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2 Who is Clive Palmer and why is he saying these things? “The Australian government has racially discriminated against (China) and stopped them from investing.

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Presentation on theme: "2 Who is Clive Palmer and why is he saying these things? “The Australian government has racially discriminated against (China) and stopped them from investing."— Presentation transcript:

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2 2 Who is Clive Palmer and why is he saying these things? “The Australian government has racially discriminated against (China) and stopped them from investing in Australia…They've brought in things like the Foreign Investment Review Board in Australia, which is an outstandingly racist legislation designed to slow down Chinese growth, and it's a national disgrace” Clive Palmer The Australian 29 September 2009

3 3 The facts do not support a racist policy which discriminates against Chinese investors  In the past 4 years the FIRB has approved around 230 Chinese investments worth some $60 billion, one outright rejection and six with conditions  Over the last decade there were three high-profile rejections of which one was Anglo-Dutch, one Singaporean and one Chinese

4 4 Chinese investors believe that Australia discriminates against them  Survey by Australia’s Lowy Institute found Chinese believe investment discrimination by Australia is driven by:  Media driven nationalism  Perception that state related investors are not focused on commercial objectives  Concerns about China as both owner and customer  Concern with China’s growing geo-political clout  Such perceptions stem largely from the failure of a series of high profile resource deals

5 5 A serious policy debate, but we can still laugh

6 The topics and structure of this presentation 1 An aly ze th e m ag nit ud e an d str uc tur e of Ch in a’s ov er se as dir ec t in ve st m en t in ge ne ral an d to Au str ali a in pa rti cul ar 2 Explain the workings of the FIRB and detail its track record in approving and rejecting investment proposals 3 Consider characteristics that make Chinese investment different to other foreign investment to Australia 4 Discuss the Chinalco Rio Tinto transaction as a case study to better understand Australia’s FDI policy

7 7 Key facts relating to China’s overseas direct investment 1 China’s ODI has increased in recent years, but is still much smaller than FDI (bigger recipient than investor) 2 Australia is the largest beneficiary of China’s overseas direct investment 3 Mineral resources are the largest part of China’s Australian ODI, but this is not the case overall 4 China has encountered problems in countries other than Australia and usually with natural resource investments

8 Over time, China has attracted far more FDI than ODI

9 9 Official data would suggest Australia is a very minor beneficiary of China’s ODI

10 10 Australia is ahead of all other countries in attracting Chinese overseas direct investment Heritage Foundation

11 11 Mineral resources are a significant, but not the largest part of China’s ODI

12 12 Iron ore and copper make up 60% of China’s mineral resource sector ODI

13 13 The Heritage Foundation has identified a further US$122 billon of troubled investment 2006 to 2010

14 14 Australia not the only difficult destination, but natural resources are mostly a problem Total value (US$ billion) Most troubled sector Most troubled destination EnergyIran AgriculturePhilippines FinanceGermany MetalsAustralia MetalsUSA

15 15 Summary of key issues relating to China’s Australian bound ODI 1 While its level of investment is growing, China is still a minor player in Australia’s FDI 2 Almost all the proposals submitted to the FIRB are approved, though some have conditional obligations 3 Minerals resources account for 56% of Australia’s FDI, but almost all of Chinese investment 4 Mineral resources differ significantly from other forms of investment

16 16 FIRB statistics not a reliable indicator of Australia’s foreign investment inflows  Data do not cover investments below legislated thresholds  Includes proposals that are approved in a given year, but may not be actually implemented or could be implemented in a later year or over a number of years  Can include approvals for multiple acquirers of the same target asset  Because of time, I have not been able to access additional data published by Australian Bureau of Statistics

17 17 Its Australian investment is growing, but China is still a relatively small investor USA29%26%22%28% UK9%17%11%21% China2%4%15%12% Japan3% 12%4% Singapore12%6%1%3% Europe27%34%24%31% Asia (other)7% 18%10% No of transactions not value

18 18 Even on a value basis, China is a significant but not the largest investor

19 A sample of China’s biggest Australian deals DateTargetAcquirerValue (US$ m) March 10Arrow EnergyPetro ChinaA$3,500 April 09Felix ResourcesYanzhou Coal$2,755 April 09Mining assetsMinmetals$1,386 Feb 09FortescueHunan Valin$765 March 08Oil & gas assetsChina Petrochemical$560 March 09Mining assetsChina Metallurgical$515 Feb 08Soco YemenSinochem$465 Feb 08Mining assetsChina Metallurgical$370 Aug 08Mining assetsShenhua$261 Aug 09Aquila ResourcesBaosteel$237

20 20 FIRB approvals involving mineral resources represent 56% of all approvals

21 21 About half of China’s FIRB approvals involve mineral resources

22 22 Mineral resources differ significantly from other forms of investment  Usually associated with economic rents  Involve a wasting resource  Capital intensive and asset specific investment  In many countries, including Australia, minerals are owned by the people  Transfer pricing is an issue:  Opaque global prices  Intermediate products and integrated companies

23 23 Analysis of FIRB annual reports reveals the vast majority of proposals are approved Rejected totally0.03%0.10%0.03%0.04% Approved99.97%99.9%99.97%99.96% Unconditionally90.00%85.0%75.0%90.0% With conditions10.oo%15.00%25.00%10.00%

24 24 Australia does not rank too badly on the OECD FDI restrictiveness index, but China…

25 25 Summary of key issues relating to the administration of Australia’s FDI 1 Australia has a long tradition of accepting foreign investment, especially in the resources sector 2 A clearly defined approval process, with the final decision made by a politician, however rejection is rare 3 Entities with >15% foreign government ownership are subject to lower thresholds and additional criteria 4 Investments are approved if they are found to be in Australia’s national interest

26 26 Because of the benefits, Australia has always welcomed foreign investment  From settlement in 1788, the development of Australia’s mineral resources have depended on foreign capital and technology  Almost all of the great Australian mines have been developed because of the availability of foreign capital and technology  Foreigners own 50 to 70% of Australia’s mining industry  While Australia now has the technology, it still is very dependent on foreign capital AND markets  Foreign investment must ultimately benefit Australia’s long term interests i.e. National Interest Test (Net benefit in Canada)  Beijing’s own restrictive FDI policy confirms that, like Australia it has a national interest test. (Coca-Cola and Carlyle).

27 27 Understandably, the national interest is an opaque standard that changes over time  Introduced in 1986  Burden of proof rests with the Government NOT the investor  According to Treasurer Swann, reasons include:  Preserving national security  Preserving government revenue  Investor will not respect Australian law and business practice  Reduce competition or result in excessive competition  Consistent with government policies  Character of investor  Rarely used but basis for rejecting Shell, Lynas, WISCO and SGX

28 28 Current regulations regarding foreign investment are detailed in the FAT Act (1975)  Foreign Acquisitions and Takeovers Act (1975) requires investors obtain approval to acquire > 15% of a company worth > $219 m  FTA with US means higher thresholds for US companies  Irrespective of size, entities owned >15% by a foreign government require approval  Sensitive areas include media, banking, telecommunications, civil aviation and real-estate for which there are special rules  Decision made by Treasurer (political decision) on FIRB advice  30 days to make a ruling but can be extended to 90 days  Process seems to be flexible with each case examined on its own merits while consultation is welcomed

29 29 Applications are becoming more complex and require more than the maximum 90 days  If likely to exceed 90 days applicants are asked to withdraw and resubmit applications  No comprehensive data on withdrawn applications nor withdrawn and resubmitted, but FOI fillings show no obvious bias against Chinese investment  Between November 2007 and January 2011, 349 proposals withdrawn of which 66 were from China (15 government) and 35 from USA  During 2010, 10o withdrawn of which 6 from China (5 government) and 11 USA  High proportion of withdrawals in early years could reflect lack of familiarity with the process

30 30 Not in the national interest, but very reasonable grounds for outright rejections  2001: Shell additional stake in the Woodside LNG JV rejected by Treasurer (sic.) because of the belief that further development could be sacrificed for other Shell projects  2009: China Nonferrous Metal Mining Group proposed 51.66% stake in rare earth hopeful Lynas rejected unless reduced to 95% of market and acquisition would reduce competition Withdrawn  2009: WISCO’s planned purchased of Western Plain Resources iron ore project rejected because of close proximity to Wommera  2011: SGX takeover of much larger ASX rejected because of perceived loss of economic and regulatory sovereignty. 23% non- voting Singapore Government ownership in SGX

31 31 Applications from foreign government entities are judged on additional criteria  Entities include companies as well as sovereign wealth funds  The extent an investor’s operations are independent from the foreign government  Whether the investor is subject to adequate regulation in other jurisdictions  That the investment not hinder competition or lead to undue concentration or control in the relevant industry sector  Investment taxed same way as other commercial entities  Investment will not impact Australia’s national security  Whether the investment impact Australian exports, research etc

32 32 Summary of key arguments for treating Chinese entities differently 1 Most Chinese investment involves SOEs where no clear distinction between commercial and political objectives 2 Chinese entities increase the possibility of transfer pricing between related entities 3 Reciprocity: foreign companies, including Australian cannot invest in China’s resource industry 4 SOEs etc have little experience in operating with open society multi-stakeholder and strong institutions

33 33 Chinese companies are different from most other enterprises investing in Australia  Vast majority (95%) of Chinese investment involves SOEs where there is no clear line between commercial and political objectives  Many Chinese investors have little experience with the administrative processes associated with rule of law jurisdictions so have difficulty working with the FIRB process  Transfer pricing is a problem in the mining industry and more so with integrated companies and state owned enterprises

34 34 Reason to believe that SOEs sacrifice commercial efficiency for political imperatives  NDRC selection of Chinalco to thwart BHP move on Rio confirms political interference and suggests that Beijing does not want companies to compete with each other outside of China  Party secretary is the most important position in an SOE and it is usually a joint appointment with the enterprise chairman.  Party personnel department controls political and commercial appointments

35 35 There are many cases where the Party rotates people between industry & government  Wei Liucheng from CNOOC to Hainan Governor  Zhang Qingwei from Aerospace to Minister of Technology  Guo Shengkun from Chinalco to vice-governor Guangxi (now Party General Secretary)  Xiao Yaqing from Chinalco to State Council where he is secretary to Vice Premier, Zhang Kejiang  Li Xiaopeng from Huaneng to vice-governor Shanxi  Fu Chengyu from CNOCC to Sinopec

36 36 Even the largest Chinese companies are not experienced at operating outside China  When operating in China, SOEs really have only one, but very powerful stakeholder  The large number of Chinese projects withdrawn from the FIRB system in 2007 and 2008 suggests a learning process  Chinese companies seem to have shifted from criticizing the FIRB to complaining about compliance over environment, heritage and labor regulations  Overseas problems (Ramu, Chambishi etc) can be traced to attempts at replicating the China model i.e. confining negations to political elite while ignoring local stakeholders

37 37 Even outside China, national strategic objectives seem to trump commercial objectives  Hanlong chairman (Liu Han) reported as saying Beijing backs his takeover of Sundance Resources (ASX) as it would give China an opportunity to influence the price of iron ore  Similar statements by Shen Heting regarding MCC’s involvement in the Sino Iron project in WA  Representatives of government organizations ranging from CISA to the NDRC supported Chinalco’s move on Rio because it would lower the price of iron ore  The mining industry affords ample opportunity for transfer pricing and it is hard to police infringements  A Chinese SOE increases the risk of transfer pricing

38 38 Sino Iron project demonstrates Chinese can bring their own perils with them  CITIC Pacific purchased Cape Preston project from Palmer in 2006 for $200 million  Planned cost of $1.4 billion and 2009 delivery blown out of the water because CITIC’s partner, MCC has no Australian (developed country?) experience  Problems being solved by employing more labor and MCC critical of Australian Government for not approving import of laborers from China  MCC has suggested that problems with their project stem from Australians managing Australians

39 39 Lack of reciprocity is a reasonable argument against Chinese resource FDI  Much of China’s mining industry is out of bounds to foreign investors, including Australians  Outside the resource sector, China is also very tough on foreigners wanting to invest in its local companies. Coca-Cola and Huiyuan Juice, Carlyle and Xugong  China’s discrimination is a powerful rallying point for nationalists  Because China discriminates against foreigners, does this make China racist?  Rosen and Hanemann argue that China has grown stronger by opening its doors wider FDI and US should do the same. But is Australia different? Are resource investments different?

40 40 Chinese perceptions are driven by several high profile failures

41 41 Summary of the key issues surrounding the Chinalco transaction with Rio Tinto 1 Rio Tinto under significant financial pressure following disastrous purchase of Alcan 2 Chinaclo’s (an SOE) initial proposal to increase its Rio stake was approved, subject to some conditions 3 Proposal withdrawn when bailout plan collapsed under shareholder opposition and improved financial markets 4 Treasurer never had to decide on various strategic alliances

42 42 The Rio Tinto-Chinalco transaction is widely known but not well understood  During GFC Rio came under significant financial pressure because it overextended to purchase Alcan  Rio’s circumstances compounded by a hostile bid from BHP  In a daring and well executed share market raid, Chinalco snapped up 9% of Rio to become its largest shareholder.  Chinalco (an SOE) and NOT Chalco the listed subsidiary  Chinalco threw Rio a lifeline in exchange for additional shares, board representation and strategic stakes in a number of key operations  Chinalco permitted to grow to 14.99%, subject to not raising it again without fresh approval and not seeking a board position

43 43 Chinalco’s planned alliance with Rio Tinto failed because the deal was unsound  Fierce opposition from Rio shareholders who were annoyed with their management and were positioning to vote it down  Improved financial climate confirmed that Rio could improve its balance sheet with shareholder equity  Proposal withdrawn so FIRB did not have to make a decision, but approval given to Chinalco increasing its stake in Rio up to 14.99% and not seeking to appoint a director

44 44 Urandaline Investments PO Box 100, Biggera Waters Queensland 4216 Australia Phone Cell

45 45 Minemtals’ legally enforceable conditional approval protects national interest  Operate as a separate business with commercial objectives, HQ in Australia and managed locally  Sales team based in Australia with arm’s length pricing  Maintain or increase production at nominated mines subject to economic conditions  Comply with Australian IR laws and honour employee entitlements  Maintain and increase levels of indigenous employment

46 46 Hunan Valin share holing in FMG also has enforceable undertakings  Hunan’s Board nominees will comply with FMG’s director’s code of conduct as well as submitting a standing notice on potential conflict of interest relating to marketing, sales, pricing, costs etc  Hunan and any person nominated to FMG Board will comply with information segregation arrangements

47 47 Yanzhou Coal’s purchase of Felix Resources is another conditional transaction  Acquisition through Yancoal, an Australian subsidiary  Two Australian directors  Yancoal to list in 2012 at which time Yanzhou to reduce stake to 70%  Arm’s length dealing on coal sales to China

48 48 Process  Confidentiality can be justified on basis that some applications seek advance approval for possible investments that have yet to be revealed to the stock market

49 49 Chinese companies have come a long way since the failed Noranda deal  2004 Minmetals US$4 billion bid for Noranda which foundered on Canadian opposition and decision paralysis by NDRC  Acquisition completed in September 2005 by Xstrata for US$19.2  In past 4 years FIRB has approved 230 Chinese investments worth $60 billion, no outright rejections, but 6 with conditions  Foreign exchange reserves are no longer an issue and decisions made by NDRC and not State Council

50 50 Australian companies have not been active investors in China  Australian investment in China is a paltry $11 million  Services make up 70% of the Australian economy and China has yet to open this area to foreign investors

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