Opinion - The China Syndrome
Written on the 10 March 2009
As speculation surrounds Chinese interest in the Australian resource sector, the fact of the matter is that foreign companies already hold large stakes, so why should this case be any different? While most of the talk surrounds the big players like Rio Tinto, OZ Minerals and Fortescue, there are a number of large Brisbane-based resource companies with significant levels of Chinese ownership. UQ economist Dr James Laurenceson tells Brisbane Business News what Chinese takeovers really mean in the long term and says if we want these resources to be developed and to maintain jobs, foreign investment is a necessity, not an option.
WHILE the recent objects of mining affection are headquartered elsewhere, you only have to look as far as Brisbane’s Macarthur Coal to find Chinese stakes in the Australian resource sector, with a 20.39 per cent share from CITIC Resources Holdings. Then you have Whitehaven Coal which has a joint venture mine in Narrabri with the Guangdong Yudean Group. Alongside all the other foreign investment we already have in Australia, what cause is there for the sudden fears about Chinese acquisitions?
The spike in Chinese interest in Australia’s resources sector is driven by the fact that after having been relatively self-sufficient for many years, the scale of the Chinese economy is now such that domestic resources demand has outstripped domestic supply capacity, making it necessary to rely on imports to fill the gap. Of particular interest to Queensland, China became a net importer of coal for the first time in 2007, and in 2008 there were many investment proposals, such as China’s Xinwen Mining Group agreeing to pay Brisbane-based Linc Energy $1.5 billion for coal exploration permits it held in Queensland. Linc Energy CEO Peter Bond commented that the proposal should be viewed no differently to European investment, but the deal has since been delayed.
The reality is that Chinese investment is viewed differently to other countries by regulators and other interest groups such as some trade unions.
Fears surrounding Chinese investment are in large part due to its sudden rise. While Australia has been used to investment from Europe and Japan, the extent of recent interest from the Chinese has taken many by surprise and fuelled all sorts of theories about the motivations of ‘China Inc’. Fears are exacerbated by China’s one-party political system and the fact that most of the Chinese companies are majority state-owned, as are their financial backers. But the real crux of the matter is that China’s apparent sudden interest comes from being less self-sufficient than they used to be.
In that sense, the interest shown by the Chinese is no different to that which has long been shown by the Europeans, the Japanese, the Koreans, and increasingly, the Indians, all of whom are seeking to secure stable supply. The fact that the Chinese companies wanting to invest are majority state-owned simply reflects the fact that China is an economy in transition.
Some of the specific fears being bandied about, such as Chinese companies wanting to acquire ownership stakes in Australian resources companies in an attempt to extract price concessions on traded goods, border on xenophobia. Firstly, it is not clear why such claims should be directed at the Chinese, and not the Europeans and Japanese, which presently hold much larger stakes in Australia’s natural resources sector.
Secondly, investment proposals such as the one involving Rio Tinto and Chinalco require not only regulatory approval, but also shareholder approval. Irrespective of how competent a company’s board of directors is viewed as being, why shareholders would vote en masse to approve a deal they perceive as likely to destroy value is also not clear.
Thirdly, pricing-related matters are often incorporated into investment agreements without any prompting from regulators. For instance the Whitehaven-Yudean deal agreement states that the joint venture will supply coal to Yudean at market prices, satisfying Yudean because they secure supply and have a natural hedge if coal prices rise.
The dangers of not being open to Chinese investment
The dangers of not being open to Chinese investment are three-fold. The first is that projects in Australia’s natural resources sector will not go ahead, and jobs will not be created. The bottom line here is that Australia is a country with a small population, a low savings rate and a lot of natural resources. If these resources are to be developed, foreign investment is a necessity, not an option. Indeed, this explains why some estimates put the share of foreign ownership of Australia’s mining industry already at greater than 50 per cent.
The second reason is that if Chinese investment is restricted, investors from other countries will gain leverage to acquire assets more cheaply than would otherwise have been the case, and thirdly, tensions on the investment front could spill over to damage other parts of the Australia-China economic relationship. China is Australia’s No.1 trading partner and the two countries are currently in the midst of negotiating a free trade agreement. When negotiating, the Australian Government claims that it uses a guiding principle that any FTA it enters should be comprehensive, encompassing trade in goods, services and investment. Australia’s national interest would be well served if this principle were applied in practice.