Be wary on foreign funds, says RBA’s Glenn Stevens

Glenn Stevens says we should be more ­cautious about foreigners simply purchasing existing Australian ­assets.

Glenn Stevens has weighed into the foreign investment debate, saying Australia should do more to attract the flow of funds that builds new businesses but be more ­cautious about foreigners simply purchasing existing Australian ­assets.

In an exclusive interview with The Australian and The Wall Street Journal, the Reserve Bank governor, who steps down next month, said the tide of foreign investment was pushing up the value of the Australian dollar and countering the impact of Reserve Bank rate cuts.

Mr Stevens stopped short of urging capital controls, but said Australia needed to consider the kind of foreign investment it was attracting.

“Australia wants to be open to foreign capital. That’s our national philosophy. I think in that discussion it would be helpful to think about the kind of foreign capital we want,” Mr Stevens said.

“Foreign capital that builds new assets — like some of the capital that funded the mining boom — that’s one thing. Foreign capital that buys up the existing assets, I’m not saying that we should be closed to that, but that’s not ­creating new capital for the ­country. “That’s just altering the allocation of who owns the capital that’s here now.

“When we all talk about ‘we want capital inflow’, we can probably have a bit of nuance and subtlety over what kind of inflow we mean and ask ourselves ­whether we’re attractive enough to the kind of capital that actually builds new assets.

PDF: Glenn Stevens interview in full

Mr Stevens emphasised that his concern with foreign investment was not related to last week’s decision by Treasurer Scott Morrison to block two Chinese bids for the NSW electricity company Ausgrid, about which he had no knowledge.

The Reserve Bank has been acutely conscious of the inflow of foreign capital because of the strength of the Australian dollar. Although the Reserve Bank has cut its benchmark interest rate both in May and this month, the Australian dollar has risen back to the US77c level where it stood in April.

The Reserve Bank does not ­target the Australian dollar but it has been frustrated by its strength, noting after each of its recent board meetings that a further significant rise would make it harder to adjust to the end of the resources boom.

Mr Stevens said the Reserve Bank had limited influence over the value of the Australian dollar. “The cash rate obviously matters and the assumed future path of rates has some bearing on the way the exchange rate behaves,’’ he said. “But it is other assets than just those that clearly matter here.”

Mr Stevens said foreign investors were looking for infrastructure, commercial property, shares or any kind of Australian asset paying a reasonable return.

Although a 6 per cent return on commercial property was low by Australian historical standards, it was very attractive to investors in Frankfurt, Tokyo or New York.

Even the commonwealth government’s bonds paying interest rates of about 2 per cent were luring foreign investors.

“That’s not something that the Reserve Bank can kind of wave a wand and make go away,” Mr Stevens said, noting Australians had mixed views about ­foreign ­investment. “We get ­nervous when foreigners buy land or other assets, but I’ve never met a businessperson yet who doesn’t think that foreign investment as a general thing is good.

“That’s why I say that maybe some more clarity about what we mean by foreign investment, what kinds of foreign investment are better than others, what kind helps us grow our capital stock and our country and how to manage all of these things, that’s probably a constructive debate we might hope to have.”

Attracting capital to build ­assets should be part of a growth agenda. Just as the Reserve Bank has limited influence on the value of the Australian dollar, it also has limited influence on the economic growth rate.

Mr Stevens believes he is leaving the Australian economy in good shape, with unemployment below 6 per cent and reasonable prospects for economic growth over the next few years, however he said there was still idle capacity and it would be good if more could be achieved.

“Whether monetary policy could just dial that up is something that I am a bit dubious about. We should do what we can do, but I’m not sure that what the central bank can do is in itself sufficient.”

Mr Stevens argues it is up to government to do more to boost productivity, tackling difficult ­decisions on the budget and on economic reform. “Genuine ­reform is hard to do. It takes a combination of leadership, the right circumstances and being ready,” he said.

Mr Stevens said it was ­important that Australia ­remained attractive to global capital and retaining its AAA credit rating was one way of demonstrating this.

“For 200 plus years, we’ve imported other people’s capital and we’ve grown rich by doing that. We want to keep doing it and you need to maintain confidence, credibility in order to do that.”

Mr Stevens has urged that Australia should be prepared to borrow globally to fund infrastructure.

He said he believed global credit rating agencies and global ­financial markets would accept Australia doing this, provided it was covering its running costs, pensions and welfare with taxes.

The big question was not how Australia would get the foreign money to fund infrastructure — that was plentiful — but rather would it choose the right projects.

“Have you got the relevant ­decisions appropriately out of the day-to-day politics so that people can be confident ‘Yes, this has been subject to appropriate cost-benefit scrutiny, we can trust that?’

“That’s actually much harder than finding the cash. There’s a lot of money out there looking for yield.”