If Australia’s reliance on foreign investment is to continue, especially from China, it will need to get its act together – literally, writes Ian Harper, Director, Access Economics.
THE CHALLENGES AHEAD
The global financial crisis has left major economies short of capital as regulators have imposed higher capital standards on banks, and governments struggle to finance enormous fiscal deficits. The US and Europe – traditional sources of foreign capital to Australia – are especially affected. The rising cost of financial intermediation plus higher risk premiums will favour FDI over intermediated capital inflow and China will become a relatively more important source of foreign capital inflow to Australia with more of it coming in the form of FDI.
The complexion of foreign investment in Australia in changing. At the moment China is responsible for a very small stock of FDI in Australia but the growth rate of Chinese FDI into Australia is very high. The size of Chinese FDI into Australia will, in the future, rise in leaps and bounds – it just needs a few big ones – which are the ones the Chinese are interested in.
The traditional sources of investment into Australia – namely the US and the UK, and to a lesser extent Japan are now in the midst of recovery from the GFC and are borrowing heavily. So we would anticipate that traditional sources of FDI will grow more slowly. Put those two things together and growth from China will be much farther reaching than it has been. (See graph pictured right – courtesy Access Economics).
In terms of Chinese foreign investment into Australia there are two basic points:
1. At the moment levels from China are low but growing rapidly.
2. Traditional sources of FDI (UK, US, Japan) into Australia are slowing.
That’s the context for why we need to review our foreign investment guidelines. Our Foreign Acquisitions and Takeovers Act was passed in 1975. It was built on an assumption that foreign investment in Australia was a good thing and that foreign investment was essential and commercial in nature.
It would be the exception rather than the rule that it would run against Australia’s national interest.
The Act was passed by the Whitlam government in response to Japanese investment and was written in a way that foreign investment was considered a good thing, but nevertheless could still be contrary to the national interest. It was written so that the Treasurer had the right to block a deal deemed to be contrary to the national interest – and so today foreign investment is assumed to be in the national interest except where the Treasurer deems otherwise.
True to form, the history of foreign investment in Australia is that the great majority of foreign investment proposals have gone through. There have been only a few cases where it has been blocked. But the great bulk, admittedly small projects, have never been an issue, and so it has worked in theory, relatively well.
The Foreign Investment Review Board was created in the expectation that 99 percent of deals would be in the national interest. However, the Act does not actually spell out what is in the national interest. There is no test for it and no guidelines. It is up to the Treasurer to decide. And the Act does not oblige the Treasurer to give any reason when the decision has been made. Generally the Treasurer has given a statement explaining why a deal is not in the national interest but there is no template.
Today, two things have changed. Firstly, an increasing share of foreign investment will come from China. And the Chinese don’t necessarily see the distinction between political and commercial activity in the same way we do. Our Act was developed implicitly with US and UK foreign investment in mind, countries where the distinction between political and commercial activity is maintained more clearly.
In future much of our FDI will come from China – much of that will come from state-owned enterprises (SOEs). The distinction between the Chinese state and its commercial interests is not clear – at least not to an Australian observer. China is a one-party state yet maintains that its SOEs operate separately from the Chinese Government even though they still answer to the government. So it’s a two-edged sword.
We therefore need to be more discerning – especially with the bigger deals – about where Australia’s national interest lies, because we are increasingly dealing with the Chinese state and its instruments rather than shareholders.
So, in my view, we need a new Act; one that incorporates a national interest test with a sharper edge to it. We need to be asking, ‘what constitutes the national interest?’
At the moment our test is not strong enough for several reasons:
1. The Chinese have no idea whether their proposal will be accepted or not and no way of knowing;
2. The Chinese seem to understand the national interest argument but are asking why they can’t get a straight answer from us and whether Australia is just “anti-Chinese.”
From the Chinese point-of-view, they are wondering how you could not know what is in your national interest and what is not.
The urgency for Australia is to spell out our position on what is in our national interest.
Australia is used to relying on foreign investment – what it is not used to is money coming from China, in large dollops. And so long as our national interest test remains obscure, we risk leaving the Chinese thinking that we are racist and don’t want their money while, at the same time, risking a domestic political backlash.
We need to have a broader public discussion on this issue in Australia – and that means bringing opinion leaders up to scratch. It also means understanding that, for the future of the Australian economy, we really can’t afford to be turning our back on Chinese investment. ■
*Professor Ian Harper is a director with Access Economics in Melbourne.