Pearls and Irritations

During Premier Li Keqiang’s visit to Australia in March, Australia and China signed a “Declaration of Intent” to accelerate a review of the provisions governing services trade and investment in the bilateral China Australia free trade agreement (Chafta).  So far the declaration hasn’t generated frenetic activity:  DFAT set a six month deadline for submissions from interested parties. Delay is a positive  Beijing’s decisions of late point to regress in its approach to foreign investment and Australia needs to take careful stock. 

While Australian commentators often point to a tension between our US strategic alliance and our heavy reliance on China as a trading and investment partner, they tend to overlook   that, for China, trade and particularly investment, is driven as much by strategic as commercial considerations. Before the conclusion of the China Australia free trade agreement  (Chafta), China’s access for its goods and services in the Australian market was nigh well unfettered: what mattered to it was having parity with the US when investing in Australia.

Philosophically, Australia and China occupy different solitudes regarding trade and investment. These days, not always, the underpinning attitude for Australia is free enterprise capitalism: commercially-motivated, profit- driven, private sector enterprise, pursued within a clear legal framework. Beijing’s version is state capitalism, an underpinning of autarky: investment at home and abroad directed to national priorities, improving China’s competitive advantage (often using subsidies), the aim to enhance China’s economic power and sovereignty. There is nothing new in this but Australians, Andrew Robb for example, clearly delude themselves by assuming that the logical course for China is to become more like us. In fact, China is moving in an opposite direction.

At a societal level President Xi has been emphatically reasserting the centrality of the communist party. Controls over China’s citizenry are being tightened, for example by the “great firewall” scrutinising and limiting access to the internet, and by closer monitoring of all citizenry for a “social credit score”.

So too there is regress in the economic field. China has been tightening controls on the outflow of capital including by clamping down on private sector overseas investment in property, leisure and entertainment. Now constrained are leading private firms as Beijing judges them to have been overpaying for their foreign assets and adding risk to the Chinese banking system. The specific nature of the clampdown shows that for China there is no clear cut distinction between the public and private sectors; the reach of the government extends to controlling individual private enterprise firms. In future, companies’ investment abroad should be directed to state set priorities; Premier Xi’s Belt and Road initiative, agriculture, priority industrial and technological sectors  ̶  for example the semiconductor industry.

Again, Beijing has stopped referring to the “decisive role” of the market in shaping China’s economic development. Instead, it has been amalgamating some already massive State Owned Enterprises, (SOEs) to create new national champions, entities that can operate internationally with the competitive advantage of government financial and other economic subsidies.

The recurrent experience of foreigners seeking to invest in China has been that they are pressured to provide information on their secrets and systems as part of the price on entry. One fears for Cochlear and CSL. This is now being taken a step further. According to an Angus Grigg article in last week’s Australian Financial Review, in future all foreign companies operating in China will soon be forced to hand over sensitive commercial data to Beijing a under a system directed at generating a “social credit score” for commercial enterprises as well as individuals.

More generally, while foreign investment in China is encouraged in cutting edge industrial sectors, foreign firms are squeezed out once these reach maturity, with their key technologies secured. Writing some months ago in the Australian Rowan Callick noted that China opened its mining industry to foreign investors about twenty years ago. At the peak, in 2009, there were 300 foreign mining operations in China. The number is now down to a handful. “Through a range of contrivances their services have been dispensed with.”

The bottom line from all this is that in approaching Chinese investment in Australia it’s crucial that we assess what suits Australia’s national interest and if need be put on stipulations on any such investment and require these be met. Glen Stevens, approaching retirement from the Reserve Bank, emphasised the importance of “quality investment” creating new capacity for Australia not just transferring asset ownership. That’s not easy as Chafta has already, unwisely, given China considerable latitude for its involvement in the Australian economy: pulling back will come at a cost, though China itself has no compunction about doing something similar.

The situation also requires us to be more hard-headed about some current economic shibboleths, to be more like China in a sense. For example we may well need to use taxpayer resources to get Australian developed technology up and running; to require that some part of the supply chain, in agriculture for example, remain firmly in Australian hands; to encourage joint ventures not outright ownership; to use leasehold not freehold for land access.

Australia’s vulnerability to state capitalism is compounded by our predilection for privatisation now heading into areas that should definitely remain core functions of government. The control of our ports is one example (the decision on Darwin culpable), but another recent folly is for Australian states to privatise land titling, an activity that totally depends on integrity and expertise, hence on government.

The convoluted provisions of Chafta suggest the review will be considering “investment specific State to State Dispute Settlement”. I assumed this was something China was seeking. I gather that it’s the other way round, possibly in the hope of compensating for the absence of a meaningful rule of law in China. This would be a foolish inclusion, detrimental from a commercial and a national interest perspective as it would sanction pressure on the whole bilateral relationship if it suited China’s strategic economic interests.

Trade negotiating is an abstruse process: trade negotiators tend to be left “home alone”.  It’s crucial that not be so. China’s economic philosophy is heading further away from our own. We may need policies more like theirs, nationally focussed and self-interested. It’ s certainly time the government and parliament both took a look at what the changes in Chinese economic policy imply for Australia, how we should logically respond, and protect our long term national economic interests.  Start with the Chafta review.

Greg Wood headed the North Asia Branch in the Department of Trade, the North Asia Division in the Department of Foreign Affairs and Trade, and was Deputy Secretary in the Department of Prime Minister & Cabinet.

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