Chinese Foreign Investment and Ownership

Submission to the Federal Government for Review of Regulation of Foreign

Investment
Nakisha Holdsworth
S2947290

22 SEPTEMBER 2016
Word Length: 1,639
Table of Contents

Introducing Australian Strategic Policy Institute...................................................3

Chinas foreign direct investment in Australias economy....................................3

Current Regulation................................................................................................5

Public Interest Disadvantages..............................................................................5

Economic Disadvantages.....................................................................................6

Recommendations................................................................................................7

Conclusion............................................................................................................8

Reference list........................................................................................................9

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Introducing Australian Strategic Policy Institute
The Australian Strategic Policy Institute (ASPI) was formed in 2001 to provide expert
and timely advice to Australian strategic and defence leaders. While the Australian
government formed the ASPI, it remains an independent and non-partisan body. The
ASPI employs industry specialists to provide accurate and up to date analysis of
strategic issues represented both domestically and internationally, especially in the
Asia-Pacific. ASPIs aim is to not only assist policy making but also to expand the
publics awareness of the strategic issues Australia faces. This is done by, but is not
limited to, research and analysis by our panel of experts which is disseminated via
ASPIs website, events, and published literature. ASPI strives to make an informed,
innovative and authoritative contribution to the debate regarding critical strategic policy
choices facing Australia (Australian Strategic Policy Institution n.d).

Chinas foreign direct investment in Australias economy

It is recognised that Chinese Foreign Direct Investment (FDI) has played a critical part
in the development of the Australian economy in the past and it is desirable that this
positive contribution should be maintained. Due, however, to the scale of Chinese FDI
and the need to protect Australias national interests in view of Chinas increasing
assertiveness, it is imperative that the Australian Government increases regulation of
Chinese FDI.

The ASPI proposes that additional regulation should be applied by the Australian
Government to all Chinese FDI. The processes Australia has now are limited to
conducting only a brief test of select cases limited by category of investor, (e.g., State
Owned Enterprises or SOEs) or type of investment, (e.g., agricultural land). (Bath, V
2012, p. 5&30; Foreign Investment review board n.d) Most Chinese FDI is not being
assessed or reviewed at all. A more comprehensive analysis should include all
categories of Chinese FDI as well as stronger regulations of FDI through the further
review and updating of the Foreign Acquisitions and Takeovers Act of 1975 including an
enhanced public benefit test which takes into account any significant impacts on the
Australian economy or its national and international strategic interests, such as the
potential for future conflict with China.

While this submission relates to Chinese FDI, which is topical, any change to FDI
regulation should apply equally to China as well as any other similar country with

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similar circumstances with potential to conflict with Australias national interests. ASPI is
not promoting an anti-Chinese policy, but is instead in favour of better promoting
Australian national interest.

Importance of Foreign Investment

FDI in any country is essential as it brings capital into the economy that is in addition to
what is available domestically, and so accelerates domestic development.

In recent history, one of the countrys biggest FDI contributors has been China.
Chinese investment started to rise in 2005 and has been continuously growing, even
through the Global Financial Crisis (GFC) of 2007 2009 (Dent, H.K et al. 2016,p.6).
During the GFC Chinas continued high demand for Australian natural resources drove
the investment boom for energy and minerals. This in turn helped the Australian
economy avoid recession through the GFC. A review on the act governing FDI was
done in 2009 with no recommendations and Chinese investment has increased
significantly in the years after the GFC with investment expanding into other industries
such as manufacturing and services (Drysdale, P 2011, p.59; Fan, D 2016, p.188).

A positive measure of FDI is the growth in capital, technology, management,

employment, market links and marketing skills, which in turn fosters an internationally
competitive industry (Xu Yi-chong 2013,p.73; Drysdale, P. & Findlay, C 2009, p.134).

FDI benefits the economy further by increasing the national income, international
competitiveness and export growth, which is one of the many reasons why Australia is
open for investment (CROTTI et al. 2010,p.259). Making the economy open to
investments has an important role in boosting the Australian economy and creates
numerous benefits (Drysdale, P 2011, p.55). It is understood that the Federal
Governments main aim is to look after Australias national interest and in doing so it
needs Chinas FDI as it helps economic activity, tax revenues and the general economy
(Bath, V 2012, p. 29).

Current Regulation
The main focus of the Foreign Acquisitions and Takeovers Act of 1975 (FATA or the
Act), the principal instrument of regulation which was amended in December 2015, is
controlling the acquisition of Australian assets or land. Although this is done by only

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reviewing certain key investments (Foreign Investment review board n.d; Bath, V. 2012,
p.7).

The Act is only used in a targeted case-by-case scenario to test national interest, this
means that the Act will only test investments: that are large in size, over $252 Million; or
where a substantial foreign interest, over 20% ownership of an asset is to be acquired;
or where the investor is a foreign state owned enterprise (SOE); or finally if the
investment is in sensitive sectors, including media, telecommunications and agricultural
land but even then only some of these will be scrutinised further which leaves a gap for
error (Bath, V 2012, p.5; Foreign Investment review board n.d). As only these select
key national assets go through the review, Australia is seen as an open system (Bath,
V 2012, p.33). While the processes under the Act are triggered many times a year,
there have only been two recorded cases where an investment was rejected in the past
decade (Drysdale, P 2011, p.68).

Public Interest Disadvantages

The main concern about Chinese FDI and in particular Chinese SOE FDI is that there
is a possibility the foreign acquirer may be doing so with political or strategic objectives
in mind which creates a potential threat to Australias national security (Bath, V 2012,
p.30; Drysdale, P. & Findlay, C 2009, p 149).

Current policy encourages Chinese FDI in order to obtain short-term economic gains
but puts at risk the effectiveness of Australian national security with long-term
consequences for the broader economy by having increasing numbers of high level
decision makers in the Australian economy now being Chinese nationals (Drysdale, P.
& Findlay, C 2009,p.158).

The FATA has multiple strong aspects which make it effective in protecting Australias
interests as not only do the FDIs have to abide by the legislation they also have to
adhere to all the other legislation such as environmental or health and safety law.

The investment can also come under scrutiny by common law and legislative regimes
such as the Corporations Act 2001 (Drysdale, P 2011, p.65; Bath, V 2012, p. 7). The
Act, however, fails to consider the different categories of impact that the increasing
politicisation of this process can cause to national security and national interests as the
primary aim of the Act is to increase the amount of FDI in the economy.

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While there has already been an enquiry by the Australian Senate into Foreign
Investment by State-owned Entities in 2009, the review concluded that nothing was
wrong with the act and no recommendations were made (Drysdale, P 2011, p.63&65;
Chan, I. & Li, M 2015,p. 36). However, the marked increase in FDI and changed
political situation since 2009 - for example, Chinas increased assertiveness in the
South China Sea and decreasing public acceptance of loosely controlled foreign
investment - indicates that another review must be done.

Economic Disadvantages
Despite the many economic benefits of Chinese FDI, the negative effects on the
economy had gone unnoticed for some time. The potential negative impacts were
noted as the GFC neared its end, as evidenced by the first calls for change, leading to
the initial Senate review in 2009. Public disquiet has, however, continued to grow. For
example, in 2015 in response to large numbers of Chinese purchases of domestic real
estate, Victoria imposed stamp duty and land tax surcharges on foreign buyers of
residential property (State Revenue Office Victoria n.d).

Although FDI has major benefits, as discussed above, too much foreign investment has
serious consequences. One of the key risks is that Chinese FDI may eventually slow or
stop in certain areas, due to politics or for reasons beyond Australias control. This risk
is increased when the investor has a centrally controlled domestic economy, as does
China. The Australian government as a risk management initiative should consider now
what measures will be needed to implement support for specific industries likely to be
affected (Gao, Q 2014, p.362).

Chinese FDI is becoming problematic in almost all areas of the economy as its
damaging Australias long term economic wellbeing through heavy over dependence on
Chinese investors (Fan, D 2016,p.188; Xu Yi-chong 2013, p.72). Australia must
therefore develop plans now for a time when Chinese FDI may decline or be
withdrawn. A more competitive environment due to FDI makes it almost impossible for
local business to thrive (Zeller, B. & Cole, B 2014,p.239; Xu Yi-chong 2013, p.76).

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Although much effort has been put into keeping FDI at a contained yet prosperous
level, FDI in agriculture is proving to have unanticipated consequences for Australia
including but not limited to: negative impacts on property rights, food security, access to
land and water and rural development (Xu Yi-chong 2013, p.76).

Recommendations
In view of scale and breadth of Chinese FDI and its impacts and potential impacts on
the Australian economy; the need to ensure Australias national and strategic interests
are protected; the need to balance the benefits and dis-benefits of FDI; and, the need
to create certainty for Australians and Chinese investors.

ASPI recommends that all Chinese FDI should be reviewed, not just a sample and not
restricted to certain categories of investment or investors. This is required to address
increasing public concern with FDI and ensure FDI continues in Australias best
interests.

It is also recommended that Australia should develop plans to deal with a freeze or
decline in Chinese direct investment to reduce the risk posed by current over reliance
on Chinese FDI to support economic growth.

Finally it is recommended that an enhanced public benefit test should be applied to

Chinese FDI which takes into account any significant impacts on the Australian
economy or Australian national and international interests.

A similar regulatory regime should apply to any other FDI on a similar scale by a
country with national interests that conflict with Australias national interests.

Conclusion
Greater regulation is required to ensure that all foreign direct investment from China is
analysed and regulated. The scale and increasing breadth of Chinese FDI demands
greater regulation of Australias national security and economic interests are to be
better protected. A key policy priority should be to plan for the long-term care of
Australian national security and the protection of the economy through policies aimed

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at preparing the Australian for such times as when FDI may slow down.

Reference list

Australian Strategic Policy Institution n.d., About Us, Viewed 8 September 2016,
https://www.aspi.org.au/about-aspi

Bath, V. 2012, "Foreign investment, the national interest and national security: foreign
direct investment in Australia and China", Sydney Law Review, The, vol. 34, no. 1,
pp. 5-34.
http://search.informit.com.au.libraryproxy.griffith.edu.au/fullText;res=AGISPT;dn=201
21780, Viewed 1 September 2016

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CROTTI, S., CAVOLI, T. & WILSON, J.K. 2010, "THE IMPACT OF TRADE AND
INVESTMENT AGREEMENTS ON AUSTRALIA'S INWARD FDI FLOWS",
Australian Economic Papers, vol. 49, no. 4, pp. 259-275. Retrieved from:
http://onlinelibrary.wiley.com.libraryproxy.griffith.edu.au/doi/10.1111/j.1467-
8454.2010.00401.x/epdf, Viewed 1 September 2016

Chan, I. & Li, M. 2015, "New Chinese Leadership, New Policy in the South China Sea
Dispute?", Journal of Chinese Political Science, vol. 20, no. 1, pp. 35-50. Retrieved
from:http://search.proquest.com.libraryproxy.griffith.edu.au/docview/1668023069?
pq-origsite=summon, Viewed 18 September 2016

Dent, H.k., Ferguson, D.,Hendrischke, H.,Wei Li. 2016. Demystifying Chinese

Investment in Australia, KPMG & The University of Sydney,pp. 1-34 Retrieved from:
http://demystifyingchina.com.au/reports/demystifying-chinese-investment-in-
australia-april-2016.pdf, Viewed 18 September 2016

Drysdale, P. & Findlay, C. 2009, "Chinese foreign direct investment in Australia: policy
issues for the resource sector", China Economic Journal, vol. 2, no. 2, pp. 133-158.
Retrieved from: http://www-tandfonline-
com.libraryproxy.griffith.edu.au/doi/full/10.1080/17538960903083467?
scroll=top&needAccess=true, Viewed 1 September 2016

Drysdale, P. 2011, "A New Look at Chinese FDI in Australia", ,

vol. 19, no. 4, pp. 54-73. Retrieved from:
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124X.2011.01250.x/epdf, Viewed 1 September 2016

Fan, D. 2016, "Localized learning by emerging multinational enterprises in developed

host countries: a fuzzy-set analysis of Chinese foreign direct investment in
Australia", International business review, vol. 25, no. 1, pp. 187-203. Retrieved from:
http://ac.els-cdn.com.libraryproxy.griffith.edu.au/S0969593115000049/1-s2.0-
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Viewed 1 September 2016

Foreign Investment review board n.d. Monetary Thresholds, Viewed 18 September

2016, < https://firb.gov.au/exemption-thresholds/monetary-thresholds/>, Viewed 1
September 2016

Gao, Q. 2014, "Chinese NonResources Investment in Australia: Current State and

Outlook", Economic Papers: A journal of applied economics and policy, vol. 33, no.
4, pp. 362-373. Retrieved from:
http://onlinelibrary.wiley.com.libraryproxy.griffith.edu.au/doi/10.1111/1759-
3441.12089/abstract, Viewed 1 September 2016

State Revenue Office Victoria n.d. Foreign Purchasers of property, Viewed 18

September 2016, <http://www.sro.vic.gov.au/foreignpurchaser>

Xu Yi-chong 2013, How Foreign Investment Oils the Worlds Economy, in Government
and Business in Volatile Times. [online]. Pearson Australia, pp. 71-98. Retrieved
from: <http://www.myilibrary.com?ID=940063>, Viewed 1 September 2016

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Zeller, B. & Cole, B. 2014, "Australian Trade Agreements - A Divergence between
Trade Policy and Business Outcomes - Can They Deliver Trade-related Growth for
Australia?", Global Journal of Comparative Law, vol. 3, no. 2, pp. 236-255. Retrieved
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