Caution must come first in relations with foreign interests such as China

In late 2015 Australia’s most senior diplomat, Peter Varghese, summoned US ambassador John Berry to his Canberra office for a delicate meeting. Notionally, Varghese wanted to talk about the recent decision by the Northern Territory government to grant a 99-year lease to Landbridge Group, a Chinese company with links to the Chinese Communist Party. In truth, he wanted to give his American friend the diplomatic equivalent of a gentle bollocking.

For months the Americans had been complaining about the decision, which had caught them unawares. Darwin was a hub for strategic co-operation between Washington and Canberra, and the Americans worried Chinese control of the port could expose its assets to the threat of espionage.

Privately, Australia felt Washington had overreacted. Australia’s security agencies had run the ruler over the deal and given it the all-clear. But US officials continued to raise the issue, in public and in private. At an Asia-Pacific Economic Co-operation summit meeting in Manila, Barack Obama had gently rebuked Malcolm Turnbull for not giving Washington a “heads up” on the deal, prompting the Australian Prime Minister to joke that the US president should take a subscription with the NT News. But months after the sale, the issue had become an embarrassment for the government as well as an irritant in Canberra’s otherwise fine relationship with the Americans.

Varghese took Berry and one of his advisers into the secretary’s conference room adjacent to his office. Over coffee, he told Berry: “You either know something we don’t, in which case you have an obligation to share it with us. If you don’t, you should know that we have been through the issue very, very carefully and we have no ­intention of changing our mind. If that is the case we would be grateful if you stopped making gratuitous public comments about it.”

The controversy surrounding the Port of Darwin sale typified the paranoia that has come to accompany foreign investment in Australia’s critical infrastructure. Two years after Varghese told Berry to pull his head in, the threat of foreign interference is now the issue du jour in Canberra. The Turnbull government is set to ­announce sweeping reforms to Australia’s espionage and foreign interfer­ence laws to counter a spectrum of gathering threats. Russian meddling in the US presidential election, a string of suspect foreign investment bids and continued cyber attacks by state-­directed entities have combined to put the issue front and centre in the minds of policymakers.

None of this is new. For years Australia’s security establishment has been warning that foreign ­interference in Australia’s affairs was rising, even soaring. The national security community, which has been flat to the boards fighting the Islamist threat, has failed to keep up with a problem that ASIO admitted this week had reached “unprecedented” levels.

Nobody in government is saying it publicly but the focal point of these concerns is China. China’s interference in the internal workings of its friends, neighbours and rivals has grown along with its power and prestige. Beijing has ­become more assertive as the rest of the world, Australia included, has been increas­ingly reliant on it for foreign investment.

To some, Chinese money risks ­enfeebling Australia’s institutions, even the quality of its democracy. Universities depend as never ­before on Chinese students, Chinese investors bring much needed foreign capital, a portion of which is spent on sensitive projects such as electricity infrastructure, and cash-strapped political parties have shown few qualms about ­accepting generous donations.

The mercantilist nature of the China’s corporate sector makes it impossible to say with confidence what the true purpose of these ­investments is or how they may be used in the future. When a Chinese state-owned company bids for a stake in the NSW energy market, does it see a lucrative ­investment or a vulnerability in Australia’s critical infrastructure to be leveraged at some point? If China’s telco behemoth Huawei pursues lucrative National Broadband Network contracts, is it attracted to the return on investment or a future opportunity for surveillance? To China, these questions cut both ways. Beijing sees no difference between one of its Confucius Institutes operating out of the University of Sydney and an Alliance Francaise 5km down the road.

Except there is a difference. China sees its vast global diaspora as a strategic asset that can be used to further its interests. To a greater or lesser ­extent most countries do this. The Saudis, the Iranians, even the ­Malaysians keep a close watch on their expatriate communities or, in the case of the Israelis, use them as a recruiting pool for espionage. But Chinese interference is more effective. Its diaspora is larger, its aims are broader and its government officials looking to shape opinion or curb dissent have more levers to pull to influence Chinese Australians, most of whom have relatives or business interests back in China.

This week ASIO warned that foreign powers — it did not name China — had tried to “shape the opinions of members of the Australian public, media organisations and government officials in order to advance their country’s own political objectives’’.

“Ethnic and religious communities in Australia were also the subject of covert ­influence operations designed to diminish their criticism of foreign governments,’’ ASIO said in its 2016-17 annual ­report. “These ­activities, undertaken covertly to obscure the role of foreign governments, represent a threat to our sovereignty, the integrity of our national institutions and the exercise of our citizens’ rights.’’

There is a sense of frustration within ASIO that the present flurry of government anxiety about foreign interference postdates by several years ASIO’s own numerous warnings about the ­nature and scale of the problem. In 2008 ASIO watched with amazement and alarm as Beijing used its embassies and consulates as operational hubs to mobilise an estimated 10,000 Chinese students in support of the Chinese torch relay that was making its way around Australia ­before the Beijing Olympics.

As the torch made its way around Canberra, flying squads of Chinese students who had been bussed in especially followed it at every step, co-ordinating with each other via two-way radio and descending on protesters embedded in the crowd, mobbing them in a sea of red flags. It was a fusion of spontaneous Chinese nationalism and co-ordinated state interfer­ence. To ASIO it was also the clearest example yet of how effectively Beijing was able to effect­ively mobilise its diaspora to further its propaganda goals.

ASIO, of course, is paid to be sceptical. The Department of Foreign Affairs and Trade is not. It was telling, then, that in the week before ASIO’s annual report appeared, DFAT secretary Frances Adamson issued a rare and public rebuke to Beijing over what she described as “attempts at ­untoward influence and interference”. Speaking at the University of Adelaide’s Confucius Insti­tute and addressing her comments to “international students”, Adamson said silencing debate was “an affront to our values”.

“No doubt there will be times when you encounter things which to you are unusual, unsettling or perhaps seem plain wrong,” ­Adamson told her audience. “So when you do, let me encourage you not to silently withdraw, or blindly condemn, but to respectfully engage.”

The mild tone of Adamson’s ­remarks masked a growing alarm in Canberra at Beijing’s increasingly aggressive tactics on campuses. They were also part of a larger messaging campaign aimed at reining in Beijing’s influence as well as softening the ground for the government’s foreign interference reforms, which will be ­unveiled later this year and whose provisions are likely to be aimed squarely at China.

Australian National University professor and former Office of ­National Assessments analyst Rory Medcalf says there has been a “creeping realisation’’ across government in the past 12 to 24 months that foreign ­interference has become a major problem.

“There’s a misconception that the security sector has captured policymaking in Canberra,’’ Medcalf tells Inquirer. “That’s a false analysis. What we’re seeing is a much more integrated approach to policymaking. It’s easy to ­silence this debate by playing the xenophobia card.”

There is little doubt Beijing ­actively seeks control over Chinese student associations and that it uses the Chinese student community as a means to monitor and control dissent. Pressure on academics also seems to be growing. In August Sydney University IT lecturer Khimji Vaghjiani was forced to issue a grovelling apology after ­inadvertently using a map that ­depicted Chinese-claimed territory as belonging to India.

Sydney University has denied forcing its academic staff to apologise, even though Vaghjiani’s statement was sent via the university’s communications department. But the fuss surrounding Vaghjiani was one of a string of ­recent incidents in which academic teaching staff has been targeted by pro-Chinese students over the content of their teaching.

Group of Eight chief executive Vicki Thomson acknowledges there is a problem with Chinese chauvinism on campus but warns against over-egging it. She says Chinese students are not the only student group to have overstepped the mark. “There is a lot of noise around at present and we have to deal with that … but it does not mean we abandon our Chinese students or damage our valued ­relationships,” Thomson tells Inquirer. “All that said, we are not naive. We accept that there will be Chinese students who have more reason than receiving a quality education to come to Australia.”

Thomson’s caution is easy to understand. In the past two decades, Australia’s tertiary sector has become increasingly beholden to full-fee foreign students, particularly from China. The inter­national education sector is Aus­tralia’s third largest export. It brought in a whopping $28 billion last year — more than double what it was earning 10 years ago. Seventy per cent of that money came from universities. Governments now provide less than 50 per cent of university funding. The remaining funding comes from philanthropy and other ­sources but overwhelmingly it is foreign students who are picking up the bill. Critics inside the univer­sity system used to worry about the effect these commercial pressures had on academic standards. Now they worry about the effect on academic freedom.

In the tertiary sector, infrastructure, the residential property market and in the realm of politics, Australia has long been happy to take China’s penny without giving a great deal of thought to the cost. Some argue that one answer is to tighten the rules on foreign investment. Australian Strategic Policy ­Institute director Peter Jennings argues the Foreign Investment Review Board should be taken out of the Treasury Department and given a stronger national security focus. The appointment in April of former ASIO director-general David Irvine as the FIRB’s new head was a clear sign the government was becoming increasingly worried about the dual-use nature of some foreign investment.

“Culturally Treasury sees the role of the FIRB as investment ­facilitation,’’ Jennings says. “I don’t disagree with that but I think we have a more balanced approach that gives equal weight to national security and you’re not going to get that by leaving it in Treasury. Treasury represents one half of the argument.”

Others caution about throwing out the baby with the bathwater. Giving the national security establishment too great a role in managing foreign investment would send all the wrong signals to the world. It also would be to overstate the scale of the problem. “You’ve got to be careful about giving the ­national security community too much of a say in an issue that is overwhelmingly economic,” one insider tells Inquirer. Yes, there are concerns about sensitive foreign investments. But the FIRB’s job is to facilitate investment in Australia, not block it. The overwhelming bulk of Chinese capital flowing into Australia is ­benign and ­attracted to the return on investment. This is particularly true in, say, the residential property markets, where sinister explanations about high levels of Chinese ­investment are outmoded by the spectacular rate of return on offer in the Sydney and Melbourne housing markets. Sometimes a cigar is just a cigar.

The most serious concerns are around foreign investment in ­infrastructure. The 2015 Port of Darwin deal, which was valued at $506 million, left Washington gobsmacked. To the Canberra security establishment, the issue was a storm in a teacup. No serious national security vulnerability was identified. But the handling of the deal embarrassed the government and sparked a rethink about how the sale of critical infrastructure should be managed. The 99-year lease issued to Landbridge was made possible because foreign acquisition laws did not require FIRB approval for assets sold by state or territory governments. In effect, it was a loophole. As a result, the FIRB was given an expanded remit to examine future sales and the government set up the Critical Infrastructure Centre, in part to help the FIRB cast a more watchful eye over ­future purchases.

In other words, Australia is learning as it goes. Its vetting processes are getting better, but there are gaps and it is through these gaps that Australia is vulnerable.

The Port of Darwin sale served as a wake-up call across government. Since then Treasurer Scott Morrison has blocked China’s state-owned State Grid Corp from buying into Australia’s biggest ­energy grid, Ausgrid, on the grounds the sale would be contrary to the national interest. State Grid Corp already has significant holdings in the Victorian, South Australian and ACT energy markets. Jennings says that as the control of infrastructure becomes increasingly automated, the poten­tial for hacking and cyber ­attacks increases. In 2015 Russia shut down power to a quarter of Ukrainians in what was considered the first major cyber attack on an electricity grid. It was a stunning example of what is possible using what defence boffins call “asymmetrical warfare”.

“Over the last decade critical infrastructure is being run completely differently — that is, with internet-enabled industrial control systems,” Jennings says. “That creates a whole new set of what the Australian Signals Directorate in Defence describes as ‘attack sur­faces’. They can be exploited with malware or by using with agents with access to the systems.”

Part of the problem is that these new web-enabled industrial control systems are being tacked on to old, even ancient infrastructure, multiplying the number of potential vulnerabilities. Espionage and sabotage are the main threats. Medcalf says much of the concern lies around risk management. Modest foreign investment in one sector may not be a problem but once it reaches a critical mass it can become a problem.

“Once you get an aggregation of these investments the future leverage they can bring to bear ­becomes pretty acute. We’ve learned the Chinese take a very long-term view over their long-term perspective of its interest.”

Jennings says one solution is to exercise greater control over access — for instance, banning foreign companies from operating sensitive systems remotely or ­security-clearing Australian staff to operate it locally.

It is in the realm of political ­donations where Chinese influence is the most pernicious. In 2015 ASIO director-general Duncan Lewis reportedly warned the main parties about accepting ­donations from Chinese businessmen with close links to the Communist Party. Huang Xiangmo and Chau Chak Wing donated more than $6.5m to the Liberal and Labor parties.

The government looks set to crack down on, if not ban, foreign ­donations to Australian politicians and perhaps associated entities such as activist groups such as GetUp!, which maintains close relations with the ALP. The reforms will focus on lobbyists acting on behalf of foreign powers. Australia could gold-plate its system by banning foreign donations and capping all others. Instead, it could ­socialise federal elections, publicly funding candidates and levelling the playing field between the parties. As it stands, Australia is virtually alone within the Anglo­sphere in allowing large donations from foreigners. The material ­effect of all this foreign money on the electoral process is questionable. What is not in doubt is its ­capacity to erode public trust.