George Gilligan & Megan Bowman
Senior Research Fellow & Research Fellow
Centre for Law, Markets & Regulation
What's the State of Play?
The Effects of State Capital Investment in
Australia
and Regulatory Implications
Structure of Paper
• Introduction – State Capital and the
Changing Global Economy
• International Regulatory Issues
• Inward Capital Investment to Australia
• Researching State Capital: A Snapshot
from Ground Level
Introduction – State Capital and the Changing Global
Economy 1
• Globalisation - ↑ Interdependence between jurisdictions & ↓ economic
sovereignty?
• Globalisation further elevates national deficits & surpluses → ↑macroeconomic imbalances
• Absolute centrality of political economy issues regarding State Capital
• State Capital – Back To The Future?
• Gunboats & Redcoats & Linkages of Investment Capital: State
• East India Company (EIC) - 1600
• Dutch East India United Company - Verenigde Oostindische
Compagnie (VOC) -1602
• Hudson Bay Company (HBC) - 1670
Introduction – State Capital and the Changing Global
Economy 2
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•
•
•
•
•
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Contemporary state capital actors do NOT play EIC, VOC or HBC
militaristic/governmental role but DO facilitate sovereign’s economic & political
influence
↓ liquidity on capital markets & ↑ strategic importance of state capital as sources of
liquidity with longer-term investment horizons
GFC fall-out, e.g. nationalising/part-nationalising failing banks;
Entwined regulatory/investment role of the state becomes more cloudy
Potential conflicts as:
an active investment actor;
a detached and independent regulator;
a recipient of inward investment from both state and non-state sources; and
the promoter of the national interest
West → East global imbalances & ↑ of China, e.g. foreign reserves
$21 bn in 1992, 5% of GDP → $31 bn in 2012, 45% of GDP
Introduction – State Capital and the Changing Global
Economy 3 - % share of global GDP
(Jorgensen & Vu 2010)
2010
2020
China
13.92%
20.08%
US
20.14%
17.44%
G7 (Canada, France,
Germany, Italy, Japan,
UK & US)
40.62%
33.30%
Asia 7 (China, Hong
Kong, India, Indonesia,
Singapore, South Korea
& Taiwan)
25.16%
33.18%
China as % of Asia 7
GDP
55.35%
60.52%
US as % of G7 GDP
49.59%
52.39%
Introduction – State Capital and the Changing Global Economy 4 - Actual and
projected top 20 economies based on GDP in PPP terms (PwC Economics, 2013)
2011
2030
PPP rank
Country
GDP at PPP
(2011 US$bn)
Country
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
US
China
India
Japan
Germany
Russia
Brazil
France
UK
Italy
Mexico
Spain
South Korea
Canada
Turkey
Indonesia
Australia
Poland
Argentina
Saudi Arabia
15,094
11,347
4,531
4,381
3,221
3,031
2,305
2,303
2,287
1,979
1,761
1,512
1,504
1,398
1,243
1,131
893
813
720
686
China
US
India
Japan
Russia
Brazil
Germany
Mexico
UK
France
Indonesia
Turkey
Italy
Korea
Spain
Canada
Saudi Arabia
Australia
Poland
Argentina
Projected
GDP at PPP
(2011 US$bn)
30,634
23,376
13,716
5,842
5,308
4,685
4,118
3,662
3,499
3,427
2,912
2,760
2,629
2,454
2,327
2,148
1,582
1,535
1,415
1,407
2050
Country
China
US
India
Brazil
Japan
Russia
Mexico
Indonesia
Germany
France
UK
Turkey
Nigeria
Italy
Spain
Canada
South Korea
Saudi Arabia
Vietnam
Argentina
Projected
GDP at PPP
(2011 US$bn)
53,856
37,998
34,704
8,825
8,065
8,013
7,409
6,346
5,822
5,714
5,598
5,032
3,964
3,867
3,612
3,549
3,545
3,090
2,715
2,620
Introduction – State Capital and the Changing Global
Economy 5 (DFAT, 2013)
Australia's top 10 two-way trading partners 2011 ($ billion)
Goods(a)
Services(b)
Total(c)(d)
% Share
1 China
113.6
7.4
121.1
19.9
2 Japan
68.4
4.0
72.5
11.9
3 United States(e)
38.1
16.1
54.2
8.9
4 Republic of Korea
30.4
2.2
32.7
5.4
5 Singapore
20.5
7.1
27.7
4.6
6 United Kingdom
14.3
8.7
23.0
3.8
7 New Zealand
15.3
6.3
21.6
3.5
8 India
17.5
2.9
20.3
3.3
9 Thailand
15.2
3.3
18.5
3.0
10 Malaysia
13.1
3.0
16.0
2.6
Total two-way trade(b)
499.1
109.1
608.2
100.0
APEC(e)
367.7
63.9
431.6
71.0
ASEAN10
68.4
19.9
88.4
14.5
EU27(c)
60.0
21.3
81.4
13.4
OECD(c)(e)
225.9
55.0
280.9
46.2
of which:
Introduction – State Capital and the Changing Global
Economy 6 (Coleman, 2013 using SWFI data)
Introduction – State Capital and the Changing Global
Economy 7 – Measurement Issues
• The figure for China's largest fund "is a best guess estimation”
• Discourse on state capital - some parallels with the discourses on white
collar crime and financial crime, e.g. both heavily reliant on “best guess
estimations” as well as:
• definitional & classification uncertainty;
• diffusion of effects;
• powerful actors not welcoming scrutiny;
• problematic re gathering hard data → measurement difficulties;
• so difficult to evaluate regulatory responses;
• empirical uncertainty symbiotic with ambiguity & ambivalence re state
capital?
Introduction – State Capital and the Changing Global
Economy 8 - Sovereign Wealth Funds (SWFs)
• Wide rage of definitions re SWFs, e.g.:
• Lowery (2007): ‘..a government investment vehicle which is funded by
foreign exchange assets, and which manages these assets separately
from official reserves.’;
• IWGSWF [now IFSWF] in their GAPP (2008): ‘SWFs are defined as
special purpose investment funds or arrangements, owned by the
general government.
Created by the general government for
macroeconomic purposes, SWFs hold, manage or administer assets to
achieve financial objectives, and employ a set of investment strategies
which include investing in foreign financial assets.’
• Jen (2007) SWFs have five basic ingredients: i) sovereign; ii) high
foreign currency exposure; iii) no explicit liabilities; iv) high risk
tolerance; and v) long investment horizon.
Introduction – State Capital and the Changing Global
Economy 9 – SWF Operators
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Extremely diverse, e.g.:
authoritarian one party states;
sophisticated democracies;
highly developed European oil/gas exporters (e.g. Norway, Russia)
less developed oil/gas exporters in the Middle East (e.g. UAE, Kuwait);
manufacturing/trading entrepots in Asia (e.g. China, Korea Singapore);
broad-based commodity exporters (e.g. Australia, Chile);
smaller emerging economies (e.g. Mauritania, Uzbekistan).
SWFI (2013): 40% in Asia; 35% in the Middle East; 17% in Europe; 3%
in Africa; 3% in the Americas; and 2% in other areas of the world.
Introduction – State Capital and the Changing Global Economy 10 –
State Capital & Regulatory Environments
• State capital actors likely to become more prevalent & larger
• ↑ly influential recyclers of global finance but shaped by global
macroeconomic imbalances themselves
• Post GFC = lower returns in investment returns in developed
economies → state capital as ↑ conduits → emerging markets
• Post GFC = global appetite for risk ↓
• Regulatory trends → ↓ emphasis on light touch regulation
• The state to be an ↑ly active investor in financial markets &
• ↑ly active overseer of their design and regulation (e.g. G20, FSB)
1
International Regulatory Issues 1
• State capital ↑ly varied & aggressive in their investment strategies → ↑
fears of financial protectionism in recipient countries
• e.g. US Dubai Ports World (2006) – Bush administration approved deal,
but rejected by House Panel 62: 2 (March 2006)
• Management of seaports already foreign owned by P & O (UK), media
pressure: public hostility: protectionist sentiment
• 2008 → Confluence of GFC: liquidity shortages: state capital
(especially SWFs) as liquidity sources: multi-lateral regulatory activism
of SWFs themselves (facilitated by IMF & World Bank)
• May 2008 – Washington DC = 25 SWFs → IWG
• October 2008 – Santiago = Generally Accepted Principles and Practices
(GAPP) – The Santiago Principles
International Regulatory Issues 2
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Kuwait City – April 2009 IWG evolved → International Forum of Sovereign
Wealth Funds (IFSWF)
July 2011 – IWFSWF Members Survey (80% participation): ‘..it was not
reasonable or possible to expect uniform compliance with the GAPP from all
IFSWF Members.’ = Reflection of political reality?
Can top-down regulatory infrastructure work?
E.g. OECD Multilateral Agreement on Investment (MAI) in 1998
OECD Members bound by agreements such as Declaration on International
Investment and Multinational Enterprises & Code of Liberalisation of Capital
Movements, BUT Non-Members are not → gaming of protocols
So intermediation NOT new regulatory institutions?
Evolutionary approach congruent: market realities & ↑ process legitimacy?
International Regulatory Issues 3 –
Beauty Parades 1 (Spa, Belgium 1888)
International Regulatory Issues 4 –
Beauty Parades 2 (Wodaabe Tribe Niger)
International Regulatory Issues 5 –
Beauty Parades 3
• Competitive ‘regulatory beauty parade’ environment as recipient
jurisdictions compete for capital, regulatory infrastructures are a
crucial part of that competitive process
• Some regulatory uniformity, e.g. G20/FSB measures
• Recipient country approval regimes → monitoring & partial control of
inward investment, legitimate protection of national interest
• State capital actors as downstream users of commodities, acquisition
of foreign assets → implications for recipient countries re:
• corporate governance; competition & tax policies.
• Australia Senate Economics References Committee (2009): best way to
regulate foreign investment is ‘robust domestic legislation.’
• Continuing balancing act of robust legislation: beauty parade….
2
Inward Capital Investment to Australia 1
• Foreign Acquisitions and Takeover Act 1975 (Cth) (FATA) & Foreign
Investment Policy administered by the Foreign Investment Review
Board (FIRB) - a non-statutory body
• FIRB’s functions advisory only, decision-making with the Treasurer.
• Ongoing authorisation (effectively a delegation) = 94% + proposals
decided under this delegated authority (FIRB 2011-2012)
• Little controversy, rejection statistically low, e.g. FIRB 2010-2011:
• 10,865 applications; 10,293 approved 43 rejected, 390 withdrawn; 139
deemed exempt
• Real estate dominant: 9,771 of the approvals & 42 of 43 rejections
• Until recently little controversy, really only rejection of Shell’s 100%
acquisition of Woodside (2001)
Inward Capital Investment to Australia 2
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Recent years = ↑ high profile coverage of Chinese investment in Australia especially
regarding resources assets (scaremongering?). For example:
2008 - Chinalco : Rio Tinto
2009 - China Minmetals Non-Ferrous Metals Co Ltd acquisition of Oz Minerals (issues
re Prominent Hill Mine in Woomera Prohibited Area)
Treasurer Wayne Swan imposed restrictions in both Chinalco & Minmetals cases
2012 Huawei prevented from significant tendering in National Broadband Network
(NBN).
Jingoism always lurking in the DNA of Australia’s inward investment discourse?
‘The Foreign Acquisitions and Takeovers Act was put in place in 1975, when there was a
huge backlash against Australia being sold off to the Japanese.’ (FIRB Chair Brian
Wilson – 2012)
‘..talks on a free-trade deal with China have stalled because of a dispute over restrictions
on investment in Australia by Chinese state-owned enterprises.’ (Trade Minister Craig
Emerson – April 2013)
Inward Capital Investment to Australia 3
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FIRB Approved Proposed Investment: 2011/12
(Deal Value in $Aus billion & Number of Contracts)
Total Deal Value = 170.71 $Aus billion
Total Number of Contracts = 10,703
Sources: FIRB Annual Report 2011/12
Top 5 countries by proposed
investment value
U.S.A
United Kingdom
China
Japan
Canada
36.613
20.343
16.190
13.920
8.871
268
1,018
4,752
324
131
3. Researching State Capital:
A snapshot from ground level
3.1 Context: Foreign acquisition by SOEs - a contentious issue
• Strength of State capitalism
- SOE capitalisation = significant element in 3 of the BRIC countries;
- One third of FDI from emerging economies 2003-2010 = SOE
Share of SOE capitalization on the MSCI national stockmarket index: % of total, June 2011
Source: The Economist, 21 January 2013.
Context, cont.
• Weakened state of Liberal Capitalism
- Vulnerability of several advanced economies post-GFC
• Several high-profile acquisitions & investments
- Qantas/Emirates 2013
- CNOOC/Nexen 2012
- Abu Dhabi/Chrysler Building 2008
 Questioning of liberal capitalism; and
Concerns re diminution in home-state ownership of national
resources & entities.
Context, cont.
Concerns focus specifically on foreign SOE acquisition.
• Exemplified in media headlines:
China's state-owned enterprises
obtain FIRB approval by stealth
The Australian March 13, 2013 12:00AM
Don't mix politics and deals:
FIRB in warning to state-owned investors
The Australian August 7, 2012 7:00AM
Context, cont.
...policy guidelines:
Eg. Revised Canadian investment policy guidelines:
• Investors “expected to address…the inherent characteristics of
SOEs, specifically that they are susceptible to state influence”
 projects are commercial & free from political influence.
...and political decisions:
• Aust govt: exclusion of Huawei from National Broadband
Network bidding (2012)
• US govt: prohibition of Ralls Corporation from owning wind
farms in Oregon (2013)
Context, cont.
• Intrinsic nature of an SOE:
eg. Clarke and Howson (2012) on Chinese SOEs
 Feeds media sensationalism and influences political discourse
But is there documented cause for concern?
• Assumption = inward investment by SOEs (particularly China) is
statistically dominating the Australian landscape
• Reality = lack of readily accessible empirical data on exactly
where SOEs vs. non-SOEs are investing:
Which jurisdictions? Which sectors? Which entities?
3.2 Our Research Goals
(1) Source empirical data on Chinese SOE vs. Non-SOE investment
 readily accessible one-stop database
(2) Research individual Chinese SOE companies  where else
investing?
(3) Make well-founded mid-term predictions about likely materiality
of Chinese SOE investment into Australia
 cross-compare and evaluate the current Australian regulatory
regime
 provide evidence-based recommendations for optimal
regulatory design.
3.3 Initial stage – data gathering & challenges
• Aim:
produce a longitudinal table - incidence of Aust approvals of
Chinese investment by sector differentiating between SOE and
non-SOE investors
• Process 
has revealed surprising gaps, inconsistencies and methodological
challenges for researchers of state capital.
3.4 Initial stage & challenges, cont.
• Multiple sources: Chinese, Australian, international
• Starting point = FIRB but no breakdown of SOE: non-SOE
• Extracting that level of detail from other sources, incl:
-
ABS, NBS
DFAT
OECD, IMF
Heritage Tracker,
Media
KPMG, Deutsche Bank
MOFCOM, SASAC.
 (1)
Datasets are not easily compared
Examples of differences between sources
Source
Currency
Label
Deal value
Deal Type
Locale
FIRB
AUD
“Approved
proposed
investment”
<AUD1mn;
>AUD2bn
-All deals that
require federal
approval
-Changing
Thresholds
Excludes SARs
& Taiwan
ABS
AUD
Actual
investment
All actual flows
All deals above
10% equity
threshold
Excludes SARs
& Taiwan
KPMG
USD
? Actual
investment
>USD5mn
-M&A
-Jt ventures
-Greenfield
-Equity
acquisitions that
result in foreign
ownership
Subsids & SPVs
based in HK,
Singapore,
“other
locations”
NBS
RMB
? Actual
investment
>RMB1mn
-
Excludes SARs
& Taiwan
MOFCOM
USD
“Actualized
investment”
?
Equity & “other
investments”
Excludes SARs
& Taiwan
Global Tracker
USD
Actual
investment
>USD100mn
All deals, excl
bonds.
-
(2) SOE investment data for Australia:
state/territory, sector, industry, entity?
• Traditional areas of SOE investment: natural resources, utilities,
telcos, defence.
• KPMG 2013: Chinese SOE diversification towards other sectors
& away from natural resources & mining
• Lee 2012: Chinese SOEs now operate in all major sectors
• Marchick & Bowles 2011: growth of small private coys.
• Heritage Foundation’s China Global Investment Tracker
- Limitations  triggers methodological caveats outlined above.
- BUT can further investigate data to reveal insights about SOE
investment in Aust.
Company
Enterprise
type
Sector (sub sector)
Accumulated value
2005-2012
US$ millions
Chinalco
SOE
Metals (aluminum)
14,300
Yanzhou Coal
SOE
Energy (coal)
6,590
Sinopec
SOE
Energy (gas & oil)
3,070
CITIC
SOE
Metals (steel), Energy (coal)
3,020
Minmetals
SOE
Metals
2,960
Guangdong/CDB
SOE
Metals
2,280
CNOOC
SOE
Energy (gas)
2,200
Datang/Boading
SOE
Energy (alternatives)
2,030
Sinosteel
SOE
Metals (steel)
1,460
China Metallurgical
SOE
Metals (steel)
1,090
Total
39,000
4. Conclusion
• Post-GFC world: rising economic power of Asian countries
 changing perceptions of appropriate levels of state-directed
investment activity
 changing trends in composition of the global economy.
• Highlighted significant trends & strategic importance of state
capital
 national/ international policy development must be
underpinned by accurate data.
• Methodological challenges associated with evaluating the extent
and impact of investment by state capital actors
 important process to chart these developments.