China’s SOEs and Australia’s Foreign Investment Policy

My recent research paper on China’s state owned enterprises (http://policyschool.ucalgary.cahttp://www.policyschool.ucalgary.ca/sites/default/files/research/china-soes-final.pdf) caused quite a ruckus. Looking at the criticisms of my China paper carefully, most of them appeared to be based on some out of context phrases in the summary of the paper. Though out of context, the words did match the records I researched. Regardless, the future is ahead of us, trading partners can learn from past experiences and move forward to build or deepen mutual understanding and even trust.

It is only natural that different economic systems originate from and reinforce different beliefs that guide or support different commercial conduct. For example, when in November 2007, the world largest mining company, BHP-Billiton, launched a $127-billion bid for its rival, Rio-Tinto, the Chinese government saw such a merger, if it succeeded, as a clear threat to its national interest. The Politburo of the Chinese Communist Party quickly decided to curb this merger and Chinalco, a Chinese SOE, scooped up 9 percent of Rio-Tinto shares for $14 billion on the London stock market in a matter of hours! Chinalco’s share investment was funded by a consortium led by the China Development Bank, which funding was directly approved by the State Council without CDB’s board even discussing the loan. This episode was seen in China as a triumph of the national economic strategy (despite its subsequent huge financial loss of $10 billion from this $14 billion share acquisition), but left a bad taste for those who believe in a free market system that features a level playing field (see Richard McGregor, “The Party: The Secret World of China’s Communist Rulers”, pp. 58-61).

The important thing to me in this debate for our foreign investment policy is to see our free-market system being protected and strengthened, not the other way round.

In any business dealings, mutual trust (or mistrust) is established through mutual understanding (or misunderstanding) and related experience; in the above example, it is the lack of common belief and common ground for commercial conduct that led to mutual distrust. Partly because of the co-existence of different beliefs that guide different commercial conduct, the global stage sees misunderstanding and distrust, which is the reason that trading partners need to negotiate and agree on mutually accepted rules and resort to WTO’s arbitration when such rules are broken. When dealing with foreign investment, particularly from state-owned enterprises, that negotiation and rule setting is even more critical.  

Let’s have a look at Australia. The 2013 version of Australia’s Foreign Investment Policy (http://www.firb.gov.au/content/_downloads/AFIP_2013.pdf) defines, in reasonable, clear and rightly self-interested terms, what the issues are when it comes to investment in Australia by foreign investors. In this document, foreign investors are divided into two categories: foreign government investors and privately-owned foreign investors. Interestingly, the “foreign government investors” include and are broader than SOEs (see below) but SOEs are not referred to specifically anywhere in this document.

To my reading, Australia’s Foreign Investment Policy appears to have provided clear references concerning the three key questions that have arisen in our current debate on how to deal with foreign investment from SOEs. These three questions are: What is our national interest? Should we provide a clear-cut baseline or robust mechanism for fast-tracking the government process for approving the foreign investment applications made by SOEs? And what is the exact definition of an SOE whose investment needs to be scrutinized and approved by government?

First, the Australian government clearly defines that its “national interest” includes national security, competition, other Australian government policies (including taxation), economic and community impact and, interestingly, the investor’s character in terms of transparency and corporate governance. To me as an economist, perhaps “competition” and “the investor’s character” are the most instructive criteria because they help guard the integrity of our free-market system. 

Second, the Australian government pointedly states in the document, “What is contrary to the national interest cannot be answered with hard and fast rules. Attempting to do so can prohibit beneficial investments and that is not the intention of our regime.” The Australian Government therefore made it clear that it prefers a flexible, case-by-case approach that aims at maximizing investment flows, to rigid laws that could stop valuable foreign investments. In other words, the case-by-case approach is preferred by the Australian government over the hard and fast rules.

And finally, for dealing with foreign government investors, Australia’s foreign investment policy provides three key specifications that ensure clarity:

• It defines “foreign government investors” to include all entities—companies, trusts and limited partnerships—in which governments and their agencies and related entities from a single foreign country have an aggregate interest of 15 per cent or more; or from more than one foreign country, have an aggregate interest of 40 per cent or more. (That is, “foreign government investors” includes much more than foreign SOEs, of which the foreign governments are the majority owners.)
• It requires that “all foreign government investors must notify the Government and get prior approval before making a direct investment in Australia, regardless of the value of the investment.” 
• It provides a list of “prescribed sensitive sectors” in which even investment by privately-owned foreign investors, including those from New Zealand and the United States– the most favoured foreign investors to Australians– with an investment value above A$248 million, is required for government’s preapproval. (These “prescribed sensitive sectors” include media, telecommunications, transport, the supply of training or human resources, the manufacture or supply of goods or equipment or technology relevant to military purposes, business involving encryption and security technologies and communications systems, and the extraction of uranium or plutonium or the operation of nuclear facilities.)

Of course, countries are very different in terms of their primary concerns related to their national interest, their experiences in dealing with the same issues and their tradeoff between costs and benefits. For example, in dealing with investment from China’s SOEs and Chinese national economic strategies, Australia might be more experienced than Canada because of its more intensive bilateral economic relationship with China. On the other hand, as a relative latecomer, we might have benefited from Australia’s past dealings with China, which helped move some of China’s SOEs some steps closer to the international norm for commercial conduct.

The important thing to me in this debate for our foreign investment policy is to see our free-market system being protected and strengthened, not the other way round. I therefore strongly support our federal government’s decision to end the trend in foreign SOEs takeover of our natural resources. I am also encouraged to see that the Chinese government is learning and adjusting its strategy for outward foreign investment. As reported in a recent issue of The Economist (April 20^th, 2013), there was a pattern switch in China’s outward foreign investment from outright takeovers to acquiring minority shares, and this pattern switch was seen as “a pragmatic response to local hostility at outright takeovers and to the fact that it is hard to run a company from abroad.”

After all, the wave of capital investment from SOEs, particularly China’s SOEs, into global commerce is a relatively new phenomenon. “Concerns over the financial, regulatory and other advantages that governments provide them” are not only understandable but also need be carefully examined and dealt with. (Refer to Columbia FDI Perspective, No. 99, July 15, 2013, http://www.vcc.columbia.edu) Therefore, the intensive national debate on our foreign investment policy towards foreign SOEs, or foreign government investors in the context of Australia’s foreign investment policy, is a healthy thing. It will not deter investors from China. Instead, it will help them to better understand our free-market system and act accordingly.