Mixed Chinese messages

Unless Australia clearly articulates its security and 'national interest' requirements for foreign investment, wary Chinese investors could abandon vital projects.

Over the years, Australia has experienced a number of challenges in dealing with foreign investors, both from Western nations (including the UK and US) and Asia (including Japan). But any issues have ultimately worked their way through the system – in large part because these nations were, and continue to be, significant trading partners and, importantly, close security allies.

But what if the nation is the former, but not necessarily the latter? In other words, China.

The significance of this distinction was arguably demonstrated when Foreign Investment Review Board (FIRB) blocked China Minmetals' first proposal to acquire OZ Minerals on national security grounds because it included the Prominent Hill site, which is located in the Woomera Prohibited Area. More recently, the Department of Defence blocked the proposed magnetite joint venture between Wuhan Iron & Steel (Group) Co and Western Plains Resources in relation to the Hawks Nest project.

Chinese investors have reported that they perceive the FIRB approval process to be opaque and a potential obstacle to investment decisions – a criticism which had the potential to be addressed by the government's revisions to Australia’s foreign investment policy, announced on June 30, which provided greater clarity on its position.

However, very little has been said about the national security consideration, other than that the government relies on advice from the relevant national security agencies.

In a positive step, the federal government has – for the first time – formally articulated how it will apply the 'national interest' test. This is important because a foreign investment proposal can only be blocked under the Foreign Acquisitions and Takeovers Act (1975) if it is 'contrary to the national interest'.

Under the revised policy, the government has stated that it will determine 'national interest' on a case-by-case basis, without applying any hard-and-fast rules. It has also clarified what it will consider; namely, the impact on national security, competition, other government policies, the economy and the community and the character of the investor.

However, this clarification has two important implications which may concern potential Chinese investors.

The first is that the determination of 'national interest' does not favour investors that are state-owned and state-controlled enterprises. Most of the recent Chinese investment proposals would fall under this category.

The second is that 'national security' tops the list of considerations. Recent history indicates that Chinese investment proposals are more likely to run up against the consideration of national security than potential investment by other foreign investors.

The Chinese are sensitive to any suggestion that Australia's foreign investment policy is targeted against investment by Chinese entities or the Chinese government. This has been evidenced by Chinese media commentary following some recent failed investment proposals.

It is clear that the revised Australian foreign investment policy does not target Chinese investment. However, if investment proposals by Chinese state-owned enterprises end up being singled-out due to national security concerns, there is a very real risk that growth in Chinese investment into Australia may be discouraged – particularly in light of the reality that Australia is competing with the likes of Canada and Africa as a destination for such investment, and that those regions are just as keen (if not more so) to roll out the welcome mat for foreign investment.

This is not to say that the Australian government does not have a legitimate interest in national security considerations when it comes to foreign investment. But it should consider providing more guidance on this topic so that all foreign investors – not just the Chinese – know what the rules are and do not feel that they are being dealt with arbitrarily or singled out.

Jeremy Low is a partner at law firm Allens Arthur Robinson.