Portrait of the late Communist leader Mao Zedong is reflected and distorted in a bus window as the bus drives past Tiananmen Square near the Great Hall of the People where sessions of the annual National People's Congress are held in Beijing, China, Friday, March 7, 2014. (AP Photo/Alexander F. Yuan)
Australia-China free trade agreement negotiations started when John Howard was still the prime minister. After 19 rounds, three prime ministers and nine years, we are finally close to a strike a deal.
The most positive signal came from Chinese premier Li Keqiang, who mentioned the need to accelerate the negotiation in his government work report at the recently closed annual gathering of China’s parliament.
Li’s comment has been met with enthusiasm from both government and the business community including Prime Minister Tony Abbott, Trade Minister Andrew Robb and ANZ CEO Mike Smith. So what has been holding back progress and why are we closer now?
Two major concessions that Beijing craves are the relaxation of foreign investment rules, especially concerning state-owned enterprises, and less restriction on the movement of labour. China’s commerce minister made that clear in a recent press conference. These are two controversial areas that are bound to attract domestic political opposition.
Let’s start with Chinese foreign investment. It is one of the most divisive issues between the two countries. The relationship reached a nadir in 2009 when Chinalco’s bid for a large part of Rio Tinto failed after extensive delays in the foreign investment approval process. Stern Hu, a Rio executive, was subsequently arrested.
Fifty-seven per cent of Australians think the country is allowing too much investment from China, according to the Lowy Institute Poll 2013. Prime Minister Abbott also made a similar point about the undesirability of state-owned investors when he was the opposition leader during a visit to Beijing.
The government is reportedly prepared to make major concessions in this area, according to The Saturday Paper. So what has changed?
Canberra offered the $1 billion investment threshold to South Korea in the recently concluded free trade agreement. This privilege had previously only been extended to the US and New Zealand, two of Australia’s closest diplomatic allies.
Now the government has offered it to South Korea, it is next to impossible to withhold it from the Chinese -- otherwise it will look utterly discriminatory. It is likely that the government will offer the same deal to Chinese private investors.
However, it is not clear what kind of concessions Canberra is prepared to give up on when scrutinising state-owned investors. It is worthwhile pointing out that the existing policy that requires all state-owned investors and sovereign wealth funds to submit themselves to the Foreign Investment Review Board for examination regardless of the value of their investments has no legal standing.
In other words, it is not enforceable and foreign investors only obey it because they want to maintain the goodwill of the FIRB.
If Canberra were to make a concession on state-owned investors -- whatever form that may take -- the outcome may not be that significant in practice. The Chinese have been their losing their appetite for Australian resources over the last year or two. And Australia has lost its top billing as the most favourite destination for Chinese investment to the US, according to a KPMG report.
Gilbert & Tobin M&A partner Craig Semple said deals from large Chinese state-owned enterprises have dried up. Law firm Corrs Chambers Westgarth finds Chinese bidders from the private sector are getting active in cross-border M&A deals.
It appears that the great rush into the Australian resources sector during the mining boom is more or less over. Chinese state-owned investors also bought a lot of dud assets at the top of the market. They probably wish now that the FIRB rejected their deals at the time. If there is ever a good time to make some concessions, it’s right now.
Meanwhile, Beijing has long sought for the right to bring in its own skilled workers and engineers to complete major Chinese mining projects in Australia, such as CITIC Pacific’s $8 billion iron ore project in Western Australia.
The Saturday Paper reports that the government is considering visa options for skilled workers to come to the country to work on major Chinese projects. If Canberra were to make this concession, CITIC Pacific, which operates the biggest Chinese project in Australia, is unlikely to benefit much from it. The construction phase of the project is nearly complete.
However, it is not clear whether the government is prepared to give ground on the requirement that foreign and Australian workers need to be paid and treated the same way. Otherwise it makes no sense for China to bring in its own workforce. Beijing's goal is to minimise wage bills.
It is not clear that the Abbott government is prepared to go this far to clinch a trade deal with China. Canberra can afford to make concessions on foreign investment due to rapidly changing circumstances on the ground such as the $1 billion threshold for South Korea as well as declining investment from state actors.
But there is a common misconception that the FIRB is the last line of defence. In fact, Australian regulatory agencies like ASIC, APRA and the ATO can still exercise oversight over Chinese companies once they are in Australia. In fact, it is arguable that an agency like the ATO has far greater power, resources and enforcement experience to discipline foreign investors.