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ECONOMICS REFERENCES COMMITTEE
01/07/2009
Foreign investment by state owned entities

CHAIR —Welcome. We have received your submission. Would you like to make an opening statement?

Prof. Drysdale —Yes. I passed a note to the secretariat from which will make a few points to begin with, if it is acceptable.

CHAIR —Of course. Thank you very much.

Prof. Drysdale —The note I passed over focuses more on the direct terms of reference of your committee, which is really on the state owned enterprise aspect of Chinese foreign investment in Australia. There are three main points that I want to draw attention to from the document I handed over to you. The first is about the motivation for Chinese foreign direct investment more generally but also particularly in Australia. The first point to make in respect of the resources sector in Australia is that Chinese investors in this sector aim to secure stakes in projects that are linked to supplying the rapidly growing markets in China.

Putting yourselves in their shoes, the second point to make is that they perceive foreign investment as an investment in their future too, as the projects they invest in in Australia and other countries and the firms that they link up within Australia and other countries bring management know-how, technology and other resources to them in the links that the projects provide. They have a positive impact on the operational efficiency of firms in China, as well as the corporate standing of firms in China.

They are undertaking this investment in the context of what is called in China a ‘going out’ strategy, which is a policy that released the controls on foreign investment abroad and encouraged Chinese enterprise to take up stakes in foreign companies and undertake foreign investment, and foreign investment has grown rapidly under that policy. Of course, the other point is that this investment offers a lot of advantages to the host countries, including Australia, because in countries like Australia this investment provides capital, technology, know-how and, most importantly in the case of this Chinese resource investment, access to markets.

These benefits are very substantial for Australia and this is the first big point I want to make. What the Chinese are doing in this sector in Australia is not untypical of what foreign investors over a very long period of time—over the more than 50 years that I have been looking at this thing—have done in Australia. Through their investment they contribute to the efficiency of the Australian industry. We have undoubtedly one of the most efficient and competitive resource sectors in the international economy. Undoubtedly, that efficiency and competitiveness is importantly due to the presence of foreign investment alongside domestic businesses in developing and exporting the resources to international markets. This is across a wide range of activities in our resource sector. We would not be the most competitive player in this sector without foreign investment and we are not going to remain the most competitive sector internationally without the continuation of foreign investment, including Chinese foreign investment. That is the first big point I make in this note.

The second thing is obviously about the issue that you are focused on, which is: what is different about this wave of Chinese foreign investment from other waves of foreign investment that we have had before—US foreign investment, European foreign investment, Japanese foreign investment and Korean foreign investment? It has to do with the fact that China is a partially reformed economy at this point and that state owned enterprises are still an important although a diminishing part of that economy. At the same time, the role and the nature, the character, of state owned enterprises is evolving and changing very rapidly indeed.

You will all know that China had invested in the Channar iron ore mine in the 1980s. That investment took place through the Ministry of Minerals and Metallurgical Industry in China, so it was a state owned enterprise. At that time that ministry was a state owned enterprise and it encompassed a vast range of activities in that sector. Steel and other enterprises under that umbrella have now been segmented into separate competing entities and corporatised. Some of these enterprises are listed on the Chinese as well as international stock markets. These are all ostensibly state owned enterprises.

Alongside that big institutional change there have been changes in corporate governance that include the establishment of non-executive boards and executive independence in the day-to-day operation of most state owned enterprises. Of course, some state owned enterprises in so-called strategic sectors or strategic industries are more independent than other state owned enterprises in their operations.

The other aspect of that is that since 2003 the State owned Assets Supervision and Administration Commission of the State Council, SASAC, in China has assumed the responsibility for exercising ownership of state owned enterprises on behalf of the Chinese government. SASAC has two important roles. It supervises the key state enterprises and their management; it exercises a monetary role in their profit and management performance. Its second important role is that it carries forward the reform of state owned enterprises. It has the responsibility for reforming state owned enterprises, the privatisation of state owned enterprises, their governance and their consolidation. All of these things are also a main responsibility for SASAC.

It is under the umbrella of SASAC that some of these changes have been effected over the last five or six years—under SASAC these changes have taken place in the state owned enterprise sector of the Chinese economy. So it is an active and an ongoing process and it is aimed at making state owned enterprises conform to normal commercial market disciplines. That is the principal objective of it. Of course, many still believe that state owned enterprises, because they include in their management teams—not always and not necessarily—political cadres in China. For that reason they are disqualified from the normal rules and regulations applying to other foreign investors in host countries like Australia but I think that is a mistaken view. State ownership has been a policy consideration in a number of countries in the regulation of foreign investment. Of course, it has now become explicitly so in the case of Australia. It is a matter that the regulatory authorities look at.

The second main point is just about the scale of it all, and I will speak to that very briefly. In the 1980s Chinese investment abroad ran at less than half a billion dollars a year. In the 1990s it ran at a bit under $2.5 billion a year. It has since grown rapidly under the new policy, which has released control on investment abroad. Earlier, most investment from China was by private investors but state owned enterprises were given the green light recently. Chinese investment in the last year for which numbers are available was running at about $41 billion and that is about double what it was four years ago. It is a considerable element of overseas investment abroad. And to get it into perspective—and this is the second main point I want to make in this submission—global FDI fell by at least 20 per cent last year; Chinese FDI doubled. So China is now the principal source of new foreign investment activity internationally. It is an element in the supply of international capital that no country that takes its own interests into account can afford to ignore. It is a very important source of capital and market innovation. That is the second main point I want to make.

The final point in the note I gave you that I would like to emphasise is that obviously these things are changing. Institutional and policy circumstances surrounding state owned enterprise investment abroad are changing. They are matters that Australia has an interest in—the way in which these changes are taking place. The argument that I put in the larger paper that I submitted to you and in the note that I handed across today is that it is important for these enterprises in their overseas investment activities to be involved in markets like the Australian market, which, because of the work of policymakers, is a well regulated, disciplined market that subjects the participants in this market to rules and behaviours that are governed by good policy in this country. You have control over that policy and that is the most important thing in managing foreign investment activity whether it is from state owned enterprises in China or from Japan or the United States.

It is important in my view that there be fuller participation by Chinese state owned enterprises subjecting themselves to the disciplines of robust and well governed market institutions such as we have here in Australia. Applying special conditions to those investments would just reinforce the perception of the primacy of regulatory solutions over market solutions to state owned enterprises in China, the government of China and our other partners and damage our foreign investment regime and environment, discourage Chinese and other investors from participating and help sustain the dominance of bureaucracy over the market both in Australia and also in China.

I think the circumstances would recommend strongly that we take an active role in relating to the Chinese authorities in respect of the investment of firms from China, whether they be state owned enterprises or private firms from China, in Australia. The rapid rise of China and Chinese investment has caught many people by surprise, including policymakers here. We are on the leading edge of it because of the active interest with a rapidly industrialising economy like China, like Japan’s was 40 years ago, in the resource sector. These developments do not fully explain the elevation of policy interest in the matter, but they do encourage active policy participation in working with China to ensure that we understand the nature of the evolution of enterprise and its operation in China and the objectives of policy there, as that relates to Chinese participation in Australian industrial activity.

There are a lot of complex issues that have to be resolved within China. The Chinese alone will resolve those issues, but Australia can play its role through cooperation in this way. And it will not only be cooperation in these affairs between Australia and China; it will be cooperation, importantly, between the United States and China and other major partners of China. The aim there from the Chinese perspective will legitimately be to guarantee for itself the opportunity to improve its resource base, its technology base in particular, as it undertakes activities abroad; secure reliable supplies of resources as it industrialises; and transform its enterprises into truly market disciplined international competitors. We have an interest bilaterally in relating to that process, so there is a role for government in getting together the relevant agencies in Australia and all the support—research support and informational support—that they can bring to bear on this process and interacting with the relevant Chinese agencies. There has been very little interaction between these agencies in Australia. An example is SASAC: it is new days for SASAC, but it is a very important organisation and a bit of knowledge about what it does would be helpful here. So these are active areas for policy interest.

If there is one last point I would make it is that there is an important opportunity for Australia here to play a fairly leading role in engaging the Chinese policy authorities in thinking through and responding to all the issues that arise as their big, state owned enterprises undertake investments abroad, including in the Australian resources sector. Thank you, Senator.

CHAIR —Thank you very much, Professor. In the course of today we have heard some comment about the six principles which the minister laid down last year regarding foreign investment, one of which was, of course, to have regard to the national interest, which is the test the Treasurer applies. You have referred in your written submission to:

… ‘additional factors’ that could demand a test of suitability beyond the ‘national interest’ test …

Do we need to have additional factors taken into consideration?

Prof. Drysdale —My submission would be that the national interest test encompasses all the relevant factors that you need to apply in the consideration of foreign investment proposals in Australia. I think that in the longer paper I presented to you I have gone through a few circumstances in which you might wish to apply that test to Chinese or to other foreign direct investment proposals. They include, of course, where those investment proposals might impact upon security interests so they are likely to be very limited in character. We have had the application of the test in that respect concerning one Chinese investment proposal in Australia—whatever the rights and wrongs of that. But you can conceive of others, so that is an obvious area.

The other area that is considered is where the investment might in some way monopolise key resources in Australia to the detriment of the development. I have always presumed that the test was applied. For example, in the case of the Woodside North West Shelf project, I would presume that there was a test of that kind applied in respect of that project, and I am on record as having said that that was appropriate. And there are other circumstances that I think people sometimes think of as national interest tests, which just are not, and you can look at the way in which these investments work and the way in which they serve the development of a competitive and efficient industry in Australia. The example that is often cited—and this was mentioned, I think, in some of this discussion earlier—is where the investor is the customer or related to the customer in some way. It is a perfectly normal circumstance in resource sector investment for customers to invest in these projects. These are very large and complex projects technologically and in terms of the delivery of resources and the processing of the resources and the delivery of the resources either directly or in their processed form to the final market. An important interest of customers or related parties, and often in the Japanese case it was related parties but it might as well have been the customers—trading companies or whatever—is to secure a window on the management of that process and to be involved in the process in its complex detail.

So this is a very normal thing in this sector and it has been the case for many, many years. It is not a new thing. Very infrequently would that be in itself or of itself a reason for rejecting, for example, an investment proposal on national interest grounds, and I think they are the three areas that I mentioned in the earlier paper that you might consider. All of these issues can be encompassed under the national interest test in the review of investment proposals from China and from other investors.

I was of the view that the elaboration of these principles was somewhat damaging to Australia’s foreign investment climate. That was not an uninformed view. I take part in seminars around the world on foreign investment activity globally and these issues were raised in seminars that I took part in, for example, in 2008 in various parts of Europe about the investment climate in Australia. These principles, when you do them, do not only apply to Chinese investors; they impact upon the perception of Australia as a reliable host to investors from any source including North America or Europe or anywhere else. These issues were raised, I might say, by North Americans and Europeans in European seminars that I attended on foreign investment flows. They are subtle issues but they are not unimportant issues.

CHAIR —So are you saying that Australia is regarded as having a stricter foreign investment regulatory regime than other countries?

Prof. Drysdale —Some people argue that, and I have mentioned those arguments. There are various indexes that people construct to measure the restrictiveness of a foreign investment regime. On some of those measures—and I have quoted references to them in the longer paper—certainly Australia does not come out looking very good. My bottom line is, since the 1970s, Australia has pursued a very open approach to foreign investment, including in the resource sector. We have FIRB, which was established in the 1970s, to review proposals and to take the consideration of proposals to the relevant minister. I see that as a fairly robust and useful process.

When FIRB was being established back in the 1970s, I was among those doing work on the whole problem that we had in the 1970s with the surge in foreign investment, so-called resource nationalism and so on. The establishment of an institution like FIRB, which would be seen, for example, in North America as an interference with foreign investment and as a restrictive agent in respect of foreign investment, was a useful and positive development. It desensitised the management of foreign investment into Australia in a significant way. It made it easier to manage in policy terms and in political terms.

The truth of the matter is that, if you ask members of the community—and I am sure you have asked members of the community what they feel about foreign investment, not only Chinese investment but foreign investment—what they feel about foreign investment 70 per cent, as I remember the last poll, say: we do not want anymore foreign investment, whether it is Chinese, US or whatever. But, when you ask them whether they are comfortable with the foreign investment that is here, the same proportion will say: yes, we want the foreign investment that is here. So once you get in it is all right, but that is not a way to run policy.

So you have to have a process, effectively, that takes that political feeling into account and reassures people that there is a process through which you can scrutinise investment proposals, that that process is a serious process and that it is properly constituted. There is a question of whether it might be more transparent than it is. That is a question to which I am inclined to think not at this stage, although my views are evolving on that. That is the rationale for it. This is a long answer to your very specific question, but I think it helps to explain the view that I have about these measures of foreign investment restrictiveness in Australia, as they are dished up in some of the literature that I have commented upon as being open to some qualification.

CHAIR —Thank you.

Senator HURLEY —I want to follow up on those international comparisons. There were media reports back here that people in the United States were getting a bit worried about Chinese investment as well. There was some quite considerable concern there. Did the United States take policy action of any kind at all in response to that?

Prof. Drysdale —In respect of particular investment proposals they did—there was the oil industry case which was rejected in the US—but not in a regime changing way, if that is the implication of your question. This is a phenomenon that we are dealing with, like the Japanese phenomenon was some years back, that impacts not only on Australia but other countries. We are in the cockpit of it, frankly, because of the importance of the resource sector in this stage of development in China and the importance of China to us because of its development and industrialisation.

There have been prominent cases elsewhere. Chinese investment abroad is not just an Australian phenomenon; it is a global phenomenon. That is why I said in my earlier presentation that it is important that we work with China bilaterally. That is an important area of policy action, but this will be an area in which we will be working with other countries. It will be an area of interest regionally and will be an area of interest globally. Does that help?

Senator HURLEY —Yes, thank you. In speaking of resources, we have had submissions that say that there are particularly sensitive areas of the Australian economy that we should not allow the control of to go overseas. The mineral resource area was one that was mentioned in particular. You talked about how China is a customer for a lot of Australian resources, and a lot of people have been talking about that as the thing that has possibly saved Australia from being more badly affected by the global economic crisis. I think you did mention that is not uncommon for customers to buy into. It is happening to some extent in Australia. We have seen quite a lot of investment in resources. Are Chinese state-owned enterprises investing in other resources elsewhere in the world?

Prof. Drysdale —Just on the last point: obviously, yes. One of the issues is that, if we deny ourselves the opportunity of hosting Chinese investment here, it will go elsewhere. There are lots of prospective iron ore resources elsewhere in the world. People sometimes think that this is a kind of moonstone type of resource that we uniquely have supplies of. The big increment in supplies of iron ore to China did not come from Australia in the last boom period; they came from India and Africa, because we were not ready to supply the increment. I hesitate to say in a room with some friends present, but we in Australia were not prepared to lift the uptake into China as rapidly as we might have to take advantage of the huge surge in demand for iron ore. We were underperforming in the Chinese market.

If you take the share that we had in a more stable market, like the Japanese market, which you can sort of use as a benchmark of our competitiveness in the international market or at least the regional market for these resources, that runs at well over 50 per cent but in China it is significantly under 40 per cent. I hope it will rise in the next period, but that is a measure of the failure of the Australian industry to deliver the uptake that was demanded into the Chinese market over this boom period. That was drawn from India, Africa and other places in Latin America.

I want to go back to the first point that you make because I think it is a really important starting point about how we have to think about this issue. There is no question of Chinese investors, Japanese investors or American investors ultimately having control of these resources. We have control of these resources. They are our resources; they are our sovereign resources. The policy regime that you and your colleagues put in place is what governs the use of these resources within a market. If there are problems in the market, if there are monopolies and distortions in the market, then the policymakers need to deal with those. We have the power to deal with them, including the power to deal with markets in which foreign investors are heavily involved and regulate them in respect of a whole range of things, including the way in which they develop the resources sensitive to the environment, Indigenous people and all the considerations that you and we as interested citizens would want to have sensitivities to.

Control over these resources is within our province. It is not the province of the investor that has delivered to it the right to undertake it, whether it be a foreign investor or a domestic investor. Again it might seem like a moot point but actually it is a fundamental point in the understanding of how we have to manage these market activities, whether they be market activities that foreigners take part in or domestic businesses take part in.

Senator HURLEY —To pursue that a bit more, I think one of the sources of anxiety with the state-owned enterprises is whether there is the potential for a country such as China to operate strategically to tactically put so much pressure on a country where they have significant investment that it changes the way that those resources are used.

Prof. Drysdale —One can imagine circumstances putatively in which that might be the case, but none of these circumstances, I think, are present in any of the projects or proposals relevant to the management of these investments in Australia. As I said in response to Senator Eggleston earlier, most of these investments are undertaken through a transparent process of taking up minority equity in projects and firms developing projects. That reflects the motivations and interests of the investors that I mentioned before with respect to Chinese investors, Japanese investors, Korean investors and so on. In these circumstances, I cannot posit a set of circumstances in which that would be an issue of concern.

Senator HURLEY —These state-owned enterprises do seem to be an increasingly used vehicle—and Australia has set up its own, of course, in the Future Fund. I think you said that they are changing rapidly. Why is it that they are being used as a vehicle more and more? Do the global economic circumstances have any impact on that—whether they are more or less useful for countries and investment?

Prof. Drysdale —I guess the latter part of your question relates to the global financial crisis. In respect of the first part of your question, as I said before, the fundamental objective is to see these enterprises operate competitively in an international market and stand the test of the international market. They stand the test of the domestic market fairly well. They are very profitable. They do have preferred access to credit in domestic terms because of the distortion in the capital market there. They are very profitable and competitive and they are measured on the basis of their performance in that respect.

There has been a powerful interest in seeing them get out of that closet and compete internationally, for a number of reasons, not in respect of the resource sector so much but in respect of the major industrial sectors—for example, telecoms or sectors like that. Given the fact that there is a large foreign investment presence in China, the only way that a Chinese state-owned enterprise is going to compete effectively at home, in its own market, is for it to go out and establish links with firms that can deliver market knowledge, management know-how, technologies and so on that will help them to compete at home on a level playing ground. So that is one motivation that has led to the going out strategy. It has been very important for the big industrial manufacturers in China to link up with international players, small and big, in order to improve their competitiveness in the market at home. In the resource sector, as I have said before, the motivation is somewhat different. It is to establish prospective investments which are linked to the supply of raw materials to the Chinese market.

So they are some of the considerations that are involved. At a fundamental level, those considerations relate to the mission which I mentioned is the second mission of SASAC, which is the reform and increasing market disciplining of state owned enterprises—that is, the development of the state owned sector to make it perform better. That has progressed quite a long way, as I said, in the last five years, and it is a continuing story and an ongoing process.

CHAIR —Thank you.

Senator JOYCE —I have quite a number of questions and will not get through them all, so I have to start with the most important first. For the purposes of the answers, could you just say what you think are the most relevant things first and truncate the end. My first question is: if foreign investment is such a great idea, then you would believe by the process of reciprocity that BHP and Rio would have the capacity to go and buy coalmines in China. Do they have that capacity? If not, why not?

Prof. Drysdale —That capacity is limited at this stage in a number of sectors, including the mining sector. Reciprocity in this sense is not the critical test to me, and I will say why it is not. It is not the critical test because actually it is what we do to ourselves that matters in respect of the impact on this economy and this society, not what the Chinese do to themselves. If they limit investment for whatever reason—and there are a number of reasons why they do, although that is, again, changing—

Senator JOYCE —So you are saying the rules are different for different countries.

Prof. Drysdale —Obviously they are different for different countries, but those rules of course are negotiable internationally and bilaterally.

Senator JOYCE —Could I go to China and buy 195 square kilometres of prime agricultural land?

Prof. Drysdale —No individual Chinese can buy that much prime agricultural land. That would not affect your consideration of policy which limited the opportunity to buy prime agricultural land in Australia, would it? It certainly would not affect mine.

Senator JOYCE —Yes, it would affect mine very much. You talked about sensitivity to Indigenous people and the environment. I want to refer to two areas that I thought you might want to comment on. The Chinese obviously are a large investor in Sudan and they basically prop up its government. How do you feel about the sensitivities of the African Sudanese who are being wiped out by the Janjaweed? How do you feel about the sensitivities of the Chinese investment in Burma and the Karen, who have been persecuted by that regime? How do you feel about the sensitivities of people in North Korea, the North Korean government being propped up by the Chinese next door? Do these indigenous people come into your observations when you are talking about sensitivity to indigenous people?

Prof. Drysdale —I think they are different matters and we use different policy instruments to deal with different matters. We use policy instruments such as environmental regulation, such as policies towards Indigenous people of various kinds in Australia, including those that encourage investors, domestic and international, to, for example, develop capacities in our Indigenous community—

Senator JOYCE —So we have different indigenous people, different countries, different rules.

Prof. Drysdale —Allow me to finish my answer to the question. We have, as I said before, full control and sovereignty over those policies. In the negotiation of policies in other countries we have to use different instruments, because, unless we presume hegemony, we do not have that same kind of control, and we do not presume hegemony if we are wise. So we use different instruments, mainly foreign policy instruments. We have to make decisions about how to apply those foreign policy instruments in different cases and there are different views about how to do that.

Senator JOYCE —Based on convenience.

Prof. Drysdale —Uniqueness in respect of what?

Senator JOYCE —No, based on convenience: it is convenient for us to ignore that; it is not convenient—

Prof. Drysdale —No, I did not say that at all. That is misinterpreting what I said. I said that we can actively engage in the use of those for policy instruments which we have at our command to deal with those issues. In particular I have been actively interested in the North Korean problem and have been engaged in looking at the issue carefully. We do not abdicate responsibilities for that at all but we use different instruments to manage it. If we do not carefully distinguish the instruments we use to manage different aspects of policies, basically we are living in fantasy land.

Senator JOYCE —I believe in the related entity test for tax and I think that it should stand. We are dealing with the same sorts of organisations. These are all arms of the same corporate structure and basically they are predominantly controlled by the Chinese government. I do not see how we can have this haphazard choice governing when we want to engage in a belief that something is right or wrong and then disengage so that we believe we have a right or a statement to protect certain indigenous people but then disregard other people because it is convenient to disregard them.

Prof. Drysdale —I think that is not the conclusion I would draw from this discussion at all. The conclusion I would draw from this discussion is that it is really quite important for Australia to engage these enterprises and entities in a system like the Australian system over which you and other policymakers have control and which introduces to them exactly the kinds of disciplines you might wish to put on them in other countries. If you retreat from doing that, Senator, you retreat from an opportunity to so influence them and I would think that it is really rather important to take every opportunity to engage them in a process which subjects them to these disciplines. But on the other issue of how related these entities are, then I would differ from you in respect of the nature of that relationship, and I think that you would have to look at that very carefully before you came to that conclusion.

Senator JOYCE —Let us go to where you quoted that the Chinese have been involved—India, Africa and Latin America. Can you tell me the great benefaction to Africa and where I can go to be able to say, ‘Boy, wasn’t that a great outcome for those people!’ You said that Africa is an area where the Chinese had invested and, because we did not have the capacity for the uptake of the delivery of iron ore, that alternative arrangements were made with India, Africa and Latin America. Can you please direct me to where I should go in Africa to see the great benefaction to the African people of Chinese investment.

Prof. Drysdale —If you went to South Africa and you discussed it with South African authorities, you would come to the conclusion that the impact of Chinese investment in South Africa had been positive—

Senator JOYCE —So South Africa is what you hold up as an example. Chinese investment in South Africa is what you deem to be—

Prof. Drysdale —It has had a very positive impact on the African economy.

Senator JOYCE —And Latin America?

Prof. Drysdale —And in Latin America, in Brazil, and not only investment but also in the uptake of all purchases from Brazil it has had a very positive impact on the Brazilian economy.

Senator JOYCE —This is when Australia could not come online. What period are we talking about here?

Prof. Drysdale —In the early part of this decade, until the boom ended last year—in the eight years before that.

Senator JOYCE —You also said that they are sovereign assets of Australia and we do not have to worry about that.

Prof. Drysdale —I did not say that. What I said was that they are sovereign assets of Australia and we have to exercise control over sovereign assets whether it is in respect of their use by foreign investors or domestic investors. I think that is what I said.

Senator JOYCE —Do you think there are any other factors that come into play in how we deal with foreign countries? Is it just a case of, ‘If it’s in our rule book, it says so and we don’t have to concern ourselves with anything else; we don’t have to be sensitive to other issues such as, for instance, the strength of the nation that we are dealing with, its capacity to grow and, to be completely honest, whether it is developing an expeditionary military force’? Should that come into our considerations, or do you think it is completely a case of, ‘That’s all old-fashioned ideas that we don’t worry about; it’s a new world’?

Prof. Drysdale —No. Again, I do not think you could draw that inference from what I have said.

Senator JOYCE —So what inference could you draw?

Prof. Drysdale —What I have said is that all of these other matters are matters of foreign policy interest. Specifically in respect of this issue, I said in my introductory remarks that it is important for Australia to be engaged, alongside other partners, with Chinese authorities in the management of this particular issue. So, no, I am not advocating a benign approach to this at all.

Senator JOYCE —If that were the case, we would not need a Defence Force.

Prof. Drysdale —I think my record will show that I have not advocated a benign approach to any of these aspects of foreign policy that you think dominate all other considerations in respect of the management of foreign investment in Australia. They do not. They have not in the case of all the other investors, including the United States. If we had had this conversation—as I did—in the 1950s about US investment then we would be having a very similar conversation in terms of politics and foreign policy.

CHAIR —Senator Joyce, after this we might have to go to Senator Bushby, because we still have Rio to hear.

Senator JOYCE —Sure. Let us just go to that, because that is something that is always thrown up—it is about Japan in the seventies and China in the noughties—so it is all the same. But it is not the same, is it? There was a completely different law that was in place with Japanese investment. Wasn’t it that there had to be a strategic partnership between domestic and foreign investments at that point in time? That is the case, isn’t it?

Prof. Drysdale —There was a completely different law.

Senator JOYCE —In the foreign investment, there had to be a strategic engagement with an Australian partner. I think it was up to 51 per cent. Wasn’t that the case?

Prof. Drysdale —No, I am talking about the period in which there was a surge of investment after those laws were in place.

Senator JOYCE —Can you tell me what year that law was—

Prof. Drysdale —I am talking about before there were such laws, and that was the problem. What happened in that period was that we lost market share in the resource sector. We became less competitive in the international marketplace. That was the problem. If you look back at that period carefully—and I do recommend that you look back at that period carefully—it was a period of considerable uncertainty with respect to foreign investment, not only from Japan but from other sources, into Australia. That was an experience that damaged the resource sector significantly in Australia, and that is when we moved to the robust process that I spoke about before and the establishment of FIRB. Post the mid 1970s, we have had a regime which is open and less subject to those restrictions, and that has been of considerable benefit economically and, I would say, in other terms.

Senator JOYCE —Are you saying that the development of the Central Queensland coalfields, which would have been pre 1993 and under the old rules, was at a time of immense uncertainty when we lost market share?

Prof. Drysdale —When?

Senator JOYCE —Are you saying that, under the old laws with the 51 per cent ownership, that was a period of immense uncertainty when we lost market share?

Prof. Drysdale —Yes.

Senator JOYCE —When did those laws change?

Prof. Drysdale —The second half of the 1970s. We started to gain market share through the 1980s.

Senator JOYCE —Just tell me this so that we can correlate your evidence with evidence that has already been given to us: weren’t there other stages in the changes to the investment laws? Do you want to walk us through them piece by piece?

Prof. Drysdale —The main changes—and these are the relevant ones—were a move to release the ownership controls in the late 1970s and the establishment of FIRB in the 1970s. They are the main changes. Since then, we have basically had a fairly open approach to foreign investment in the resource sector. I think they are the big changes.

Senator JOYCE —I bring your attention to other evidence that has been tabled with us:

… Beijing’s National Development and Reform Commission has put companies on notice that they must clear foreign takeovers with the central authorities first so as to combine corporate and “national strategic planning” interests.

Surely this shows that we are up against not market forces but a sovereign power with long-term strategic aims and that is basically corralling the whole corporate structure of the nation in a certain direction. That is completely at odds with your belief in the corporate structure and the market tensions providing an outcome. This is a sovereign nation determining its nation’s future from a centrally planned position, about which you have stated, ‘We are at the cockpit of their considerations.’

Prof. Drysdale —What was your last point?

Senator JOYCE —You stated, ‘We are at the cockpit of China’s considerations.’ I am saying that, if that statement is correct and we are at the cockpit of it, then we are at the behest of a centrally planned organisation.

Prof. Drysdale —The context in which I said that we are at the cockpit of China’s consideration of investment projects abroad is the context of the rapid rise of the resource market in China. We were at the cockpit of the consideration of Japanese investment proposals in the 1970s and 1980s in the same way. That is the context in which I said it.

Senator JOYCE —The 1970s as well.

Prof. Drysdale —The process started in the 1970s but it went through the 1980s. So we are in the cockpit of China’s consideration in respect of resource supplies in the same way.

There are two aspects with respect to the role of the state and approvals, and I have mentioned them both. One aspect is that China exercises control of external flows of capital. It has to control capital account; it is a process that all such proposals have to go through. There is no question about that. But considerations other than market interest considerations are at play in that, and I would put it to you that they are very limited in this context.

Senator JOYCE —What is limited?

Prof. Drysdale —Considerations other than market interest considerations are very limited in the decisions to release authority to undertake investment overseas.

Senator JOYCE —How would you know that? Have you been to meetings?

Prof. Drysdale —Because I have done research on it.

Senator JOYCE —Who told you—

Prof. Drysdale —Have you?

Senator JOYCE —I did not give the evidence. I ask the questions; you answer them.

Prof. Drysdale —Because I have talked to the authorities, I have looked at what happens and I have studied the issue.

Senator BUSHBY —Professor Drysdale, you have outlined your belief that there are a lot of benefits for Australia in terms of foreign investment. We do not have time go through those benefits in detail or to outline them. This committee has also heard a lot of evidence that there are risks to Australia’s interests from allowing sovereign wealth funds and state owned enterprises to invest heavily, particularly in energy resources. Do you think any restrictions are justifiable to ensure that we can maximise the benefits while still protecting our interests and, if so, what restrictions could be justifiable?

Prof. Drysdale —Most of the restrictions that are justifiable are restrictions that we would want to run across all investment proposals in respect of considerations of monopoly and so on and that are within the power of the regulatory authority in Australia to consider in looking at foreign investment proposals. So, yes, there are circumstances in which restrictions are relevant. I have said that. I have said that in respect of—

Senator BUSHBY —You actually said that, as decision makers, it is in our court, effectively, to decide what restrictions should or could apply, depending on the foreign investment proposed and how that might be looked at.

Prof. Drysdale —That is right. I have also said that, in the last few years, in most of the circumstances in which these investments have taken place and that we have had consideration of and the policy discussion over that there are a few that we would want to apply restrictions to.

Senator BUSHBY —Information that has been supplied to the committee suggests that China currently amounts to only about 0.5 per cent of the foreign investment in Australia. Given that it is a relatively minor player in the overall scheme of things, is it really that important that we look to China? Aren’t there still plenty of other sources out there of foreign investment? I note that you did say that it was currently the primary source of foreign investment world wide. What percentage of current investment does it actually represent world wide? And how is that likely to impact on Australia’s interests?

Prof. Drysdale —I would have to take that question on notice. It would be difficult to give you the answer to the last part of your question, without a lot more research. On the first part of your question, my data suggests that, as of 2007-08, Chinese investment accounts for about one per cent of total investment in Australia.

Senator BUSHBY —Is that actual investment in that year or—

Prof. Drysdale —It is accumulated stock of investment.

Senator BUSHBY —The information we have suggests that, as at 2008, it was 0.5 per cent.

Prof. Drysdale —Okay. It is in that order. It is relatively unimportant, you are right. But it is growing very rapidly, so the increment to it is likely to lift that percentage share. The important thing, as I said, is that overall foreign direct investment flows are falling very rapidly and are likely to continue to fall. China is the major source of new foreign investment abroad.

Just to get to the thrust of your question, I think the more fundamental point is that the consideration of Chinese investment in Australia has to be undertaken in the consideration of all foreign investment in Australia; it has to be seen as a part of policy towards all foreign investment. Taking specific action against China is not immune from the effects of such policy on the foreign investment environment more broadly.

Senator BUSHBY —I imagine it would also have an impact on foreign affairs—

Prof. Drysdale —Yes.

Senator BUSHBY —This is the economics committee. There is also an equivalent committee that looks at foreign affairs, and it may also have a view on some of those things.

Prof. Drysdale —I should just say on that that, at this stage, it is not a critical consideration; it is a second-order issue.

Senator BUSHBY —That is right. The argument has been put—and I note that you touched on this in the paper that gave to us—that the state-owned enterprises in China have an advantage because they have access to the Chinese sovereign reserves that have been built up. This gives them the opportunity to buy up, particularly now, when things are probably underpriced in the longer term. Does that give them an advantage as against other potential foreign investors and/or against potential domestic investors in projects?

Prof. Drysdale —It is no different from the kind of ‘advantage’ that Japanese or Korean investors had through their access to similar state funds. When a nation gives a priority to investment in the resource sector abroad by its national firms, it might from time to time extend to those enterprises funds that are submargin on commercial terms. That is the case and has been the case with Japanese investment. The point about that is that it is an advantage to Australian projects because we have access to capital on the most competitive terms through those activities. It adds to the increment of lower price capital that we have the opportunity to use.

Senator BUSHBY —In terms of adding to the lower price capital, doesn’t it also give them the ability to pay over the odds for something, because they do not necessarily need to get the same return as our commercial operators operating in Australia might?

Prof. Drysdale —That is an issue that might be important in some circumstances and certainly makes the capital from that source relatively more attractive. It is not an unusual circumstance in this business—from sources of capital other than Chinese sources of capital. It depends on the policy approach of relevant national governments.

CHAIR —Thank you, Professor Drysdale.

Prof. Drysdale —I am sorry we did not have more time.

CHAIR —That is always the problem with Senate inquiries, as the time is very limited.

[2.35 pm]