How Abbott could triumph in China

Australia's foreign investment policy stands in the way of a trade deal with China, but a deal is possible if Abbott balances liberalising the investment screening process with maintaining vigilance.

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Prime Minister Tony Abbott is trying to seal a historic trade agreement with Australia’s most important trading partner: China. It is a deal that has eluded three of his predecessors, including his mentor John Howard and Mandarin-speaking Kevin Rudd.

He is in a triumphant mood after inking two trade deals with Japan and South Korea, Australia’s second and third-largest trading partners. China is a much tougher deal to close and the asymmetric power relationship does not favour Australia.

China is fast becoming the world’s most important consumer market, and banks and fund managers are lusting over an estimated $5.3 trillion worth of gross domestic savings, which will re-shape the global financial capital once it is unshackled.

One of the biggest stumbling blocks to stitching together a deal is Australia’s foreign investment policy, especially in relation to the treatment of Chinese state-owned enterprises.

When Abbott was still the opposition leader, he told the Chinese that investment from state-owned enterprises was not necessarily in Australia’s national interest.

Needless to say, that didn’t go down very well in Beijing. This question will be in the limelight again after the government is reportedly preparing to offer the $1bn threshold to private Chinese enterprises but will maintain tight control over state-owned enterprises.  

So what’s the fuss about state-owned enterprises?

Many people see them as Beijing’s stooges doing the bidding for their political masters, the Communist Party of China. Many elements of Australia’s foreign investment policy require state-owned enterprises to invest at an arm’s length from the government.

Under the existing government policy, all investments from state-owned enterprises or sovereign wealth funds need to be vetted, regardless of their values.

However, since the introduction of the policy under former treasurer Wayne Swan, no proposals from Chinese state-owned enterprises have been rejected -- at least according to official statistics -- but some deals have been amended quietly.

In fact, both recent rejections have been non-Chinese deals: Swan’s rejection of Singapore Stock Exchange’s bid for ASX and Hockey’s rejection of Archer Daniels Midland’s takeover attempt of GrainCorp.

Let me explain why it does not make sense to treat state-owned enterprises separately.

In China, the boundary between the state and private sector is often not clearly demarcated. Think about Huawei, a private enterprise and the largest telecommunications equipment maker in the world, which has been blocked from tendering for the NBN for its alleged links to Beijing.

Some Chinese tycoons have strong ties to the state and even have seats at some powerful official bodies, such as the Central Committee of the Party. So under the new rules, it means Huawei can buy Australian companies under $1bn, without the need to submit to Foreign Investment Review Board.

On the other hand, you have Chinese state-owned companies with largely Australian management like MMG, which has a good record of corporate citizenship here and is listed on a stock exchange. Yet, they need to apply to FIRB for small things like buying an extra floor of office space.

So this artificial distinction can lead to perverse results. People also think the Foreign Investment Review Board is the last line of defence against unwanted foreign investors.

This could not be further from the truth. They are subject to a host of other regulators, arguably much better resourced and more effective agencies like the ATO, the ACCC, ASIC, environmental agencies, not to mention Australia’s court system.

So even if we allow all state-owned companies to operate here in Australia, they are subject to Australian laws and regulations and will be punished if they step out of line. Chinese executives from Hanlong were made examples for their insider trading activities.

So how do we liberalise Australia’s foreign investment screening system while maintaining vigilance over certain investment deals that could have adverse impacts on Australia’s national interest?

We can take a leaf or two from the Committee on Foreign Investment in the United States. Under the American system, foreign investors need to apply for approval in certain sectors, but otherwise are free to invest without the need to get regulatory approval. And the American law only focuses on national security-related issues.

However, the committee retains the right to ‘request’ an application if it finds a transaction problematic. So potentially Australia could offer the $1bn threshold to Chinese state investors with an American-style safeguard.

Investment in sensitive sectors such as agriculture, telecommunications, media, and aviation still need to be cleared, but other investments can proceed without vetting fewer than $1bn. However, FIRB reserves the right for state investors to submit their deals for approval if it sees a problem. 

This flexible arrangement not only retains FIRB’s discretionary power to intervene, but at the same time offers Beijing what it wants the most from the deal.

In return, Abbott can ask for significant concessions in agricultural sectors for Australian farmers who have been short-changed in the free trade agreement with Japan. 

The Prime Minister has impeccable conservative credentials to pull off a deal like this. And he can explain to voters back home that state investors can be effectively managed under our existing regulatory framework.

It took an evangelical anti-communist like Richard Nixon to reach out to Red China. Abbott can and should use his authority to clear the stumbling block for the free trade agreement with China. We need Abbott to have a ‘Nixon in China’ moment.

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