China’s SOEs and Australia’s FIRB system

Problems with Australia’s foreign investment review system are more rooted in perception than in reality.

Many of the gripes we hear from Chinese miners about confusing laws and taxes, environmental standards and stakeholder concerns are just the growing pains of a sector that is still finding its way on the world stage.

We should redouble our efforts to explain our system to foreign investors but, at the same time, remain vigilant about the intentions of China’s state-owned enterprises.

Chinese SOEs remain unusual hybrids that pursue both commercial and politically strategic ends.

When dealing with them, it’s hard to be 100 per cent certain that their motivation is all about maximising profits.

But it’s not a view shared by everyone. Andrew Michelmore, who heads up the majority Chinese controlled mining group MMG thinks our policy towards China’s SOEs needs updating. He argues Australia needs to reduce impediments to foreign investment in a world where “capital is more and more mobile”.

Australia is, as ever, reliant on foreign capital inflows to keep its economy going and China has plenty to splash around, with some reports suggesting it to rise to $1 trillion by 2020.

Mostly Michelmore wants to see the heat taken out of discussions about China’s SOEs. Government-owned enterprises, he reminds us, are by no means unique to China.

The Commonwealth Bank and Telecom played a critical role in building our nation, Michelmore argues, so why shouldn’t the Chinese do the same?

“It’s like they’ve all got horns on them… we still have them in Australia so should we treat the same way,” he says.

At any rate, Michelmore believes, the contribution of SOEs to the Chinese economy is waning as they make way for private business.

Xi Jinping must have missed the memo.

The truth is that the eventual denouement of SOE power in China is anything but a done deal. SOEs are much more entrenched in Chinese society than Telecom or the Commonwealth bank ever were in Australia.

Xi Jinping’s own PhD supervisor led a study at Tsinghua University recently that looked at how vested interest groups now welded onto the Chinese economy are hostile to reform. While the top leadership clearly understands the enormity of the problem, major reform is still off limits.

The elite families and their factional partners who treat them as their personal fiefdoms are reluctant to relinquish control.

Any discussion of it has been conspicuously absent from draft reform plans for the third plenary meeting of the Communist Party’s 18th National Congress slated for this autumn. Analysts believe that if Xi is to do anything at all, it will only come about after first weakening the massive behemoths by stealth before taking them head on in his second term.

If the Chinese leadership is concerned about these organisations, we should be too.

While much of recent election campaign rhetoric about foreign investment has been overblown, Australians have had concerns about the lack of transparency in Chinese SOEs.

Many ordinary Chinese share this concern. They’re fed up with rampant corruption and nepotism and they’re demanding more information about how state funds have been channelled into these hulking behemoths.

Prior to 2000, commercial banks lost up to 3 trillion yuan in bad loans to SOEs. How much of that went into lining the pockets of its executives is anyone’s guess. And with easy access to cheap credit, SOEs have gone out and spent up big regardless of any cost-benefit analysis.

It was always inevitable that in the context of a slowing economy, their political masters were going to take a closer look at their balance sheets. Australia, alongside countries like Canada and Brazil, were seen as safe investments but increasingly China’s SOEs are looking elsewhere to get more yield for their yuan.

But if mere talk of introducing a mining or a carbon tax is too much uncertainty for them, what must they think when, as in 2011, they had to airlift some 38,000 odd citizens out of a war-ravaged Libya.

Talk about sovereign risk.

At any rate, SOE executives should know which side their bread is buttered. The more they’re exposed to the international market, the faster they tend to rise up through the ranks of the communist party. And the more they deal with mature liberal democracies with robust legal systems and environmental and labour standards like our own, the more norms back in China change.

By refusing to drop our standards, Australia will be doing China and the rest of the world a favour.

(c) Business Spectator 26 September 2013.By Fergus Ryan


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