Just about every PowerPoint presentation on investing in Australia for Chinese investors starts with slides on the Foreign Investment Review Board, says Andrew Michelmore, chief executive of the Chinese owned MMG, a Melbourne-headquartered international mining company.
FIRB is the favourite whipping boy for Chinese investors who decry discrimination and nativists who don’t like the idea of China buying up tracts of farmland or mines in this country.
Australia’s foreign investment process is often described as opaque, time-consuming and uncertain. But in fact, the biggest nemesis for Chinese investors who want to invest Australia is not FIRB, but China’s own regulator – the National Reform and Development Commission (NDRC).
The Commission is one of the most powerful government agencies in Beijing, which has wide-ranging responsibilities from crafting the country’s economic strategy to setting the price for petrol. It is also one of the key regulators overseeing China’s fast-growing overseas shopping program.
China has emerged recently as one of the most active investors in the world, as cashed-up companies go abroad in search of resources, technology and markets. Beijing has ranked consistently as the third largest investor in Australia in the last few years, but still considerably behind traditional heavyweights like the United States and Britain.
China’s outbound investment approval harks back to the days when the country’s foreign reserves were scarce. Precious American dollars were jealously guarded and large deals needed approvals from top leaders.
For example, Sinosteel’s investment in the Channar iron ore project in Western Australia in partnership with Rio Tinto required the blessing from the highest echelon of Beijing’s political leadership.
Despite the fact that China’s foreign reserves have soared from a negligible level to a record of $3.7 trillion, more than triple those of any other country and bigger than the GDP of Germany, Beijing still maintains a close watch over how its companies invest overseas.
The outbound approval process, which is overseen by NDRC, the Ministry of Commerce and the central bank, has proven to be not only a time-consuming irritation but even fatal to completing some takeover deals.
Just like the FIRB guideline, the Commission’s criteria for assessing Chinese investment projects involve a mixture of industrial policy as well as commercial considerations. The Commission enjoys considerable discretion in the decision-making process and is often time-consuming – lasting between three and four months.
It is ironic considering that FIRB often needs to make a decision with 30 days – a statutorily mandated period. As far as time is concerned, FIRB is in fact much friendlier than the National Reform and Development Commission.
The interventionist approach by the Commission has cost Chinese investors some highly coveted opportunities to invest in premium mining assets both in Australia and abroad, most notably in Fortescue Metals Group – the third largest iron ore producer in the country behind Rio and BHP Billiton.
When Andrew Forrest was in desperate need to raise capital to create “the third force” in the iron ore industry, he went to China to look for cornerstone investors. Obnoxious officials at the Commission not only demanded a controlling stake in FMG but also anointed a state-owned enterprise to negotiate with Forrest.
The heavy-handed approach turned away Forrest, who sought money elsewhere. Chinese steel industry executives lamented the missed opportunity to invest in FMG at an early stage of its development.
NDRC only reluctantly allowed Hunan Valin, a provincial state-owned enterprise which is partly owned by ArcelorMittal (the largest steelmaker in the world) to invest in FMG many years later after its initial debacle.
Long-suffering directors and investors at Sundance Resources, an ASX-listed resources company with significant assets in Africa, can also recognise the visible hand of the Commission. It forced Sichuan Hanlong, Sundance’s Chinese suitor, to lower its takeover offer after the iron ore price collapsed from its record high.
As a result of the heavy-handed approach by the NDRC, many companies have become reluctant to deal with Chinese suitors unless they are prepared to pay significant break-up fees in the event of unwelcome intervention from the Chinese regulator.
It is believed that when Chengdu Tianjin Industry Group launched a takeover bid for Talison Lithium, a Perth-based lithium producer, it had agreed to pay break-up fee in event of an obstruction from Chinese regulators.
More recently, Shuanghui, the largest Chinese pork processor, paid a $275 million up-front break-up fee in order to secure the deal to buy Smithfield, the largest pork processor in the world, according to Li Junjie, one of China’s top M&A advisors.
This is about to change as Beijing changes its highly interventionist approval approach in favour of empowering companies to make their own decisions and bear the consequences for their investment decisions.
Chinese investors will only need to obtain advance approvals from the regulators if they want to invest in projects worth more than US$1 billion.
As suggested by Dan Ryan on Monday, “Chinese corporate management should now be able to react more quickly and be much more opportunistic about future offshore investment proposals in Australia and elsewhere in the world.”