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Foreign investment by state owned entities

CHAIR —I now welcome witnesses from the National Civic Council. Mr Westmore and Mr Byrne, do you wish to make any opening statements?

Mr Westmore —Yes, thank you. Our concern is with the state owned enterprises investing or buying corporations in Australia. We believe that there should be strategic industries, including oil and gas, iron ore, uranium, coal, banking and media where acquisition—that is the purchase of Australian companies—should be prohibited. We believe that foreign state owned enterprises should be able to take a shareholding in those strategic industries up to 14 per cent. In other industries—other important industries—we believe that foreign ownership should be restricted to 49 per cent, except where it could be shown to be in Australia’s national interest to permit a higher concentration.

Mr Byrne —Part of our submission has dealt with the issue of Australia’s own economic vulnerability, particularly in the time of a crisis like we are facing at the moment world wide. I would like to refer to the committee—just for their interest—to the UK Financial Times of 16 June, and an article by Martin Wolf, the editor. It very significantly tracked the stages of this current worldwide recession and compared it to 1929. Mr Wolf said there were certain frightening similarities. I would be happy to provide that to the committee.

CHAIR —If you would that would be appreciated.

Mr Byrne —It is based on research by several researchers looking at tracking industrial output, trade volume, fiscal balances and money supply since the onset of this worldwide recession and compares it to the similar time around 1929. He used the words ‘rather frightening similarities’, although there is a different array of policies being put in place now compared to that time. Secondly, I would like to draw the committee’s attention to the Financial Review, front page of 18 June, where our Australian banks’ chiefs have warned on the funding gap in Australia. For example, in this article the Australia and New Zealand Banking Group chief Mike Smith says the credit crunch has highlighted the limits of the funding model that has caused the Australian banks to be over lent, particularly through borrowing from offshore. The article also refers to Ashok Jacob, chief executive of Consolidated Press Holdings and a key adviser to James Packer, who said at a Macquarie Group conference just recently that Australia had the most leveraged banking system in the world: $900 billion deposits and $1.5 trillion in loans—a $600 billion shortfall. Je said that Australian banks’ loan -to-deposit-ratio was 153 per cent, well ahead of the UK at 144 per cent and the US 110 per cent. Historically the figure for Australia was around 100 per cent.

I simply draw the committee’s attention to this because Jacob goes on to say that we are going to face a potential $200 billion in loans to be rolled over by our banks in the next few years. If we are going to have a shortfall we are going to have to borrow from somewhere. And if we have to borrow—I fear it will be from countries that are the major savings countries, like China, the oil producing countries or even Russia—you will be a combination of results. Perhaps they will lend to us but it may be on the condition that we make our various industries that Peter Westmore just referred to, such as our mining industry and so on, available for takeover by their sovereign wealth funds or their government controlled or government run industries. So I think I am trying to put this in the context that it is not simply the interest of some other countries and their sovereign wealth funds and our industries; it is a vulnerability that Australia may well be facing in the near future, and which the Financial Review put on its front page on 18 June. That is the conclusion of my opening statement.

CHAIR —Thank you very much. One of the arguments that have been put in favour of direct foreign investment is the limitation on Australian financial resources to developing minerals projects and other big projects. With your proposed percentage limits on investment how do you think we might be able to proceed to some of these multi-billion dollar investments if foreign investment is restricted?

Mr Byrne —Could I suggest about this article in the Financial Review: the banks go on to make suggestions as to changes that they think may be needed; for example, that tax concessions for savings in banks should be brought into line with the various concessions that super funds have, in order to attract a certain amount of funds in that area. They go on to several other suggestions. I would like to add to that that Australia has a rather peculiar savings and investment imbalance. We actually have, as it says here, a $600 billion shortfall in domestic funds being available for various industries. I do point out, however, that while the mining industry is part of it, a lot of that borrowing offshore has actually gone into the housing market. On the other hand, we have about $1.1 trillion in superannuation funds and around 30 per cent of that is invested offshore.

We believe that there should be some balance brought in between savings and investment in Australia, in part through greater encouragement of domestic savings through the banking system but also through putting mechanisms in place that allow the investment of some of those funds out of super funds into other areas of investment in Australia. We used to have in Australia—and other countries do have—instruments to handle that sort of thing. One of them is a government-backed development bank. We believe that those sorts of instruments will be needed. We are not saying that we should not have any borrowing offshore. We are overborrowed offshore. The banks themselves are saying that, and we are going to have to confront the problem if we cannot roll over these funds—and we are talking about $600 billion.

CHAIR —That is a huge amount of money, I agree, and that is a very interesting concept. That was the Financial Review of 18 June—

Mr Byrne —It was 18 June, on front page: ‘Bank chiefs warn on funding gap’.

CHAIR —Thank you. I will ask you one other question. I notice that on page 12 of your submission you say:

Investment from China comes with far more political strings than came with Japanese investment in Australian energy and minerals industries in the 1970s and ’80s.

One of the things we heard last night and tonight is that there was a Japanese organisation called MITI, which was in effect an arm of the Japanese government, which did play a role Japanese investment in Australian resource projects. I wondered if you would like to flesh out the comment you make that there were far more political strings coming with Chinese as against Japanese investment.

—Firstly, I think there are two fundamental differences between Japan then and China today. The first is that Japan is a democracy; China is a totalitarian regime. I want to develop that point a little further, because there is a belief around that Chinese corporations are just like corporations from the United States or Japan or wherever. I would contest that view, because the Chinese corporations—at least government-owned corporations—are not only government owned but these corporations are overwhelmingly state-run monopolies in which the key positions are appointed not just by the government but by a sole party which runs the government, which is the Chinese Communist Party. I think it is a point which people are generally unwilling to mention. I want to quote from a paper on foreign policy of March-April 2006 by Minxin Pei. This from a paper given to the Carnegie Endowment for International Peace. The article is called ‘The dark side of China’s rise’, and it says:

As China continues to open itself, [observers] predict, state control will ease and market forces will clear away inefficient industries and clean up state institutions. The strong belief in gradual but inexorable economic liberalization often has a political corollary: that market forces will eventually produce civil liberties and political pluralism.

Then he says:

It is a comforting thought. Yet these optimistic visions tend to ignore the neo-Leninist regime’s desperate need for unfettered access to economic spoils. Few authoritarian regimes can maintain power through coercion alone. Most mix coercion with patronage to secure support from key constituencies, such as the bureaucracy, the military, and business interests … Most authoritarian regimes know that much, and none better than Beijing.

He goes on to say:

Today, Beijing oversees a vast patronage system that secures the loyalty of supporters and allocates privileges to favored groups.

Here is the key quote:

The party appoints 81 percent of the chief executives of state-owned enterprises and 56 percent of all senior corporate executives. The corporate reforms implemented since the late 1990s designed to turn wholly state-owned firms into shareholding companies haven’t made a dent in patronage.

So we are not just talking about corporations operating in China similar to, say, BHP or Rio Tinto or Qantas or others. We are talking about corporations which are really controlled by the ruling party. It is also important to me to keep in mind that, in the past, the Chinese government has been accused of attempting to buy influence, including in the United States in the 1990s, simply by effectively influencing the major political parties. It seems to me as though that is a concern which would be exacerbated in the case where Chinese corporations owned a major stake in strategic Australian industries.

Senator HURLEY —Thank you. I am just wondering what your background is in terms of an understanding of banking investment or foreign affairs.

Mr Westmore —I have been involved with the National Civic Council for very many years. If you want my academic qualifications, I hold a Master of Engineering Science from Sydney University. I can only say that I am a person who has had an interest in these fields over a very long period of time. My colleague, Pat Byrne, has an economics degree from the University of Queensland and has been an observer and commentator on economic policy issues in Australia for many years.

Senator HURLEY —Thank you. Your submission talks mostly about the Chinese influence. Do you have enough corporate history to tell us about the NCC’s attitude to Japanese investment or other major economies’ investment in Australia?

Mr Byrne —We all know that the Japanese have a long history of involvement in investment in Australia. But, as Peter Westmore has pointed out, we draw a distinction in investment that has come in from countries that have been democracies, that are part of the western alliance, that respect universal human rights, that respect free market principles and ownership of private property. We are not trying to treat China as an enemy; we stated that in the submission. We believe that China is now and will be an increasingly major player in world affairs and that we have a responsibility to help bring China towards those principles I have just described—principles that Japan has had and that we have had here. China is still a long way from it. To do that, our argument is that Australia needs to maintain as independent a position as it can in terms of both economics and foreign policy, in order to play a role in bringing China in that direction. China has not changed since Tiananmen Square.

Senator HURLEY —When you were talking about foreign investment in strategic industries, and restrictions, were you talking just about China or were you talking about other countries as well, including democratic countries?

Mr Byrne —A point to make about sovereign wealth funds is that sovereign wealth funds to a certain extent have come from some democracies, but they are small places like Singapore. By and large—with a couple of notable exceptions, like Norway—sovereign wealth funds are from countries that are yet to discover the western concept of democracy. Therefore, while it is a little general in the way it is described here, our particular concern is the fact that the major sovereign wealth funds are places like China and a lot of the countries in the Middle East.

Senator HURLEY —Can you tell me then what proportion of the sovereign wealth funds are from countries you regard as not—

Mr Byrne —That is a good question. I have not got the figures in front of me, but I know that one of the academics at Melbourne University has done some figures on this and I could probably dig them out and supply them to the committee.

Senator HURLEY —Is it divided up into democratic and non-democratic countries?

Mr Byrne —I have got it on my computer but not in front of me at the moment. I can try to find those figures and supply them to the committee. But if you look at China, for example, by the end of this year China’s sovereign wealth funds will be in the vicinity of about $3 trillion. I saw in the Financial Times the other day, again it was an article by Martin Wolf, that China’s trade surplus is going to be about $440 billion this year—one of the largest trade surpluses in the world.

I should add one other thing, and that is: China has achieved its huge trade surpluses through manipulation of exchange rates. When I say China does not apply by market principles, I mean Australians are floating the exchange rate, the United States has a floating exchange rate, I think Europe operates on a floating exchange rate, but China does not. It has given China a huge trade advantage—in fact, the greatest form of protectionism you can have is to manipulate your exchange rate—and has allowed it to amass these sovereign wealth funds. Trade is virtually a zero sum game, and if they are running such huge surpluses it is at the cost of deficits largely in the western democracies.

Also in our paper, the concern that we have had with Chinese investment, and this has come out of recent hearings—similar to what you are having here—in the United States. The US hearings are on the issue of Chinese investment worldwide and the mercantilist nature of its investment. It is not just on the same sort of commercial basis as we have accepted investments from, say, Britain, the United States or elsewhere. It has tended towards, in a number of countries, ownership, control, setting of price, et cetera.

Senator HURLEY —Setting of price? Where does that occur?

Mr Byrne —If you have got ownership and control, you are in a position where you can influence price as well.

Senator HURLEY —Where has that happened?

Mr Byrne —As I mentioned, Gabon is one place where they have moved for a major investment in a huge untapped iron ore deposit in Africa. If you read what Robert Gottliebsen had to say about where China could take Rio Tinto had it got the stake in it that it was after—with a 600-page agreement—and how that would affect even BHP Billiton, you would find that he says it will influence price. This is not abiding by the same market principles as we abide by and generally accept. Are we going to have a level playing field or not?

Senator HURLEY —You do not accept the argument that has been put here that once a company invests in Australia then it is subject to Australian laws, including the market related laws?

Mr Byrne —I am talking about ending up in a position where you can influence the world price. I refer you to Gottliebsen’s article; I have put part of it at the back of my submission. If the committee would like the three-part series that I think is the best analysis done of the deal that was drawn up by Chinalco to go with Rio, I think it explains very well how it would ultimately influence price. And I think that is extremely important for Australia; we are such a huge resource country, and we are close to China compared to other countries.

Senator HURLEY —So you think that if China restricted its foreign investments to the level that you are suggesting that we would not be influenced by Chinese growth and market setting power?

Mr Byrne —I do not think any one investment by China in Australia threatens Australia’s sovereignty or the direction of its foreign policy. I think, cumulatively, over time—

Senator HURLEY —No, I did not ask about that. I asked: if Australia cut itself off in the fashion that you are suggesting, would it be influenced by China’s growth and market setting and price setting powers?

Mr Byrne —We are not saying we should cut ourselves off. We are saying that there are appropriate restrictions to put on. I have referred to other countries looking at restrictions—for example, Germany which has faced a similar problem with Russian investment coming in. It is not a cutting of ourselves off; it is a protection of our sovereignty. I do add that, as I said earlier, Australia has an enormous amount of domestic savings but there is a huge imbalance between our savings and investment. I think we have to look at tapping our own domestic savings a lot more—

Senator HURLEY —I accept that you are saying there should not be a cutting off but that there should be a restriction of foreign investment. Do you think that would save us from influence by China’s ability, because it is growing strongly, to influence the market?

Mr Westmore —I also do not believe that we want to cut China off. Our approach is similar to that which was announced by the federal Treasurer early last year, when he recommended that there should be guiding principles on investment by state owned enterprises, which effectively meant that they would be subject to far closer supervision. Then the question is, as far as we are concerned: just where do you draw the line? Our view is that there should be an attempt to say which industries we regard as being strategic industries which we should ensure have Australian ownership. That, by the way, does not stop those corporations from borrowing overseas. All major corporations are also borrowing. They not only have shareholdings but also borrow. So we are not proposing restrictions on Australian corporations, or corporations in these areas, from borrowing overseas. We are proposing that there should be restrictions on ownership in certain select industries. I hope that makes the position a little bit clearer, Senator.

CHAIR —There being no further questions we thank you, gentlemen, for appearing tonight and conclude this hearing.

Mr Byrne —We will forward that relevant documentation to you tomorrow.

CHAIR —We would be very pleased if you could forward that to the secretary of the Senate Economics Committee at Parliament House.

Committee adjourned at 8.35 pm