Seeking a cure for Australia's mining hangover

The investment flows into the mining sector from China have peaked. Australia must learn to embrace Chinese funds across a range of industries.

The big miners this week told the Reserve Bank it had been too slow in acknowledging the end of the mining boom, putting an exclamation mark on Martin Ferguson's 'boom is over' call earlier this year.

According to a report by KPMG, Chinese foreign direct investment (FDI) in Australia has spiked in the last half a decade, from an annual rate of around $244 million to about $2.4 billion.

A look at the breakdown on a state-by-state basis yields no surprises, with the vast majority of Chinese FDI flowing to the mining sector – and the majority of that investment is in Australia's three major exports: iron ore, coking coal and thermal coal.

Ross Garnaut came out in the media this week to highlight the permanent structural shift in China's economy as the Chinese government deliberately seeks to refocus the economy on domestic consumption and standard of living.

"We see a deliberate attempt by the Government to shift income and resources towards consumption, towards services, including public services like education and health, deliberate attempt to raise the priority of environmental amenity, reducing energy use, reducing emissions," Garnaut told the ABC's Lateline.

A similar point was made by Goldman Sachs Asset Management’s Katie Koch to Business Spectator recently, when she said the next decade will see Asian growth nations like China significantly pare back on the building of infrastructure and begin focusing on their own populations in terms of domestic consumption and services.

Nothing about China's new direction is encouraging for Australia’s resources sector, but there are plenty of opportunities in the non-resources sector if we can mirror China’s rebalancing and lose our fear of direct investment from our biggest trading partner.

While Australia’s mining sector will continue to be inextricably tied to China – not just in terms of demand, but increasingly in terms of capital flows, it will be increasingly important that Australia now focus on realising opportunities in high-end services and manufactured goods, which should become more competitive when the stubbornly high dollar begins to finally recede with commodities prices.

That will mean Australia must leverage its strong base in R&D, something highlighted this week when Cochlear announced it has received a $100 million contract from the Chinese government and is in the process of negotiating a further $600 million worth of work. China's healthcare spend is set to triple $1 trillion by 2020.

Australia cannot welcome investment for some sectors but not others. The recent uproar around Chinese dominated Shandong RuYi outbidding Australian rivals to buy the country’s biggest cotton grower, Cubbie Station, along with the attempt by a Chinese state owned enterprise (SOE) to buy into the dairy industry through the purchase of the Van Diemen’s Land company, has shown that nationalist fears are still too easily stirred.

Politicians are still wary. Treasurer Wayne Swan said if the Van Dieman's deal was to be approved it would have to be in the national interest. But the economy is globalising and if Australia is to attract investment it needs to welcome it from all comers.

Former Treasury Secretary Ken Henry believes Australia’s debate around foreign direct investment is "frequently misinformed” and "populist”. Perhaps those who peddle in this misinformation should read KPMG’s report Demystifying Chinese Investment, which found that China’s SOEs aren’t nearly as mysterious as is generally believed, and that instead of rebelling against Beijing’s attempts to buy up assets, policy makers should do their homework.

The chief executive of Australian plastics manufacturer Qenos, Jonathan Clancy, sits on the board of China National BlueStar, a joint venture between Chinese state owned enterprise ChenChina and US financier the Blackstone Group. This week he tackled the widely held concern that Chinese firms were looking to reshape Australian businesses through their acquisitions, saying that their focus had shifted from top-line revenue growth towards return on investment and that Chinese executives are seeking to learn from their Australian counterparts on this front.

So far the quantity of talk on foreign investment in Australia has increased, but not necessarily the quality. Tony Abbott's bungled speech in China in July and Australia's rejection of Huawei's NBN tender on fears of cyber espionage are two of the more questionable moments.

Some of the fear about Chinese investment in Australia has been conflated with the belief that it must choose between its military ally, the United States, and its biggest trading partner, China. But defence strategist Hugh White largely dispels that notion in his book The China Choice and even former Prime Minister John Howard this week said that idea is only further obscuring the debate.

The release of Ken Henry's Asian Century white paper soon will hopefully serve to give Australian policy makers a more concrete stance on Chinese investment and ensure the necessity of a more sophisticated, two-way relationship between the two countries is met.

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