FOREIGN INVESTMENT: by Patrick J. ByrneNews Weekly
Stronger rules needed on foreign investment
, September 13, 2008
The Government is finding its foreign investment rules inadequate, given the sudden big jump in foreign investment from China. Patrick J. Byrne reports.While Australia is struggling to find a policy to handle foreign sovereign wealth fund (SWF) investments from countries like China, Germany has acted decisively to restrict SWF investment in local companies.
Sovereign wealth funds are government-owned investment companies from countries such as Russia, Singapore, China and the Gulf States.
A report by investment house Morgan Stanley estimates that state-owned SWFs already control US$2.5 trillion worldwide, building to $12 trillion by 2015.
Australia reviewed its SWF rules late last year. The new federal Labor Government then told Beijing that it welcomed Chinese foreign investment.
However, it recently approved the Chinese aluminium giant Chinalco's 11 per cent stake in Rio Tinto only after a long delay, and it still has on hold the Chinese steel-making giant Sinosteel's bid for Murchison Metals.Concern
Recently, Treasurer Wayne Swan expressed concern about Chinese state-owned enterprises buying stakes in Australian resources such that it might affect the prices being charged by Australian exports.
The Government has also told Chinese companies that in Australia they need to invest in joint ventures, focused on new developments, rather than hostile takeovers of companies with established projects.
China is complaining that the rules are not clear and appear to be anti-Chinese.
Clearly, the Government is finding its new SWF rules inadequate, given the sudden big jump in foreign investment from China.
Germany has faced a similar problem, with Russian SWFs pursuing major stakes in sensitive industries.
The Russian state bank VTB has tried to buy into the European Aeronautic Defence & Space Company (EADS), which is the parent company of Airbus.
Last year, the Chinese bought a 10 per cent holding in US private equity house Blackstone, which is a major stakeholder in German-based Deutsche Telekom AG, the biggest phone company in Europe.
In response, Germany has announced that attempts by non EU-controlled investment groups or companies to buy a 25 per cent or greater stake in strategic parts of German industry can be blocked in the future.
The new German rules are based on the American model. In the US the rules are triggered by "security" issues, while in Germany it is "public order and security" concerns.
Beijing's attitude to foreign investment in China is illuminating, not only because of China's huge investment push abroad into places like Australia, but also because Australia is seeking a free trade agreement with Beijing.
China is not pursuing open free trade with the rest of the world. Its objective is to master as many technologies and industries as possible, and then become the dominant player in those industries on the world market.
To this end, it has welcomed foreign investment and technology transfer into industry sectors so that Chinese firms can obtain the know-how to gain a competitive advantage over their foreign competitors.
However, once China has mastered those industries, as it has done in the likes of toy, furniture, clothing and footwear production, it then limits foreign investment in those industries. Similarly, it has banned foreign investment in high-energy or high-resource use, e.g., in the steel, aluminium, paper, cement and other basic industries.
Beijing also maintains substantial restrictions on publishing, media, market and social research, and an absolute prohibition on investment in real estate and real estate brokerage firms.
Clearly, Beijing is now aiming to become a major investor in Australia, with foreign investment jumping from a trickle three years ago to an anticipated $30 billion this year.Overhaul
Hence, Australia needs to further overhaul its foreign investment rules, especially regarding SWFs, along the lines of those adopted in Germany:
• Australia needs to declare a wider range of industries as strategic industries in which foreign investment is limited or prohibited, just as foreign investment is currently limited in Australia's four big banks.
• In the most important strategic industries, e.g., banking, oil and gas, media and television, acquisitions should be prohibited.
• In other strategic industries, foreign ownership by commercial companies should be restricted to 49 per cent, and for SWFs it should be limited to 25 per cent.
• The Treasurer needs to be given the power of divestiture to break up foreign ownership of a company when it is deemed that such foreign ownership is not in the national interest.
• The Treasurer should have the power to prohibit/limit foreign investment in the case of creeping acquisitions leading to overly concentrated ownership by one company.
These rules would go a long way towards securing Australia's economic sovereignty.
Then the Government needs to bring down the foreign debt, the biggest threat to Australia's independence.- Patrick J. Byrne.