01/10/2008 - 22:00

Chinese capital monopoly raises questions

01/10/2008 - 22:00

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The markets might be rocky but continued Chinese interest is making some wonder about our current foreign investment rules.

The markets might be rocky but continued Chinese interest is making some wonder about our current foreign investment rules. Mark Pownall reports.

AUSTRALIA may escape the worst of the global meltdown, but many are asking how our state's resources juggernaut can keep rolling with investment capital being withdrawn.

One of the few sources of potential capital that appears to have remained strong in the face of the withering credit crunch is that of foreign investors, notably Chinese steel companies, which have maintained their investment in local resources developments.

The list is steadily growing, with the latest being Jiangsu Shagang Group Co Ltd's reverse takeover proposal for Grange Resources Ltd, which has the Southdown iron project near Albany.

Last week, Sinosteel gained approval for a 49.9 per cent stake in Murchison Metals Ltd, potentially adding to its control of iron ore resources around Geraldton, where it already owns Midwest Corporation Ltd.

There are plenty of other examples from this year and earlier.

In May, for instance, China Metallurgical Group Corporation received no objection from the Foreign Investment Review Board for its proposed acquisition of the Cape Lambert Iron Ore project.

But the very fact that the Chinese companies are continuing to invest at a time of unprecedented global financial strife underscores the view that they are taking a longer-term view on natural resources.

And that is where there is much unease in the market about foreign ownership, especially from China, where virtually any major investor is considered state-controlled.

That sense of concern will only be heightened by developments in the markets.

The patient Chinese capital is, in many cases, the only option for those with projects seeking finance as the global meltdown takes other potential investors out of the market due to their own woes or a lack of confidence.

But concern about foreign investment goes both ways, with some believing efforts to rein in foreign investment by state-controlled vehicles may have gone too far and could now prove a barrier to this still-available source of capital.

Earlier this year, the federal government sought to put a check on foreign ownership - not explicitly Chinese - when it tightened FIRB guidelines to focus on government-controlled entities.

That release came just days after Chinese entity Chinalco emerged with a blocking stake in takeover target Rio Tinto Ltd.

Current policy is that no state-controlled entity can invest in Australia without FIRB approval, compared with a minimum of $100 million for independent companies - albeit with a range of qualifiers as to what sector that capital may be directed.

KPMG's Adrian Arundell is one who believes that restrictions on foreign investment may have gone too far; or worse, that efforts to play politics have led to uncertainty.

"It [state-controlled foreign investment] was incidental to our lives over the past year because there was so many other equity channels to tap into," Mr Arundell said.

"But the solutions are now very light on the ground and you have to look at where those cashed-up resources are."

Mr Arundell believes the Australian stock market and banking sectors are benefitting amid a global capital flight because their strong regulatory platforms provide certainty for all.

The exception is these very investors who have capital and want to spend yet face uncertainty over decisions that can take months to be delivered.

"It is a little bit perverse," Mr Arundell said.

"I think at the moment we have edged too far in one direction.

"You have to ask yourself, what is the difference between corporations and sovereign wealth funds? Are we just reacting or is it thoughtful? To me it is a reactive piece of regulation."

Not everyone agrees. Local corporate advisory players who spoke to WA Business News generally did so on the condition of anonymity because most have clients on one side or the other in such transaction. This was especially the case among legal professionals.

When quizzed on the issue last week, Azure Capital's Mark Barnaba was one prepared to speak on the record, backing the current policy.

Mr Barnaba said foreign investment controls were needed but Australia had a good balance, a level he considered relatively relaxed compared with other jurisdictions.

Importantly, he said, he did not think policy should be changed because of what was occurring in global markets.

One oft-repeated view is that foreign investment rules are not seen as a major impediment to investment here, with the track record in this area speaking for itself. The decision by former treasurer Peter Costello to stop oil major Shell taking over Woodside Petroleum Ltd in the early part of this decade is seen as almost the only exception, and is heralded as a good move.

Federal treasurer Wayne Swan has stated that he doesn't believe foreign investment policy changes were slowing the pace of investment.

Mr Swan revealed in July that $30 billion in Chinese investment applications had been received since the November election, compared with an average of $5 billion a year in 2005-06 and 2006-07.

Mr Swan denied that the government had taken a more restrictive stance with regard to Chinese investment.

"I have approved a Chinese investment proposal on average once every nine days since coming into office," Mr Swan said in a speech to the Australia-China Business Council.

"This is not a slowing pace."

But the Chinalco approval took nearly six months and the Murchison deal's approval had similar delays, with a result that many view as a compromise that suits no-one. Sinosteel had sought approval for 100 per cent but only won the right to buy 49.9 per cent.

Some in the market argue anything over 19.9 per cent represents control, while others point out that the only way Sinosteel can grow its stake in Murchison is under the creep provisions because the ownership cap prevents it making a proper takeover bid.

While the market has debated the finer points of the FIRB policy on sovereign wealth funds, at least one voice questions the need for such restrictions at all.

Andrew Stoeckel, founding chairman of the Canberra-based Centre for International Economics, believes foreign investment restrictions are based more on xenophobia than good policy.

The economist turns on its head the view that foreign investment rules have almost never stopped any major foreign investment in Australia.

"If they don't knock back anything why have them?" Dr Stoeckel said.

The CIE points to research showing that, while Australia is considered quite relaxed about foreign investment compared to countries in the Asia Pacific region, against our peers in the Organisation for Economic Cooperation and Development countries we are very restrictive (see graphic).

He believes Australia may have no idea how much capital fails to reach our shores because of the barriers we have.

"The mere fact that you have screening processes is like a flashing red light," Dr Stoeckel said.

"It shows there are political sensitivities to investment here.

"These restrictions are very expensive."

Dr Stoeckel believes the policy has evolved to provide political comfort. In practical terms, he said, every concern that foreign ownership gives rise to - resource development timetables, transfer pricing, tax avoidance, control of key sectors, opaque ownership - is already covered by legislation and regulatory bodies.

"It is sloppy thinking," he said.

"It is not the ownership of the assets that matters, it's the use of the assets."

"You have to be careful, but we should be encouraging foreign investment."

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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