The Nationals' Cubbie Station storm in a teacup

Until the Nationals and Barnaby Joyce in particular stirred up some controversy over Wayne Swan's approval for a Sino-Japanese purchase of the Cubbie Station cotton farm it had appeared that the once sensitive issue of Chinese investment in Australian had matured.

The debates, which peaked in intensity during the aborted attempt by Chinalco to create an alliance with a weakened Rio Tinto during the financial crisis, died down after Swan articulated a quite reasonable policy on foreign investment and investment by foreign state-owned enterprises in particular.

Under the policy the Australian Government's preference is for foreign investment in Australian resources companies to be less than 15 per cent, investment in greenfields assets to be limited to 50 per cent and that Australian companies should remain listed. It was made very clear that any investments by SOEs would attract particular attention.

Cubbie Station, Australia's largest cotton farm, has always been a controversial property because of its vast water entitlements and usage. It has been in voluntary administration for the past three years as drought and a heavy debt burden coincided and there have been suggestions that the federal government itself should acquire the group to get control of the water licences.

Last Friday Swan announced that he had approved a proposal from Shandong RuYi Scientific & Technological Group and the Australian family owned Lempriere group to acquire Cubbie Group. Shandong RuYi will own 80 per cent of Cubbie and Lempriere 20 per cent.

Shandong RuYi is a former Chinese SOE that was privatised in 2001. Last year Japanese trading house Itochu acquired a 30 per cent stake in the group, a major textiles and apparel manufacturer.

Swan imposed a range of conditions on the acquirers. Shandong RuYi has undertaken to sell down its initial interest to independent interests within three years, leaving it with an interest of no more than 51 per cent. Its board representation at that point will be proportionate to its shareholding. In the meantime two of the six-person board will be independents who are Australian residents and a third will be appointed by Lempriere.

Cubbie will be managed and operated and its marketing and sales directed by Lempriere and the acquirers will have to report to the Foreign Investment Review Board on their compliance with their undertakings every 12 months.

While the water entitlements/licences are a sensitive issue, Swan made the point that Cubbie will still be subject to state and Commonwealth rules and regulations, including those relating to water management, and that Cubbie would continue to have to comply with Queensland's allocation levels and other conditions.

The industrial logic of the Shandong RuYi involvement is obvious – it is seeking vertical integration and an effective hedge against increases in the costs of a core input.

Assuming there is scrutiny by FIRB (and the involvement of Lempriere, which will have its own self-interest to protect) the dealings between Cubbie and its proposed dominant shareholder should be effectively arms-length. Acquisitions of producers by their customers do create some sensitivities but the structure of the proposed Cubbie deal and the conditions Swan has imposed on it would appear to recognise that risk and insure against it.

There is nothing potentially sinister in a Chinese textile and apparel group acquiring access to cotton on commercial terms and it's not as though Shandong RuYi can export the water.

There are particular, albeit not always rational, sensitivities around foreign acquisitions of agricultural land, particularly where the land is used for or has implications for food production.

The historic reality, however, is that Australia has always relied on foreign capital for development, including the development of the agricultural sector. Provided that the existing protections around food security, water usage and the potential for sub-economic outcomes within a foreign-controlled supply chain are applied, foreign capital is massively positive for the economy and standards of living.

It is obvious that where the initial investments from Chinese entities were in resources the next wave will be in agriculture as it seeks both food security and protection against the projected structural increase in soft commodity prices.

If, within the framework of the foreign investment regime, it is prepared to supply the capital to help grow the Australian agricultural sector and a market for its production, that would appear to be a development that should be encouraged, not feared.

Certainly Joe Hockey and his Liberal colleagues support the deal and its implications for jobs and economic activity. It is unclear why Joyce believes his proposed carving up of Cubbie Station into small farms is a better outcome for the national interest or a more productive use of the land and water than a sale to Shandong RuYi and Lempriere might achieve.

Former Treasury secretary Ken Henry today described the debates about foreign investment as frequently misinformed and distorted by populist instincts. He also made the obvious and central point that there were strong regulatory mechanisms for foreign investment.

FIRB not only has quite strong guidelines for its recommendations but the Treasurer of the day also has complete discretion. Beyond that, of course, any foreign investment is subject to Australian federal and state laws – which can, if deemed necessary, be changed to respond to anything considered to be contrary to the national interest.