National interest must prevail over capital desires

BARNABY Joyce is right to be wary of investment from Chinese state-owned entities.

AUSTRALIA should welcome foreign investment, sometimes even sovereign capital investment. After all, as former treasurer John Dawkins told members of the China-Australia Chamber of Commerce in February last year: "Australia's economy has been built on the back of overseas investment".

Opposition Treasury spokesman Joe Hockey reminded me yesterday that it has been a mainstay of the Australian economy "since 1788". But we also need to ensure that investment from overseas is always to the benefit of Australian citizens and the national economy, particularly when the investment comes from sovereign entities.

The reason Chinese state-owned company Chinalco's bid to pour $20 billion into Rio Tinto would surely have been blocked by the Foreign Investment Review Board, had the deal not collapsed a week before the FIRB was due to rule on it, is that it would have given China a massive strategic stake in Australian iron ore deposits.

Giving such a stake to China -- our biggest export market -- would have handed over pricing control.

We have to be very careful when considering foreign investment interests in Australia from sovereign investment entities, and all the more so from somewhere such as China: a non-democracy on the rise with a sketchy rule of law (just ask Stern Hu). That's because we are helping make such a regime more powerful as well as giving it a controlling stake in Australia.

When contacted by The Australian, opposition finance spokesman Barnaby Joyce commented in his typically colourful way: "I don't want to have cantankerous issues in a new unipolar world controlled out of Beijing."

The last example of a Chinese-owned company showing interest in taking over an Australian entity is PetroChina's joint takeover bid, in conjunction with Royal Dutch Shell, for Arrow Energy, to the tune of $3.4bn.

The government has enjoyed hitting Joyce over the head for comments he has made, which it views as rabble-rousing and damaging to Australia's diplomatic relations with China.

But dismissing his concerns regarding Chinese investment out of hand would be a mistake by the government, politically and in terms of policy.

The debate about foreign investment sometimes doesn't adequately differentiate between overseas companies putting dollars into the Australian economy and the investment desires of sovereign entities.

There is a big difference. One is almost entirely beholden to the market -- the capitalist trade system our liberal democracy is inextricably linked to -- and therefore part of our political culture. The other represents investment by an overseas government, and not necessarily one with our high regard for democratic freedoms.

It is ironic that Australia has had a bipartisan consensus about privatisation of state-owned assets domestically for many years now, yet our large mining companies are increasingly being looked at for takeover by overseas state-owned entities.

To put the level of Chinese interest in investing in Australia (private and public) in context, we received more investment applications from Chinese entities in the first six months of the Rudd government than in the entire 11 1/2 years of the Howard government.

Whether the surge was a Chinese response to our new Mandarin-speaking Prime Minister, or simply real estate interest from the burgeoning cashed-up Chinese middle-class and a government with money to throw around (more likely) is unclear. But it does illustrate the new era of Chinese investment we are now living in.

The reason it is so important to differentiate between foreign investment (a good thing) and sovereign capital investment (more concerning) is because Australia as a middle power with a small population (with low savings) is not always in a position to turn its nose up at overseas injections of funds.

Economist Ian Harper made this point at a Menzies Research Centre function not all that long ago.

The head of the Australian Workers Union, Paul Howes, also raised concerns in a speech to the National Press Club. "We think that sovereign wealth funds should be looked at carefully because of the involvement of other governments in our economy and other nations and other nations' national interests," he said.

But Howes and Joyce differ when it comes to the latest example, the PetroChina joint takeover of Arrow. Joyce says many more questions need to be asked about the takeover. He stops short of calling for it to be rejected by the FIRB, but he does say: "I have got a problem with state-owned investments", implying all such investments might be a bad thing.

Howes, on the other hand, says: "We are not opposed to sovereign capital per se, and we judge every investment on its merits. There are big differences between this issue and the Rio Chinalco bid, so we'll be looking into it in detail."

The difference of opinion comes down to where you draw the line on what constitutes a "strategic investment" by a sovereign entity. Joyce doesn't see how an overseas nation investing in your natural wealth is anything but worrying.

Howes on the other hand seems to judge a strategic investment according to its size, recognising that a world financial system stripped of private funds must recognise the role of sovereign funds, a position similar to Harper's.

While sovereign investment in Australia is unlikely to be an election issue of the order of health or taxation reform, it could be important in key marginal seats, particularly in regional areas affected by mining and exploration.

In some cases, that will favour a more open consideration of overseas investment, with the wealth that such investment generates.

The national debate on foreign investment, whatever the outcome, will need to proceed carefully to avoid losing sight of what the issues really are.