This article was written by my friend, Bruce McLaughlin, of Sinogie Consulting Australia Pty Ltd. I believe he raises some interesting issues regarding foreign investment in Australia, and has articulated these well. Rather than trying to summarise his views in my own words, I am simply re-producing them here.
I was deeply concerned by aspects of Tony Abbott's speech in Beijing on Tuesday, and his subsequent comments. Mr Abbott seems to be saying that he intends to make it almost impossible for Chinese State-owned enterprises ("SOEs") to invest in Australia: this would be a reversal of long-standing Coalition policy, and would pose a severe threat to the Australia-China relationship, and to Australia's economic future. Mr Abbott appears to be unaware of the need for foreign investment in Australia, or of the nature of Chinese SOEs. The latter problem is understandable: very few people who are not China specialists understand the nature of Chinese SOEs, their connection to the Chinese government, or their influence on the countries in which they operate.
Mr Abbott’s position raises a number of serious issues.
The need for foreign investment
- Foreign investment in areas such as agriculture, mining and technology is essential. Agriculture and technology (and to a lesser extent small-cap and medium-sized mining enterprises) are starved of capital, and it's only going to come from abroad. Without foreign investment, these industries will be unable to invest in new equipment, new business practices, or expansion. They’ll therefore be unable to increase their efficiency, and they'll be unable to compete in international markets.
- Foreign investment in these areas brings more than just capital. It provides opportunities for vertical and horizontal integration, access to new markets, access to new technologies and management practices, and scope for economies of scale. This isn't something that benefits only the direct recipients of the investment: there's a ripple across the whole industry. For example, if a Chinese dairy invests near a small country town, that dairy will become more efficient, and it will export some of its products to China. But it will need milk from surrounding farms too, meaning that local farmers have access to a new market, and are no longer beholden to the supermarket duopoly that is currently squeezing dairy farmers on price. The whole town will benefit.
Provenance of foreign investment
- Given economic conditions in Europe and North America, we're not likely to see too much foreign investment from these sources in the near future. We need foreign investment, and, realistically, much of it is going to come from China and India.
- At the bigger end of the market, a lot of this foreign investment is going to come from Chinese SOEs.
- Australia has thrived from foreign investment in the past. The bulk of it has been from Europe and the US, and we haven't had a problem with that. Objections to foreign investment only seem to have arisen when more of it started to come from China.
- The argument that we only have a problem with SOEs is something of a red herring. Foreign SOEs (from countries other than China) are already major players in Australia in sectors including telecom, finance, dairy, arable agriculture and public transportation, and there have not been significant objections to these investments. Again, the objections seem to have started when Chinese investment increased.
Understanding what an SOE is...
- It seems pretty clear from Abbott's quotes that he doesn't know what an SOE is or how it works. Like most laypersons, he thinks an SOE is purely an instrument of government policy, and that all SOEs are owned and controlled by the Central government. This isn't the case: while some SOEs are occasionally used as instruments of government policy (although, these days, this is very rare), the vast majority operate on a commercial basis, and are subject to broadly similar influences to those affecting private enterprises. Also, the bulk of SOEs are controlled by local governments, not the Central government. Even those that are controlled by Central government are mostly controlled by individual ministries, which often have differing interests. There is not a single entity controlling and coordinating Chinese SOE investment.
- Where there are differences between an SOE and a private enterprise, the SOE is often the more suitable investor. As some small country towns have found to their cost, a private enterprise is driven by the next quarter's bottom line, and this can mean that the biggest employer in a town suddenly closes its doors. An SOE is in a position to make longer-term plans, and this can bring a degree of stability to the employment market.
- To the degree that there is any central government influence on SOEs, perhaps the most important issue is the Central government guideline that Chinese SOEs investing in Australia must be excellent corporate citizens. The Shenhua investment in Gunnedah, with its localisation of labour and investment in local infrastructure and services is a prime example of this.
- I don't understand how an SOE's majority shareholder being the investment department of a small city government somehow makes that SOE's investment in Australia disadvantageous to the Australian people, when investments by a foreign-listed private company owned by anonymous Swiss corporations or a local company owned by one billionaire are somehow beneficial to society.
The potential effect of Abbott's speech
- I don't know whether Abbott is serious about these proposals, or if this is more of a “thinking out loud” thing that can be immediately reversed. My hope would be that it’s the latter.
- If he is serious, and if he follows through on his promises, this will be catastrophic for the future of Chinese investment in Australia, by SOEs and private companies. And a disastrous outcome for Chinese investment in Australia is a disastrous outcome for Australia, and especially for the country towns that rely on agriculture and mining.
- If he's not serious, his comments were profoundly unhelpful. Chinese investors are already scared. They're unnecessarily scared of FIRB - explaining that FIRB is not to be feared is something that I've worked on a lot, and I know other people have too. They get very jumpy when shock jocks and extremist politicians make anti-Chinese statements: I spend a lot of my time explaining to Chinese investors and officials that what an extremist politician or low-brow TV or radio report says does not reflect mainstream policy from Labor or the Liberals. I can eventually get across the message that the Australian political and media environments mean that not all media and politicians sing from the same hymn sheet, and that their opinions do not necessarily matter. But when our probable next Prime Minister says he's going to restrict Chinese investment, I can't counter that.
- I have in the past heard leading Liberal Party members make some excellent comments on Chinese investment, which left me feeling comfortable about the investment environment for Chinese companies here. But this week’s comments from Tony Abbott turn all of that upside down.
- If Mr Abbott doesn't clarify his statements, Chinese investment will move to Europe, South America and Africa, and we'll be left as an economic backwater. At the moment, if I ran a Chinese SOE, I'd be rapidly losing interest in Australia and weighing up my options in friendlier investment environments. If I were head of a private Chinese company, I'd see the potential ban on SOE investment as the thin end of the wedge, and I'd be worried about Australia.
One would hope that Mr Abbott will conduct more thorough research into the effects of investment in Australia by Chinese SOEs, and publicly revise his position.