07/08/2012 - 09:02

Analysis: Investment vs. national interest

07/08/2012 - 09:02

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No-one expects business to apply a national interest test when it comes to making money but, in the case of Chinese investment in Australia such a test must be applied until China changes its ways.

Unfortunately, the changes which might make China as acceptable as the U.S., Britain, or European investors in Australia will not occur under the current system of government in China.

The problem, which seems to have escaped everyone commenting in the recent debate about Chinese investment in Australia is that China is a special case when it comes to buying foreign assets, and that’s because there is no separation between business and government.

All power in China resides in the government and for anyone to argue that there is such a thing as an independent Chinese company is not telling the truth.

Start from that simple, but critical point of absolute state-control of everything in China, and everything else in a discussion about Chinese investment in Australian mines, farms and factories falls into place.

Quite simply, it is impossible to imagine that a Chinese company would do anything that is not in the best interests of China – and certainly not its shareholders, as is the case with western companies, and not in the interests of a host country such as Australia.

In good times, when profits are high, the question of Chinese behaviour is not an issue because there is plenty of money to share.

But, in tougher times when profits fall, Chinese companies will do what’s best for China, because that’s the law in that country.

Until yesterday, the debate about Chinese investment in Australia had been conducted in an astonishingly naive fashion with business leaders saying Australia should be more open to direct Chinese investment, and some politicians seeming to agree.

The business view, unfortunately, is purely about making money without a second spent considering the wider implications of allowing large parts of the country to be controlled by another country.

Business people, including some with investments in both Australia and China, ought to know better, and ought to be asking themselves whether they are acting in Australia’s best interest by siding with China in the foreign investment debate.

That might happen if only because one very important player in the foreign investment game spoke loudly yesterday on the question of national interest.

Brian Wilson, the new chairman of the Foreign Investment Review Board, said that state-owned companies must not be driven by a political agenda when buying in Australia. “Investment decisions should be made by investors on a purely stand-alone commercial basis,” he said.

“Australian businesses, however they are owned, should be run on a purely commercial basis and not as an extension of the political or economic agenda of a foreign government,” Wilson told the Dow Jones news service.

China, no matter how is supporters might portray the country, can never pass that test while it remains a single-party state with the sole objective being to harness the energy of every person and company in the interests of the state.

Soon, Australia will have its first significant test case of what that actually means.

In the Pilbara, Sino Iron is putting the finishing touches to its grossly over-budget and behind schedule iron ore processing project.

The owner, CITIC Pacific, will be under enormous pressure to deliver iron ore to steel mills in China, but it remains to be seen whether it will be under pressure to make a profit on the processing in Australia.

Because it is starting from a severely disadvantaged position of a higher capital cost, and will deliver its finished product into a falling iron ore price, it is impossible to imagine that the Sino Iron project will be profitable – at the Australian end of the business.

In China, it might be a different matter because of the potential to deliver iron ore at cost to steel mills (also under the ultimate command of the government).

It is possible that Sino Iron will become a business consuming Australian raw materials without ever making a profit here, never paying tax here, but helping Chinse steel mills make profits there.

That is painting an extreme example of what it means to have a foreign investor in Australia acting in the interests of a foreign government, and it’s one that the pro-China lobby will say could never happen – until it does.

The insurmountable problem is this simple. China is different. It cannot be treated in the same way as western countries with their clear rules of law, and clear corporate rules.

And for businessmen to argue that Australia ought to welcome Chinese investment without question is either naive, or self-serving greed that will cost Australia dearly in the long run.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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