expect to capture new Chinese markets without the links or the capital that Chinese foreign investment provides. And without common sense in the formulation of foreign investment policy, or its expression in the trade and investment arrangements that are negotiated with China and other partners, Australia is likely to damage its foreign investment standing more broadly.
This piece was originally published at East Asia Forum. Reproduced with permission. Peter Drysdale is Editor of the East Asia Forum.