Hardly Chinese whispers at FIRB

The latest WikiLeaks "revelation" that the Foreign Investment Review Board told US diplomats that Australia's foreign investment guidelines had been revised to create disincentives for larger-scale Chinese investments are hardly going to surprise the Chinese, or anyone else.

The Age today carried a report of conversations between FIRB's now out-going executive director, Patrick Colmer, and US embassy officials, which confirmed what has been obvious – that the revised guidelines for foreign investment announced by Wayne Swan in 2009 were a response to concerns about the spate of applications for big investment by Chinese state-owned entities in strategic resource assets.

The content of Colmer's private conversations is no surprise because he gave a speech in September of 2009 – to an Australia-China investment forum – which, while he didn't explicitly single out Chinese SOEs, was clearly directed to them.

In the speech he outlined the Australian government's preference for foreign investments in major Australian resource companies to be less than 15 per cent, for investments in greenfields assets to be limited to 50 per cent and that Australian companies should remain listed. The speech merely codified what had been evident from a series of FIRB decisions that year in relation to a massive surge in proposed investments by Chinese SOEs.

The policy wasn't explicitly aimed at Chinese SOEs – it applies to all SOEs – but given that they were the only SOEs active in trying to acquire controlling or very influential stakes in strategic resource companies it was generally, and widely, interpreted as a response to the tide of Chinese investment proposals and as an obvious signal to the Chinese.

Clive Palmer's immediate response to Colmer's speech was to declare FIRB racist, although China's consul-general expressed no concern about the guidelines.

Swan's statement of the policy appears to have had the desired effect. He, acting on FIRB's advice, has continued to approve massive investments by Chinese entities in Australian resources but the controversies that had previously been generated by the SOEs' activity has largely disappeared because the investments have generally conformed to the guidelines.

There were, until the revised guidelines were published, two distinct motivations for the SOEs' investments and two different types of investment.

One was an emulation of the Japanese strategy of the 1960s and 1970s of securing supply of strategic resources and creating a hedge against the impact of its own demand on the prices of key commodities. Investments that fit within Swan's guidelines can serve that purpose.

The other, which was clearly the motivation for much of the activity that preceded the guidelines – including Chinalco's ultimately failed attempt to embrace Rio Tinto in an all-encompassing alliance – was an attempt to get control or influence over major suppliers and access to market intelligence, particularly in the iron ore industry.

No government of a resource-rich nation is going to knowingly allow entities owned or controlled by the governments of customer nations to obtain the ability to distort the supply-demand equations for key commodities and undermine the value of the resources in the process.

The transparency the guidelines have created around FIRB's previously secretive framework for assessing sensitive investment proposals – and Swan's encouragement for a re-made FIRB's greater engagement with foreign embassies and a simpler articulation of its guidelines –- has defused the tensions and controversies that their absence used to generate.

While the guidelines were clearly a response to the Chinese activity it should be noted that they are not discriminatory – they apply to all SOEs and sovereign wealth funds – and that most developed countries have similar sensitivity to investment by state-controlled entities and treat them differently to proposals from publicly-owned companies.

The Chinese didn't need a cable leaked 18 months after the event to understand and accept Swan's message that their continuing investment in Australian resources was warmly welcomed, but with some limitations.