perils
TRANSCRIPT
The Perils of Down Under:
Chinese Investment in Australia
Hong Kong University of Science and TechnologyHong Kong September 2011
2
Who is Clive Palmer and why is he saying these things?
“The Australian government has racially discriminated against (China) and stopped them from investing in Australia…They've brought in things like the Foreign Investment Review Board in Australia, which is an outstandingly racist legislation designed to slow down Chinese growth, and it's a national disgrace”
Clive PalmerThe Australian
29 September 2009
3
The facts do not support a racist policy which discriminates against Chinese investors
In the past 4 years the FIRB has approved around 230 Chinese investments worth some $60 billion, one outright rejection and six with conditions
Over the last decade there were three high-profile rejections of which one was Anglo-Dutch, one Singaporean and one Chinese
4
Chinese investors believe that Australiadiscriminates against them Survey by Australia’s Lowy Institute found Chinese
believe investment discrimination by Australia is driven by: Media driven nationalism Perception that state related investors are not
focused on commercial objectives Concerns about China as both owner and customer Concern with China’s growing geo-political clout
Such perceptions stem largely from the failure of a series of high profile resource deals
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A serious policy debate, but we can
still laugh
The topics and structure of this presentation
1•Analyze the magnitude and structure of China’s overseas direct investment in general and to Australia in
particular
2•Explain the workings of the FIRB and detail its track record in approving and rejecting investment
proposals
3 •Consider characteristics that make Chinese investment different to other foreign investment to Australia
4 •Discuss the Chinalco Rio Tinto transaction as a case study to better understand Australia’s FDI policy
7
Key facts relating to China’s overseas direct investment
1•China’s ODI has increased in recent years, but is still much smaller than FDI (bigger
recipient than investor)
2 •Australia is the largest beneficiary of China’s overseas direct investment
3•Mineral resources are the largest part of China’s Australian ODI, but this is not the
case overall
4•China has encountered problems in countries other than Australia and usually with
natural resource investments
Over time, China has attracted far more FDI than ODI
2003 2004 2005 2006 2007 2008 2009 2010$0
$20$40$60$80
$100$120
FDI ODI
Valu
e (U
S$ b
illion
)
9
Official data would suggest Australia is a very minor beneficiary of China’s ODI
2003 2004 2005 2006 2007 2008 2009 20100%
1%
2%
3%
4%
5%
Shar
e of
Chi
na’s
ODI
10
Australia is ahead of all other countries in attracting Chinese overseas direct investment
Australia USA Nigeria Iran Brazil Canada Other$0
$100
$200
$300
$400
FDI (
US$
billio
n)
Heritage Foundation 2005-10
11
Mineral resources are a significant,but not the largest part of China’s ODI
2003 2004 2005 2006 2007 2008 2009 20100%
20%
40%
60%
Shar
e of
Chi
na’s
ODI
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Iron ore and copper make up 60% ofChina’s mineral resource sector ODI
Iron ore
Cu Al Pt C Au Other0%
20%
40%
60%
80%
100%
13
The Heritage Foundation has identifieda further US$122 billon of troubled investment
Agricul
ture
Energ
y
Finan
ace & pr
opert
yMeta
ls
Techn
ology
Transp
ort$0
$40$80
$120
2006 to 2010
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Australia not the only difficult destination,but natural resources are mostly a problem
Total value(US$ billion)
Most troubledsector
Most troubled destination
2006 34.5 Energy Iran2007 13.7 Agriculture Philippines2008 33.2 Finance Germany2009 33.1 Metals Australia2010 7.6 Metals USA
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Summary of key issues relating to China’s Australian bound ODI
1 •While its level of investment is growing, China is still a minor player in Australia’s FDI
2•Almost all the proposals submitted to the FIRB are approved, though some have
conditional obligations
3•Minerals resources account for 56% of Australia’s FDI, but almost all of Chinese
investment
4 •Mineral resources differ significantly from other forms of investment
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FIRB statistics not a reliable indicator of Australia’s foreign investment inflows Data do not cover investments below legislated
thresholds Includes proposals that are approved in a given year,
but may not be actually implemented or could be implemented in a later year or over a number of years
Can include approvals for multiple acquirers of the same target asset
Because of time, I have not been able to access additional data published by Australian Bureau of Statistics
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Its Australian investment is growing, but China is still a relatively small investor
2007 2008 2009 2010USA 29% 26% 22% 28%UK 9% 17% 11% 21%China 2% 4% 15% 12%Japan 3% 3% 12% 4%Singapore 12% 6% 1% 3%Europe 27% 34% 24% 31%Asia (other) 7% 7% 18% 10%
No of transactions not value
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Even on a value basis, China is asignificant but not the largest investor
USA UK China Japan Switzerland Other$0
$40
$80
$120
$160
Shar
e of
FDI
(A$
billio
n)
A sample of China’s biggest Australian dealsDate Target Acquirer Value (US$
m)March 10
Arrow Energy Petro China A$3,500
April 09 Felix Resources
Yanzhou Coal $2,755
April 09 Mining assets Minmetals $1,386Feb 09 Fortescue Hunan Valin $765March 08
Oil & gas assets
China Petrochemical
$560
March 09
Mining assets China Metallurgical
$515
Feb 08 Soco Yemen Sinochem $465Feb 08 Mining assets China
Metallurgical$370
Aug 08 Mining assets Shenhua $261Aug 09 Aquila
Resources Baosteel $237
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FIRB approvals involving mineral resources represent 56% of all approvals
Mineral
resou
rces
Real es
tate
Resourc
e proc
essing
Servi
cesMan
uf.$0
$6,000
$12,000
$18,000
FIRB
app
rova
ls ($
bil-
lion)
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About half of China’s FIRB approvals involve mineral resources
Mineral
resou
rces
Real e
state
Resourc
e proc
essing
Servi
cesMan
uf.
Agric
ulture
Finan
ce
Touri
sm$0
$30,000$60,000$90,000
$120,000$150,000
FIRB
appr
oval
s ($
billio
n)
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Mineral resources differ significantly from other forms of investment Usually associated with economic rents Involve a wasting resource Capital intensive and asset specific investment In many countries, including Australia, minerals are
owned by the people Transfer pricing is an issue:
Opaque global prices Intermediate products and integrated companies
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Analysis of FIRB annual reports revealsthe vast majority of proposals are approved
2007 2008 2009 2010Rejected totally
0.03% 0.10% 0.03% 0.04%
Approved 99.97% 99.9% 99.97% 99.96%Unconditionally
90.00% 85.0% 75.0% 90.0%
With conditions
10.oo% 15.00% 25.00% 10.00%
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Australia does not rank too badly on the OECD FDI restrictiveness index, but China…
China Non OECD
Aus-tralia
Brazil World USA OECD0.000
0.125
0.250
0.375
0.500
1=Cl
osed
,0=O
pen
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Summary of key issues relating to the administration of Australia’s FDI
1•Australia has a long tradition of accepting foreign investment, especially in the
resources sector
2•A clearly defined approval process, with the final decision made by a politician,
however rejection is rare
3•Entities with >15% foreign government ownership are subject to lower thresholds
and additional criteria
4 •Investments are approved if they are found to be in Australia’s national interest
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Because of the benefits, Australia has always welcomed foreign investment From settlement in 1788, the development of
Australia’s mineral resources have depended on foreign capital and technology
Almost all of the great Australian mines have been developed because of the availability of foreign capital and technology
Foreigners own 50 to 70% of Australia’s mining industry
While Australia now has the technology, it still is very dependent on foreign capital AND markets
Foreign investment must ultimately benefit Australia’s long term interests i.e. National Interest Test (Net benefit in Canada)
Beijing’s own restrictive FDI policy confirms that, like Australia it has a national interest test. (Coca-Cola and Carlyle).
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Understandably, the national interestis an opaque standard that changes over time Introduced in 1986 Burden of proof rests with the Government NOT the
investor According to Treasurer Swann, reasons include:
Preserving national security Preserving government revenue Investor will not respect Australian law and business
practice Reduce competition or result in excessive
competition Consistent with government policies Character of investor
Rarely used but basis for rejecting Shell, Lynas, WISCO and SGX
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Current regulations regarding foreign investment are detailed in the FAT Act (1975) Foreign Acquisitions and Takeovers Act (1975) requires
investors obtain approval to acquire > 15% of a company worth > $219 m
FTA with US means higher thresholds for US companies Irrespective of size, entities owned >15% by a foreign
government require approval Sensitive areas include media, banking,
telecommunications, civil aviation and real-estate for which there are special rules
Decision made by Treasurer (political decision) on FIRB advice
30 days to make a ruling but can be extended to 90 days
Process seems to be flexible with each case examined on its own merits while consultation is welcomed
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Applications are becoming more complex and require more than the maximum 90 days If likely to exceed 90 days applicants are asked to
withdraw and resubmit applications No comprehensive data on withdrawn applications nor
withdrawn and resubmitted, but FOI fillings show no obvious bias against Chinese investment Between November 2007 and January 2011, 349
proposals withdrawn of which 66 were from China (15 government) and 35 from USA
During 2010, 10o withdrawn of which 6 from China (5 government) and 11 USA
High proportion of withdrawals in early years could reflect lack of familiarity with the process
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Not in the national interest, but very reasonable grounds for outright rejections 2001: Shell additional stake in the Woodside LNG JV
rejected by Treasurer (sic.) because of the belief that further development could be sacrificed for other Shell projects
2009: China Nonferrous Metal Mining Group proposed 51.66% stake in rare earth hopeful Lynas rejected unless reduced to <50% and minority board representation. China controls >95% of market and acquisition would reduce competition Withdrawn
2009: WISCO’s planned purchased of Western Plain Resources iron ore project rejected because of close proximity to Wommera
2011: SGX takeover of much larger ASX rejected because of perceived loss of economic and regulatory sovereignty. 23% non-voting Singapore Government ownership in SGX
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Applications from foreign government entities are judged on additional criteria Entities include companies as well as sovereign wealth
funds The extent an investor’s operations are independent
from the foreign government Whether the investor is subject to adequate regulation
in other jurisdictions That the investment not hinder competition or lead to
undue concentration or control in the relevant industry sector
Investment taxed same way as other commercial entities
Investment will not impact Australia’s national security Whether the investment impact Australian exports,
research etc
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Summary of key arguments fortreating Chinese entities differently
1•Most Chinese investment involves SOEs where no clear distinction between
commercial and political objectives
2 •Chinese entities increase the possibility of transfer pricing between related entities
3•Reciprocity: foreign companies, including Australian cannot invest in China’s
resource industry
4•SOEs etc have little experience in operating with open society multi-stakeholder and
strong institutions
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Chinese companies are different frommost other enterprises investing in Australia Vast majority (95%) of Chinese investment involves
SOEs where there is no clear line between commercial and political objectives
Many Chinese investors have little experience with the administrative processes associated with rule of law jurisdictions so have difficulty working with the FIRB process
Transfer pricing is a problem in the mining industry and more so with integrated companies and state owned enterprises
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Reason to believe that SOEs sacrifice commercial efficiency for political imperatives NDRC selection of Chinalco to thwart BHP move on Rio
confirms political interference and suggests that Beijing does not want companies to compete with each other outside of China
Party secretary is the most important position in an SOE and it is usually a joint appointment with the enterprise chairman.
Party personnel department controls political and commercial appointments
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There are many cases where the Partyrotates people between industry & government Wei Liucheng from CNOOC to Hainan Governor Zhang Qingwei from Aerospace to Minister of
Technology Guo Shengkun from Chinalco to vice-governor Guangxi
(now Party General Secretary) Xiao Yaqing from Chinalco to State Council where he is
secretary to Vice Premier, Zhang Kejiang Li Xiaopeng from Huaneng to vice-governor Shanxi Fu Chengyu from CNOCC to Sinopec
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Even the largest Chinese companiesare not experienced at operating outside China When operating in China, SOEs really have only one,
but very powerful stakeholder The large number of Chinese projects withdrawn from
the FIRB system in 2007 and 2008 suggests a learning process
Chinese companies seem to have shifted from criticizing the FIRB to complaining about compliance over environment, heritage and labor regulations
Overseas problems (Ramu, Chambishi etc) can be traced to attempts at replicating the China model i.e. confining negations to political elite while ignoring local stakeholders
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Even outside China, national strategic objectives seem to trump commercial objectives Hanlong chairman (Liu Han) reported as saying Beijing
backs his takeover of Sundance Resources (ASX) as it would give China an opportunity to influence the price of iron ore
Similar statements by Shen Heting regarding MCC’s involvement in the Sino Iron project in WA
Representatives of government organizations ranging from CISA to the NDRC supported Chinalco’s move on Rio because it would lower the price of iron ore
The mining industry affords ample opportunity for transfer pricing and it is hard to police infringements
A Chinese SOE increases the risk of transfer pricing
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Sino Iron project demonstrates Chinesecan bring their own perils with them CITIC Pacific purchased Cape Preston project from
Palmer in 2006 for $200 million Planned cost of $1.4 billion and 2009 delivery blown
out of the water because CITIC’s partner, MCC has no Australian (developed country?) experience
Problems being solved by employing more labor and MCC critical of Australian Government for not approving import of laborers from China
MCC has suggested that problems with their project stem from Australians managing Australians
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Lack of reciprocity is a reasonableargument against Chinese resource FDI Much of China’s mining industry is out of bounds to
foreign investors, including Australians Outside the resource sector, China is also very tough on
foreigners wanting to invest in its local companies. Coca-Cola and Huiyuan Juice, Carlyle and Xugong
China’s discrimination is a powerful rallying point for nationalists
Because China discriminates against foreigners, does this make China racist?
Rosen and Hanemann argue that China has grown stronger by opening its doors wider FDI and US should do the same. But is Australia different? Are resource investments different?
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Chinese perceptions are driven by
several high profile failures
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Summary of the key issues surrounding the Chinalco transaction with Rio Tinto
1 •Rio Tinto under significant financial pressure following disastrous purchase of Alcan
2•Chinaclo’s (an SOE) initial proposal to increase its Rio stake was approved, subject to
some conditions
3•Proposal withdrawn when bailout plan collapsed under shareholder opposition and
improved financial markets
4 •Treasurer never had to decide on various strategic alliances
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The Rio Tinto-Chinalco transaction is widely known but not well understood During GFC Rio came under significant financial
pressure because it overextended to purchase Alcan Rio’s circumstances compounded by a hostile bid from
BHP In a daring and well executed share market raid,
Chinalco snapped up 9% of Rio to become its largest shareholder.
Chinalco (an SOE) and NOT Chalco the listed subsidiary Chinalco threw Rio a lifeline in exchange for additional
shares, board representation and strategic stakes in a number of key operations
Chinalco permitted to grow to 14.99%, subject to not raising it again without fresh approval and not seeking a board position
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Chinalco’s planned alliance with Rio
Tinto failed because the deal was unsound Fierce opposition from Rio shareholders who were
annoyed with their management and were positioning to vote it down
Improved financial climate confirmed that Rio could improve its balance sheet with shareholder equity
Proposal withdrawn so FIRB did not have to make a decision, but approval given to Chinalco increasing its stake in Rio up to 14.99% and not seeking to appoint a director
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Urandaline Investments
PO Box 100, Biggera Waters
Queensland 4216
Australia
Phone+61-7-5528-5595 Cell +61-409-198-173
www.Urandaline.com.au
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Minemtals’ legally enforceable conditional approval protects national interest Operate as a separate business with commercial
objectives, HQ in Australia and managed locally Sales team based in Australia with arm’s length pricing Maintain or increase production at nominated mines
subject to economic conditions Comply with Australian IR laws and honour employee
entitlements Maintain and increase levels of indigenous
employment
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Hunan Valin share holing in FMGalso has enforceable undertakings Hunan’s Board nominees will comply with FMG’s
director’s code of conduct as well as submitting a standing notice on potential conflict of interest relating to marketing, sales, pricing, costs etc
Hunan and any person nominated to FMG Board will comply with information segregation arrangements
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Yanzhou Coal’s purchase of FelixResources is another conditional transaction Acquisition through Yancoal, an Australian subsidiary Two Australian directors Yancoal to list in 2012 at which time Yanzhou to reduce
stake to 70% Arm’s length dealing on coal sales to China
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Process
Confidentiality can be justified on basis that some applications seek advance approval for possible investments that have yet to be revealed to the stock market
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Chinese companies have come a longway since the failed Noranda deal 2004 Minmetals US$4 billion bid for Noranda which
foundered on Canadian opposition and decision paralysis by NDRC
Acquisition completed in September 2005 by Xstrata for US$19.2
In past 4 years FIRB has approved 230 Chinese investments worth $60 billion, no outright rejections, but 6 with conditions
Foreign exchange reserves are no longer an issue and decisions made by NDRC and not State Council
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Australian companies have not beenactive investors in China Australian investment in China is a paltry $11 million Services make up 70% of the Australian economy and
China has yet to open this area to foreign investors
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