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Expert backs foreign investment in local reso -

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Reporter: Stephen Long

ELEANOR HALL: The Federal Government remains under pressure from investors and unions to block
Chinese bids for key resources companies in Australia.

The former treasurer Peter Costello has said that he would stop the Chinese state-run company
Chinalco from upping its stake in Rio Tinto.

But a leading expert on the issue says that the fears about Chinese investment are baseless and
that such investment is in Australia's national interest.

James Laurenceson is with the East Asia Economic Research Group at the University of Queensland and
he spoke to our economics correspondent Stephen Long.

JAMES LAURENCESON: This growing investment in the mining industry is really the forefront of a
developing investment relationship that follows quite naturally on the back of the trade

The bottom line is Australia has a small population, a low savings rate and a lot of natural
resources that need development. So if we are going to develop these resources we need foreign
capital. We don't have any choices about that. In the past we have got foreign capital from the
likes of Europe and Japan and now the people who are most keen on investing in the resources sector
is the Chinese.

STEPHEN LONG: Why the concern then about China?

JAMES LAURENCESON: Oh I think it's connected to the fears that, you know, China has a communist
government and there is fears that China is somehow trying to extract pricing concessions when it
comes to negotiations for setting the prices for the goods that are traded.

STEPHEN LONG: Isn't that a fair critique though - that China is the major customer? They want the
resources so if they've got investments in mining companies they won't be operating on commercial
terms. They're conflicted. They will want to get the lowest price for the mining exports rather
than developing the highest price for the other shareholders of the company.

JAMES LAURENCESON: Yes, well but ...

STEPHEN LONG: Or Australia in terms of national income.

JAMES LAURENCESON: There are protections already in place to manage those sorts of concerns. The
board of directors of any company is required to act in the best interests of the shareholders.

And also if you look at the other Chinese investments abroad, for example Chinese have invested in
Australia since the 1980s in the mining sector and there haven't been any of these such concerns
that have come to the surface.

I really do think it's more fear than any real worries.

STEPHEN LONG: In fact they have a coal mine that's Chinese-state owned in the Hunter Valley in New
South Wales. People say it's not the only communist coal mine in the Hunter Valley given the
politics of the mining union.

JAMES LAURENCESON: (Laughs) Okay, well I'm probably not very well placed to comment on that.

But the Chinese need the resources as much as want to sell it to them. They are operating in a
global market with a lot of competition. They are not the only ones seeking access to stable supply
- the rise of India, Japan, Korea. So they are in a competitive market place. I wouldn't call them
the only players in the game.

STEPHEN LONG: In a sense is this emblematic of the changing power balance between East and West?
You've got the low savings, high consumption countries of the West that are increasingly relying on
China to bail out companies in trouble with too much debt but also bail out their domestic

JAMES LAURENCESON: Yeah, look that's certainly true. I mean there is a massive flow of funds from
China's financial sector abroad to countries like the US and Australia but it is a two-way street.
I mean when it comes to this securing a stable supply of resources, this is something that the
Chinese economy desperately needs.

STEPHEN LONG: The fact that the West needs China to fund its consumption and China's foreign
currency reserves to fund the debt that Western governments are having to take on to bail out their
economies - does that give China increased leverage to convince Western governments it's a good
thing to accept these foreign investments such as the ones we are seeing in the Australian mining

JAMES LAURENCESON: Oh look absolutely. I mean there is no doubt that the Chinese have more leverage
now over say Rio Tinto compared with what they did six months ago.

But let's not forget, I mean that's just business. That's not politics, that's business. I mean six
months ago or one year ago there was an uproar in the Chinese media regarding the fact the likes of
Rio Tinto and BHP had extracted huge increases in the price of iron ore to China. And now over the
last six to 12 months the balance of leverage has changed and that's business.

STEPHEN LONG: So what do you think that Wayne Swan, the Treasurer will do?

JAMES LAURENCESON: Well I mean I think if we are acting in the national interest and certainly in
terms of the long term national interest, I don't think he has much choice other than to go along
with these investments.

There is no doubt in my mind that Australia and China have huge complementarities when it comes to
the investment relationship - low savings rate in Australia, China has a lot of capital, and they
need resources, we need foreign capital to develop our resources sector. So there's a perfect match
there and I think if you were acting in the national interest that's what you would be looking at.

You wouldn't want to send conflicting signals in the short run and put that long term relationship
in jeopardy.

ELEANOR HALL: Dr James Laurenceson from the University of Queensland speaking to Stephen Long.