The Boom and Chinese Investment in Australia

Speech to Sydney China Business Forum

25 September 2012

Firstly thank you very much to the University for inviting me here today.  The updated research on Chinese direct investment in Australia by KPMG and the University of Sydney shows that the bulk of $US45 billion invested between 2006 and 2012 flowed to opportunities in resources: 79 per cent to mining, and a further 12 per cent to oil and gas. [1]

And given the importance to China of reliable suppliers of raw materials and energy, Australia’s geology and strong mining industry, and the scale and duration of the post-2003 resources boom, such a skew in terms of the investment mix is no surprise.

But the opportunities currently attracting offshore capital – Chinese or otherwise – to our country are not confined to resources, as the recent Cubby Station transaction and yesterday’s report that CIC is looking to invest in the Van Diemens Land Company in dairy farming in Tasmania, serves to remind us.

It should come as no surprise that Chinese investors are starting to look more and more at agricultural assets in Australia. As Matthew Cranston reminds us this morning in the Australian Financial Review, a litre of milk in Beijing sells for about $7 a litre compared to $1 in Australia and a combination of rising demand from China and other developing nations coupled with drought in the United States and elsewhere has resulted in much higher food prices.

The task of feeding China’s billions will require more imports and this is not simply a consequence of prosperity leading to demand for more, and more expensive, more grain intensive food such as beef. But China’s own food production capacity is under threat from a range of environmental pressures not least of which is the unsustainable extraction of groundwater especially in the North China plain, China’s grain basket.  As China’s water resources become more constrained it will have to import more virtual water in the form of food especially grains, dairy products and meat — not to speak of other water intensive products like cotton.

Since 2006 the Chinese Government has encouraged Chinese companies, both private and state owned, to “Go Global”.  And this is a continuation of course of the policy trend initiated by Deng Xiaoping when he went south and reminded the critics of his modernization reforms that when China was open to the world – when Admiral Zheng He set off across the Indian Ocean – China was open to the world and the world was open to China.  It was at that time China was its most prosperous.  And he reminded his critics that when China closed itself to the world it became weaker and weaker, until ultimately it became the victim of imperialism, exploitation and humiliation.

So “Go Global” is an absolutely fundamental, central part of China’s economic policy and its strategic engagement with the world and it has happened – all of this has happened, looking around the room I think it is fair to say without fear of contradiction, within the lifetimes of all of us here.

Take one example: The China Investment Corporation, CIC, is China’s sovereign wealth fund. Its mandate is to achieve a higher return on China’s massive foreign exchange reserves (over $3 trillion). It is indeed the CIC that is proposing to invest in Tasmania that has been in the news, although to date its investments have been mostly in Europe and Africa.  It has stated that its return on investments in 2009-10 was 11% and its motives are avowedly commercial.

Nonetheless there is an anxiety in most markets about the CIC is that it is an agent of state power, and certainly its senior executives (like those of all major State-Owned Businesses) are appointed by the central Organisation Department of the Communist Party – for an as yet unsurpassed discussion of the role of the Organisation Department I would commend Richard McGregor’s book “The Party”.

If the story of the past decade was that sustained growth in output and living standards in China and other Asian economies boosted global demand for resources and energy much faster than new supply capacity could be added, resulting in much higher prices, then there are plenty of investors betting that the story of the next will be rising consumption and changing tastes in China and elsewhere having a similar effect in many agricultural markets.

The close links between Chinese companies and the Government be they  government owned or privately owned, like Huawei, creates anxiety in the countries in which they seek to invest.

These concerns, expressed recently in Australia, should not be regarded either here or in China as being any way anti-Chinese let alone, as some people have suggested, racist.

Our Chinese friends do not forget – any more than we do – that when China was united under Mao Zedong he stood at the top of the Tien An Men and said: “The Chinese people have stood up”.  Meaning of course that the Chinese people were asserting their own sovereignty against foreign imperialism, exploitation and humiliation.  So China, and Chinese people, should remember and respect – and I know they do – that every country has a right to assert its own sovereignty, its own dignity and its own responsibility to make its decisions about who should own its natural resources or indeed who is able to invest within its own borders.

I have often, as have others, discussed the Chinese – Australian relationship as being a case of same bed different dreams: A delightfully cynical expression to describe the uneasiness of most joint ventures.   Although I must say my own experience of joint ventures in China have always been extremely cordial and productive.  I haven’t had a problem in that regard.

Now the point of that expression is not that it is bad to be in the same bed with someone who has a different dream – that would be dull commercially, politically and indeed matrimonially – but the point of the saying is that you should recognize your partner’s dreams are different and seek to understand what they are.  And to respect that difference.  And I might note for the sake of clarity, empathy need not be co-extensive with sympathy.

So every nation has concerns about foreign investment – nobody wants to end up being a nation of branch offices.  And being nationalistic in the context of foreign investment is not synonymous with being xenophobic.

Was Peter Costello manifesting a deep seated antipathy to South Africans or the British by insisting that the headquarters of BHP Billiton remain in Melbourne?  Or indeed that Shell not be allowed to take over Woodside? Of course not.

There is a legitimate Chinese concern however if they perceive Chinese companies are being discriminated against vis a vis other foreign investors.   That is a very legitimate concern.

Here I think there is a need for more clear thinking and plain speaking both in Canberra and Beijing.

The China side needs to recognize that we do not have a tradition of extensive state ownership of industry and indeed over time many government businesses have been privatized. So it is inevitable that when a Chinese government owned company seeks to buy or build an Australian mine, many Australians ask themselves: “Why should we allow a foreign government to buy a business or an asset in Australia that we would never contemplate an Australian government owned company buying?”

On the other hand, as Premier Colin Barnett of Western Australia, reminded us last week at the China conference organized by the Australian, most of the Chinese investment in Australia is in Western Australia and most of it is from state owned enterprises and to proscribe it, to stop it, would be essentially to turn off the tap on billions and billions of dollars of investment.

As the Premier said, and I quote him: “The only business organisations that I deal with from China are Chinese steel mills, Chinese petroleum and energy companies, Chinese financial institutions, Chinese commodity traders. They, without exception, state owned enterprises. And without exception they come under the influence of central policy making and groups like the NDRC.”

In a characteristically clear-eyed way Premier Barnett goes on to say that typically Chinese executives have also had a career in government, or politics, as a party secretary,  mayor or governor.

From the Chinese side therefore there should be more understanding of the inevitable anxieties about foreign state owned corporations investing in Australia.  And while China is most definitely a friend – and a good friend, and certainly not an enemy – it is inevitable there will be more anxiety about a corporation owned by the Chinese state, well on its way to being the largest economy in the world, than one owned by a much smaller country like Singapore or one of the emirates.

In the interests of helpful advice – and I recognize as a politician, I often get advice from everyone of course, occasionally I can give some advice to others – I think that China would do well to reflect on the state of their own public diplomacy and corporate communications in Australia and perhaps more generally. I imagine there are many more excellent speakers of English in China than there are Australians.  But why is it that we so rarely see a Chinese official or business leader explaining their policies or strategies in our media?  A lot of the concerns about Chinese investment come about through the uncertainty which is a consequence of a lack of transparency.   So much of the concern about Chinese investment – the political or public concerns, if you like – would be allayed if their representatives were more publicly transparent.

Now as those who have done business, be it political or commercial, in China will attest this is not due to any innate unwillingness to put the cards on the table and argue their case – but it should be done more publicly.

And so I would strongly encourage – and I have made this remarks in Beijing at the International Department of the Communist Party and other places – that I think a more overt public explanation of China’s strategy, its ambitions, its rationale would be enormously helpful.  Enormously helpful for China and would help inform the debate.

From our side, and in this respect there is a real bipartisanship here, we should take into account the ownership of Chinese investor companies – it is obviously a relevant consideration – and impose such conditions as are considered appropriate.  Perhaps including for example a requirement to bring in local partners or list.

But, as Colin Barnett reminded us, we must remember that greater engagement with the Chinese economy, greater investment from China in Australia and vice versa, is almost invariably manifestly in our national interest.  It is in our interest that we have more Chinese investment in Australia.

And on that note, let me make an observation about Chinese, or indeed other foreign, investment in agriculture given its topicality. And before doing so let me disclose my own long standing interests as a cattle and sheep grazier.

Australian agriculture will benefit from increased investment – for decades, it has suffered from a lack of investment. The rise of Asia offers new markets and we will need to scale up to take advantage of them. Some of the most productive agricultural businesses in Australia are owned by foreign companies and this has been so for a very long time (indeed from an indigenous point of view it has been so from 1788!).

There is a concern expressed that foreigners will pay too much for land and drive up the price. That is objected to presumably by would-be buyers but applauded by would-be sellers. And over time, as we know, prices will revert to a more rational mean. There are plenty of examples of Chinese investors overpaying for assets in Australia, just as there was in the previous boom with Japanese investors.  The truth is Chinese, Japanese, American, Australians, British are all capable of over-paying for assets.  So there will be plenty of examples of people who will over-pay for things and eventually they will get sold for a lower price to somebody else – most likely a local.

There is a concern – expressed in some quarters – that all of the food and fibre produced will be shipped back to China leaving Australia unable to feed or clothe itself. That seems such an extreme anxiety I won’t linger on it other than to note that this is a very big country!

Another concern is that produce may be sold back to China at an artificially low price thereby avoiding Australian income tax on profits in this country. If that is the case, then the transfer pricing rules – which I would have thought would have catered for that – but if they don’t, they can be changed .

A most important point to bear in mind in this context however is this: China’s resource security – be it for food or metals, for hard commodities – lies in trade and global markets. Above all else it lies in trade.  And indeed far from all of the resources Chinese companies produce abroad find their way back to China. In a recent LSE study, in a paper by Guy de Jonquieres, he wrote that in the case of crude oil is it is as little as 10 percent[2] actually produced by Chinese companies offshore finds its way back to China. Most of it is swapped, or sold on international markets.

We are in a very good position to meet some of the demands for increased resources, be they food, be they hard commodities – coal, iron ores, and metals – and energy from China.

The challenge for us I think, and this is something that I would just conclude on, is that we are seeing a rebalancing of the Chinese economy from investment to consumption.  This has been an aim of the Government for a long time.  It hasn’t been achieved.  It was a policy goal of the last five year plan, it is a policy goal of the current five year plan.  But we’re actually starting to see some changes.  We are starting to see depositors getting positive real interest rates.  That’s a very significant change.  That hasn’t been the case for quite some time.

Now as the mix of China’s GDP shifts from investment to consumption, that is very good news for the rest of the world – absolutely good news for the rest of the world because it will mean that China consumes more of what the rest of the world produces.   But it probably isn’t, in our current situation for Australia because  what we sell China is overwhelmingly the makings of steel – iron ore and coal.  And if Chinese investment grows at a slower rate than GDP and if consumption grows at a higher rate than GDP, you will see less growth in the demand for steel and of course over time as with all developing countries the steel intensity of China will decline.

So it is absolutely critical that we are competitive in every respect and are in a position to take advantage of the growth in China and indeed in other developing Asian markets and not simply rely on the expectation that we can continue to sell coal and iron ore – the makings of steel – and  energy.  And in terms of energy we have to bear in mind the implications of what will undoubtedly be a gas revolution in China.  China has the largest coal deposits in the world.  It’s hard to believe they won’t also end up having the biggest unconventional gas reserves in the world.

I know there’s a lot of controversy about that but having done a little bit of work in the geological area in China I can tell you it is a very, very, very big country with an enormous amount of resources.  Resources are scattered around the world not entirely randomly but China has massive energy resources if it is able – if it has the technology – to exploit them.  And the invention of horizontal drilling and fracking I think will produce an energy revolution in China just as it has here and in the United States.

I think the key message I want to leave is that I think that the concerns that both sides express from time to time are reasonable ones.  I have no doubt that they will be resolved in Australia’s national interests and China’s national interest and the two overlap – perhaps not entirely but very substantially.

And as my colleague, John Alexander the Member for Bennelong here will attest, we in the Coalition are absolutely committed to deeper and stronger engagement with China.  We’ve had some criticisms – I won’t labour them today – about the Government’s management of the China relationship but it was certainly brought to a peak of cordiality under the previous Coalition Government.  And I have no doubt, if and when we do return to Government, relations with China will continue to develop in our joint interests because we have so much to gain from collaboration both in a political and cultural sense, as well as in economic terms.

So thank you very much and I am delighted to take some questions.

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[1] KPMG & University of Sydney China Studies Centre (2012) ‘Demystifying Chinese Investment: China’s Outbound Direct Investment in Australia,’ August 2012 update, pp.5-6.

[2] “What power shift to China” Guy de Jonquieres in China’s Geoeconomic Strategy LSE Special Report June 2012