Chinese investment’s good, but think about security first

Scott Morrison is on the verge of making some big foreign direct investment decisions about the long-term lease of half of Ausgrid, the electricity distributor for greater Sydney, and the lease of the Port of Melbourne.

For Sydney’s poles and wires, the competition is down to State Grid, a Chinese state-owned enterprise, which is a polite way of indicating ultimate control by the Communist Party. The second bidder is Cheung Kong Infrastructure, owned by Hong Kong billionaire Li Ka-shing and already substantially invested in Australian infrastructure. Hong Kong is under increasingly intrusive control from Beijing.

The problem for the Treasurer is that Chinese investment in critical infrastructure here can no longer be welcomed as “business as usual”. China is changing how it behaves internationally and how it deals with countries such as Australia. We can’t afford to be naive about this. How we handle Chinese investment in critical infrastructure needs to be reconsidered. The starting point should be to look at the impact of China’s broader strategic and political activities in the Asia-Pacific. Under the increasingly authoritarian President Xi Jinping, China is becoming more assertive. By ignoring international law Beijing effectively has taken over the South China Sea, which is vital to Australian trade. Next month Chinese and Russian naval forces will stage a large military exercise in the South China Sea. Xi and Russia’s Vladimir Putin are putting more weight on their relationship and winning nationalistic support for their aggressive military actions.

It’s not accidental that China’s rapid island construction and militarisation of the South China Sea took place after Putin’s invasion of Crimea and proxy war in Ukraine’s eastern provinces. The tactics employed by both countries are the same: ignore international criticism and stoke domestic nationalism; start takeovers by using paramilitary and non-official forces; and consolidate gains with rapid and assertive military occupation.

Should any of this matter when it comes to considering Chinese foreign investment into Australian critical infrastructure? The answer of Australian officials until recently has been no.

At Senate committee hearings on December 15 last year senior officials said there was “nothing remarkable” about links between the Communist Party and state-owned enterprises. Treasury officials told the Senate that it was necessary “to look past” such links, “otherwise just about every company coming out of China would be defined as such”.

This may have been acceptable during the benign years of “peaceful rise”, when China focused on economic growth and followed Deng Xiaoping’s strategy to “hide our capacities and bide our time”.

Now we see greater Chinese assertion, marked more by the aggressive rhetoric of the Global Times, a Communist Party newspaper that, on July 30, editorialised that “if Australia steps into South China Sea waters, it will be an ideal target for China to warn and strike”. It’s clear there is an increase in Chinese efforts to put pressure on our political decision making.

While the Global Times editorial is not much more than nationalist sabre-rattling, it is officially sanctioned and should be read as part of an extended Chinese propaganda effort to prevent Australia from asserting an international right to freedom of navigation in the South China Sea. The propaganda effort now extends to the Chinese embassy and consulates in Australia mobilising “community groups” to protest against The Hague international tribunal ruling against Beijing’s actions in the South China Sea.

The chairman and key funder of the Australia-China Relations Institute at University of Technology Sydney, billionaire property developer Xiangmo Huang, recently editorialised in a Fairfax Media newspaper against Australia following “American pressure” to undertake patrols in the South China Sea.

Huang, reportedly a major financial contributor to Australian political parties, advised against “any knee-jerk reactions Australia may end up regretting”. The language is a little more subtle than the Global Times but the outcome is the same: to shape Australian policy more favourably towards Chinese strategic objectives.

This is the broader context against which Morrison has to make decisions about the advisability of approving Chinese foreign investment into Sydney’s electricity infrastructure and the Port of Melbourne. There is no doubt that state governments are desperate for the financial investment, but responsibility for national security rests in this case with Morrison, based on advice he presumably has received from Defence and intelligence agencies via the Foreign Investment Review Board.

Hopefully that advice will have told the Treasurer that Australia needs to be worried about the ability of so-called “malign actors” to shut down critical infrastructure by means of offensive cyber-attacks. Electricity infrastructure, for example, is run by industrial control systems that monitor and control the grid. In December last year a Russian hack on the Ukrainian grid cut power to hundreds of thousands of households and did lasting physical damage to the grid.

US analysts claim that American electricity utilities face near-constant cyber penetration efforts. Concern about this risk is held at the most senior levels of the US government. A policy statement issued mid last month by the Joint Chiefs of Staff of the US military warns that, by 2035, “the vulnerability of cyber-enabled systems presents an assailable flank which competitors are likely to probe, infiltrate and potentially attack. This contest for cyberspace will involve any digital code-enabled system that can communicate, emit, connect, or sense.”

This risk is just as sharply directed towards Australia. China may not be as advanced as the Russians in developing cyberattack capabilities designed to attack the electricity grid or other critical infrastructure, but it certainly will be working on these capabilities. Recent credible reports have pointed to a Chinese hack into the Bureau of Meteorology. While that may sound like a relatively low-interest target, it demonstrates an interest in information highly relevant to navy and air force operations and of significant economic value.

Clearly China doesn’t have to own a piece of Australian critical infrastructure to want to hack into it, but the problem for Sydney’s poles and wires is that ownership by a Chinese state-owned enterprise makes it enormously challenging to protect the security of the grid without there being a risk that Chinese intelligence services may try to exploit the connection.

A key problem to deal with is to define who has hands-on access to the hardware and software of the grid’s industrial control systems. The controls needed to provide assurance of the grid’s security will be demanding to maintain and police. It also must be asked how wise it is to potentially allow a Chinese state-owned enterprise such access to cyber defence methods and practices.

As complicated as these problems are for Australia’s foreign investment regime, our government needs to make a thoroughgoing investigation of the national security implications of Chinese investment into critical infrastructure. It also gives Canberra an opportunity to talk to Beijing about steps China must take to work as a trusted investment partner.

As the US seeks to harden its own critical infrastructure from attack, Washington will expect its allies to do the same. Foreign investment continues to be necessary and welcome, but it needs to be on the basis of Australia making informed and realistic judgments about the risk to our national security.

Peter Jennings is executive director of the Australian Strategic Policy Institute.