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
2
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 $60 billion, one outright rejection and
six with conditions
 Over the last decade there were three high-profile rejections of
which one was Anglo-Dutch, one Singaporean and one Chinese
3
Chinese investors believe that Australia
discriminates against them
 Survey by Australia’s Lowy Institute found Chinese believe
investment discrimination by Australia is driven by:
 Media driven nationalism
 Perception that state related investors are not focused on
commercial objectives
 Concerns about China as both owner and customer
 Concern with China’s growing geo-political clout
 Such perceptions stem largely from the failure of a series of
high profile resource deals
4
A serious policy debate, but we can
still laugh
5
The topics and structure of this
presentation
1
• Analyze the magnitude and structure of China’s overseas
direct investment in general and to Australia in particular
2
• Explain the workings of the FIRB and detail its track record
in approving and rejecting investment proposals
3
• Consider characteristics that make Chinese investment
different to other foreign investment to Australia
4
• Discuss the Chinalco Rio Tinto transaction as a case study to
better understand Australia’s FDI policy
Key facts relating to China’s overseas
direct investment
1
• China’s ODI has increased in recent years, but is still
much smaller than FDI (bigger recipient than investor)
2
• Australia is the largest beneficiary of China’s overseas
direct investment
3
• Mineral resources are the largest part of China’s
Australian ODI, but this is not the case overall
4
• China has encountered problems in countries other than
Australia and usually with natural resource investments
7
Over time, China has attracted far
more FDI than ODI
Value (US$ billion)
$120
$100
$80
$60
$40
$20
$0
2003
2004
2005
2006
FDI
ODI
2007
2008
2009
2010
Official data would suggest Australia
is a very minor beneficiary of China’s ODI
Share of China’s ODI
5%
4%
3%
2%
1%
0%
2003
2004
2005
2006
2007
2008
2009
2010
9
Australia is ahead of all other countries
in attracting Chinese overseas direct investment
FDI (US$ billion)
$400
$300
$200
$100
$0
Australia
USA
Nigeria
Iran
Brazil
Canada
Other
Heritage Foundation 2005-10
10
Mineral resources are a significant,
but not the largest part of China’s ODI
Share of China’s ODI
60%
40%
20%
0%
2003
2004
2005
2006
2007
2008
2009
2010
11
Iron ore and copper make up 60% of
China’s mineral resource sector ODI
100%
80%
60%
40%
20%
0%
Iron ore
Cu
Al
Pt
C
Au
Other
12
The Heritage Foundation has identified
a further US$122 billon of troubled investment
$140
$120
$100
$80
$60
$40
$20
$0
Agriculture
Energy
Finanace &
property
Metals
Technology Transport
2006 to 2010
13
Australia not the only difficult destination,
but natural resources are mostly a problem
2006
2007
Total value
(US$ billion)
34.5
13.7
Most troubled
sector
Energy
Agriculture
Most troubled
destination
Iran
Philippines
2008
2009
33.2
33.1
Finance
Metals
Germany
Australia
2010
7.6
Metals
USA
14
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
15
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
16
Its Australian investment is growing,
but China is still a relatively small investor
2007
29%
9%
2008
26%
17%
2009
22%
11%
2010
28%
21%
China
2%
4%
15%
12%
Japan
Singapore
Europe
3%
12%
27%
3%
6%
34%
12%
1%
24%
4%
3%
31%
Asia (other)
7%
7%
18%
10%
USA
UK
No of transactions not value
17
Even on a value basis, China is a
significant but not the largest investor
Share of FDI (A$ billion)
$160
$120
$80
$40
$0
USA
UK
China
Japan
Switzerland
Other
18
A sample of China’s biggest Australian deals
Date
Target
Acquirer
Value (US$ m)
March 10
April 09
April 09
Feb 09
Arrow Energy
Felix Resources
Mining assets
Fortescue
Petro China
Yanzhou Coal
Minmetals
Hunan Valin
A$3,500
$2,755
$1,386
$765
March 08 Oil & gas assets
March 09 Mining assets
Feb 08
Soco Yemen
Feb 08
Aug 08
Aug 09
China Petrochemical $560
China Metallurgical $515
Sinochem
$465
Mining assets
China Metallurgical
Mining assets
Shenhua
Aquila Resources Baosteel
$370
$261
$237
FIRB approvals ($ billion)
FIRB approvals involving mineral
resources represent 56% of all approvals
$18
$15
$12
$9
$6
$3
$0
Mineral
resources
Real estate
Resource
processing
Services
Manuf.
20
About half of China’s FIRB approvals
involve mineral resources
FIRB approvals ($ billion)
$15
$12
$9
$6
$3
$0
Mineral Real estate Resource
resources
processing
Services
Manuf.
Agriculture
Finance
Tourism
21
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
22
Analysis of FIRB annual reports reveals
the vast majority of proposals are approved
Rejected totally
Approved
Unconditionally
With conditions
2007
0.03%
99.97%
90.00%
10.oo%
2008
0.10%
99.9%
85.0%
15.00%
2009
0.03%
99.97%
75.0%
25.00%
2010
0.04%
99.96%
90.0%
10.00%
23
Australia does not rank too badly on the
OECD FDI restrictiveness index, but China…
1=Closed,0=Open
0.500
0.375
0.250
0.125
0.000
China
Non
OECD
Australia
Brazil
World
USA
OECD
24
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
25
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).
26
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
27
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
28
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
29
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
<50% and minority board representation. China controls >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% nonvoting Singapore Government ownership in SGX
30
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
31
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
32
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
33
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
34
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
35
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
36
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
37
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
38
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?
39
Chinese perceptions are driven by
several high profile failures
40
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
41
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
42
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
43
Urandaline Investments
PO Box 100, Biggera Waters
Queensland 4216
Australia
Phone+61-7-5528-5595 Cell +61-409-198-173
ChinaMetal@Urandaline.com.au
www.Urandaline.com.au
44
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
45
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
46
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
47
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
48
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
49
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
50
51