By Mark Bendeich
Australia has thrown out the welcome mat to Chinese investment, but some recent decisions suggest that a genuinely warm welcome is still far from assured.
Investment experts argue that Australia's 34-year-old foreign investment regime remains murky and sometimes unpredictable, despite government claims to the contrary, and say the whole process can become a guessing game that turns away investors.
They do not expect that to change anytime soon, certainly not while the government considers the nation's biggest and most important foreign investment in decades: Chinese state-owned firm Chinalco's $19.5 billion tie-up with miner Rio Tinto.
"You almost have a perfect storm hitting," said investment expert Mark Thirlwell, referring to a flood of Chinese state capital which is raising fears that resource-hungry Beijing wants to exert influence over Australia's main export-earner, mining.
Thirlwell, of the Lowy Institute for International Policy, said the current system, which favours a "national interest" test over specified ownership limits, gave Canberra wide discretion to block sensitive deals without having to fully explain itself.
"In the current environment … that's handy," he said.
Decisions are announced in press releases that usually run to not much more than a single page, leaving investors to pore over them like amateur detectives, looking for clues on how the government will rule in future or pending cases.
Just when they think they have cracked the case, convinced an approval will be issued, they can get a shock, such as in 2001 when the government rejected a takeover bid for local oil firm Woodside by oil major Shell.
BOUNCER AT THE DOOR
The current consensus is that the government will conditionally approve Chinalco's investment, if only because a rejection would hurt ties with Australia's second-largest export customer, but the element of surprise is easy to underestimate.
Australia approves about 99 percent of large foreign investments, the vast majority being routine property purchases, but it does occasionally reject contentious deals that it deems to be against the national interest. It rarely, if ever, gives a detailed public reasoning for such decisions.
The Organisation for Economic Cooperation and Development has rated Australia's foreign investment regime as the sixth most restrictive among 43 nations surveyed, only less restrictive than China, India, Russia, Iceland and Mexico.
Australian data shows up to 10 percent of investment applications are withdrawn before decisions are made, suggesting to some experts that investors lose patience with the process.
In effect, say some experts, Australia's door is wide open but a bouncer can suddenly appear and bar entry to a particular foreign investor without a full explanation — as it did with a Chinese state-owned firm, Minmetals, last month.
In that case, Treasurer Wayne Swan shocked investors and blocked Minmetals' bid for debt-stressed miner OZ Minerals on national security grounds, saying the local firm's main mine lay too close to a weapons-testing area in the outback.
The idea the government was worried about hard-hatted Chinese geologists wandering around near a desert rocket range was simply too much for many commentators. The rumour mill started up.
Rumours included the suspicion that Australia's main ally, the United States, would have been uncomfortable with the deal because the OZ Minerals' mine, Prominent Hill, was in same vast region as a U.S. spy communications facility, at Pine Gap.
More plausibly, said a lawyer who has dealt with sensitive investment cases, the government just didn't want China to take 100 percent ownership of a major local mining company, a view shared by other experts who have studied recent decisions.
Last Thursday, Australia finally approved a revised deal whereby Minmetals would buy OZ Minerals' other mines, excluding Prominent Hill, on condition that the new Chinese owner try to keep these mines open during the current commodities downturn.
READING THE TEA LEAVES
Investors say they believe the OZ Minerals case shows the government is open to state-owned foreign investors taking minority stakes in key industries, rather than full takeovers, and will therefore approve Chinalco taking an 18 percent interest in Rio and minority direct stakes in some of Rio's local mines.
Investors banking on approval for the Rio-Chinalco deal — China's biggest single offshore investment — also point to last month's approval for another state-owned Chinese firm to take 17.55 percent of iron ore miner Fortescue Metals.
In that deal, the government imposed conditions seeking to prevent conflicts of interest between Fortescue, which prefers high iron ore prices, and the buyer, steelmaker Hunan Valin Iron and Steel Group, which prefers low prices.
That potential conflict is also at the heart of concerns surrounding the Rio-Chinalco deal, but the Fortescue decision ran to less than two pages, leaving few tea leaves to be read.
The government published guidelines in February last year, spelling out issues to be considered when weighing up investments of foreign state capital, including whether the investors were truly independent from its government shareholder.
But Jeff Rae, of trade and investment consultancy ITS Global, feels that predicting rulings on such deals remains a dark art.
"There's no definition of what's in the national interest," Rae said, adding that this uncertainty restricted investment. "It means that some proposals are not being put forward," he added.
