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Economics References Committee
07/08/2020
Inquiry into foreign investment proposals

JIANG, Ms Yun, Private Capacity

Committee met at 09:02

ACTING CHAIR ( Senator O'Neill ): Good morning everyone. I declare open this hearing of the Senate Economics References Committee for the inquiry into foreign investment proposals. This is a public hearing and a Hansard transcript of the proceedings is being made. Information on procedural rules governing public hearings and claims of public interest immunity has been provided to witnesses and is available from the secretariat. I would like to advise witnesses that answers to any questions on notice are to be sent to the secretariat by Wednesday 19 August 2020.

I now welcome Ms Jiang. Thank you very much for appearing before the committee today. I invite you to make a brief opening statement.

Ms Jiang : Thank you for the opportunity to be at this public hearing. In my written submission to the committee, I made six recommendations. I will now highlight three of the issues: China's political economy; foreign investment screening as a regulatory tool; and transparency.

First, on China's political economy, foreign investment from Chinese companies attracts the most media scrutiny, because China and Australia have diverging strategic interests and the Chinese government can potentially use Chinese companies to advance its geopolitical goals. However, Australia and China still have many overlapping interests, including in issues on trade and investment. Most investments from China are not contrary to Australia's national interests. In general, we should welcome foreign investment, including from China. Foreign investment contributes substantially to Australia's prosperity. To understand whether an investment from China is in or against Australia's national interest, the Australian government, including the Foreign Investment Review Board, needs to improve its understanding of China's political economy. China's political economy is quite different from those of Australia's traditional partners. The party state has more influence and leverage over the private sector. It is more adept at using corporations to advance its geopolitical goals. The interests of the party state and the big corporations are more aligned than is often the case in Western countries. China's activist industrial policy, which has now been followed by the US and many other Western countries, is another channel that governments can use to guide or direct commercial activities. But influence also goes the other way: big corporations, especially the state owned enterprises, can also affect government decision-making in order to pursue their profit goals. Such close links between the government and businesses also pose problems for Chinese companies seeking to expand overseas, as we are seeing with the case of TikTok. All these factors make it difficult to assess our national interest when it comes to Chinese investment. Currently most Australian regulators are underequipped to assess risks appropriately, because, in order to do so, it is crucial to have a good understanding of China's political economy, legal and regulatory environment, and the role of the Chinese Communist Party in economy and businesses. Australian government departments and regulators should invest more in improving the understanding of China's political economy and its interaction with all facets of China's policies at different levels.

My second issue is foreign investment screening as a regulatory tool. Foreign investment screening should not be used as an instrument to enforce other regulatory goals, such as in tax, competition or data and privacy. These policy goals should apply consistently to all businesses, both foreign and domestic. Using foreign investment processes to impose conditions can lead to regulatory inconsistency. In addition, foreign investment approval, including the imposition of conditions, can only deal with the risks at point of transaction. Frequently changing these conditions, without appropriate industry consultation, is akin to making policy on the run and leads to investor uncertainty.

Lastly, I wish to talk about transparency. The Foreign Investment Review Board should provide more transparency around decision-making processes. This includes providing detailed analysis and explanations on decisions made. Further, there should be more transparency around withdrawal of applications, especially if the investor is aware of the inclination of the Treasurer. This concludes my opening statement.

ACTING CHAIR: Thank you very much, Ms Jiang. Before I ask some questions and then turn to my colleagues for further questioning, could you explain exactly what the China policy entity that you're part of does, what your connection to it is, and what your qualifications and interests in this matter are?

Ms Jiang : Certainly. I am a director of the China Policy Centre. It is an independent, non-profit research organisation based in Canberra. It aims to inform and promote public discussion and policy debate on China issues. We are a registered charity with the ACNC, and you can find a lot of information, including the office holders, on the ACNC website.

ACTING CHAIR: Who are your prominent donors?

Ms Jiang : We currently are not funded. We have no revenue at the moment. We just established the organisation a few months ago.

ACTING CHAIR: What was the rationale for your establishment?

Ms Jiang : We feel that the current public discussion and policy debate on China needs to have a more informed angle, and also we would like to encourage more Chinese Australians—people like me—to be more involved in such public discussions.

ACTING CHAIR: Thank you very much. I might have a question on notice in terms of a little bit more data about your background. I am particularly interested in the first point that you make. In preparation for today, perhaps you have seen the earlier work of the committee, where we considered the takeover of Alinta Energy by Chow Tai Fook. Are you aware of that?

Ms Jiang : Yes, but I would not be able to comment on individual cases.

ACTING CHAIR: A range of concerns were raised from my point of view. I have concerns about the fact that government departments didn't know that Mr Henry Cheng, who owns Chow Tai Fook, has a business relationship with Mr Ho, who has been banned from participating in business in Australia. This gap in regulatory knowledge in Australia was very concerning to me. The other concern that I had was that in our interviews with Treasury there was a failure to acknowledge the very different context of how business is done in China, its association with entities in Hong Kong and Singapore and the intimacy between the Chinese Communist Party and the government, and the potential, in my view, to use what seem to be family companies or private companies to mask the fact that they are acting in concert with the state of China. I would be interested in your response to that, because I think it goes to your first point about a lack of political understanding and awareness about the diverging strategic positions of our two countries.

Ms Jiang : I can talk a little bit about the Chinese government's influence over Chinese companies. China has a greater capacity than most Western countries to guide or influence private companies, and sometimes foreign companies, with a substantial operation or other interests in China. The degree of influence is dependent on various factors such as strategic importance of the sector, the size of the company itself and market concentration. But this is not to say that all proposed transactions from China are under the direction of the CCP. Most transactions are still undertaken for commercial reasons. In addition, just because China is encouraging certain investment it does not necessarily mean that the investment is contrary to our national interest; sometimes, such investment can be aligned to our national interest.

I think it is imperative that, when assessing investments from any country, Australia thinks carefully about the different aspects of national interest—for example, prosperity, security, values—and the ways to maximise it. If mitigations are necessary, we must consider the cost of mitigation itself and compare it to the cost of threat. The ANU geoeconomics working group, which I am a member of, has done quite substantial work on this topic, and I'm happy to share the outcome of the working group with you, if you like.

ACTING CHAIR: Thank you very much. In your submission you make the point that employing the current practice of the Foreign Investment Review Board to impose conditions and then monitor those conditions is potentially a very flawed model, because it simply captures a point in time. It doesn't deal with an issue that I think is very much emerging: ongoing acquisitions of different parts of companies over time without clear oversight of government connected—there seem to be different departments aware of different parts. Confidence that there isn't actually a state owned business and that there are not strategic moves on Australian assets is something that I don't hold at the moment. Could you respond to that concern.

Ms Jiang : Sorry, can you repeat that question. Are you talking about this bit in the submission:

Foreign investment screening should only be used to deal with risks associated with foreign ownership.

ACTING CHAIR: No; I think I'm asking you about when that moment-in-time assessment is made by the Foreign Investment Review Board and they make the recommendation to the Treasurer, and the Treasurer either accepts it or rejects it—in most cases, he's accepted it. Compliance then becomes an issue. Compliance is with the terms that were proffered at that moment in time; it is not necessarily about the strategic plans of that company to expand and grow in a range of different ways with affiliated, and perhaps not transparently known, business connections.

Ms Jiang : The conditions are only imposed at the point of the transaction, at the point of approval. With the foreign investment screening process, the framework in general is not good at dealing with risks that may emerge after the transaction has taken place or when, for example, information has not appeared at the time of approval. That is a problem with regulation. I think one way to deal with that is to have targeted regulation that is tied not to foreign investment screening but to overall regulation and compliance. For example, if there were risks emerging later on that the company was, let's say, passing private data to foreign companies, that should be regulated through privacy and data rather than through the foreign investment screening process.

ACTING CHAIR: I would like to come back to a couple more questions at the end. I will go to Senator Rennick.

Senator RENNICK: My question is in regard to national interest. Would the Chinese government allow Australian companies to buy ports and other strategic infrastructure, similar to the way that the Australian government has allowed foreign companies to buy its strategic infrastructure?

Ms Jiang : Sorry; I didn't actually hear that question very well.

ACTING CHAIR: Can I translate a little. Senator Rennick is asking: would the Chinese government allow the sale of critical infrastructure assets—I'm assuming, Senator, you meant something like the Port of Darwin—

Senator RENNICK: That's right.

ACTING CHAIR: and would it allow Australians to buy critical infrastructure?

Ms Jiang : The foreign investment environment in China is a lot more restrictive than it is in Australia. It is quite unlikely that the Chinese government would allow the sale of what it considers critical infrastructure to foreign companies. But it is not necessary to say that Australia's selling of certain assets is therefore contrary to Australia's national interests.

Senator WHISH-WILSON: Can I ask the witness to explain why the Chinese government won't allow foreign investment. What is China's national interest in regard to that decision?

Ms Jiang : The Chinese government prefers more control over the Chinese economy and, therefore, important assets in China, compared to Australia. For example, Australia, compared to China, would not like to have as much control of the economy. Because the Chinese government wants more control, it wants to retain ownership and control of more assets in China.

Senator RENNICK: Do you think it's unreasonable, then, for the Australian government to control its own critical infrastructure? Surely, as a sovereign nation, every government should protect infrastructure that is critical to its security and sovereignty.

Ms Jiang : Indeed. That is why the Critical Infrastructure Centre was set up—to monitor and assess risk associated with critical infrastructure.

Senator RENNICK: It's important to note that I probably agree more with the Chinese government, in that they hold on to their critical infrastructure. I think our view is that we think we should hold on to our critical infrastructure as well and possibly reassess whether or not selling the Port of Darwin was the smartest thing we could have done.

ACTING CHAIR: Do you agree, Ms Jiang?

Ms Jiang : Do I agree with the senator's statement?

ACTING CHAIR: Yes.

Ms Jiang : I think all transactions should be assessed on a case-by-case basis, comparing the threats they pose to the benefits they bring.

Senator RENNICK: I have one other question. In turning around the Chinese economy in the last 40 years, did the Chinese government rely on much foreign debt or did they use their own equity and sovereignty, through an infrastructure bank, to build all the infrastructure that they have built in the last 40 years?

Ms Jiang : China has a greater saving rate, which means it has a lot of savings investment funding available, which is why it is also looking to invest overseas. In that respect, because of that, it tends to use more domestic funding.

Senator RENNICK: Okay. So it's probably fair to say that you've relied more on domestic funding than foreign debt to build infrastructure?

Ms Jiang : Because it has a high saving rate, yes.

Senator RENNICK: Thank you.

Senator PATRICK: Ms Jiang, thank you very much for your appearance. Following off the back of Senator Rennick's question, the committee has received information about other jurisdictions' foreign investment regimes. I'm wondering if it's possible for you to provide something that describes China's regime, perhaps on notice. I think that would be helpful, if you would indulge us.

Ms Jiang : Yes, I can provide that on notice.

Senator PATRICK: Thank you. You mentioned in your submission and indeed in your statement that some transactions made in terms of foreign investment by Chinese investors are commercially driven, but you said that some are perhaps influenced by the CCP. Can you give me some more details about that second circumstance—how the influence of the CCP actually works in China?

Ms Jiang : Do you mean: how does the ruling government, the Chinese Communist Party, influence decisions of corporations?

Senator PATRICK: Yes, in terms of their acquisitions in foreign countries—how does that actually work? Is the seed planted by the CCP? Does the company decide something and talk with the CCP? How does that actually work?

Ms Jiang : The companies in general would pursue their own profit motive when undertaking transactions, and the Chinese Communist Party, as the government of the People's Republic of China, can make policies that change the incentives of the corporations, therefore to encourage them or discourage them to undertake certain activities. For example, it can provide funding that is perhaps cheaper for the specific corporations than it can get from other sources of funding. That way they can encourage them to acquire more assets overseas. That is one way that it can do that. Another way is that it can possibly speak—because, for example, state owned enterprises often have a certain position in the Communist Party and the government itself; they are quite closely connected to the government. Sometimes they are more powerful than some ministers. In that sense, because of the close connection between the government and the companies, they can have a degree of influence in both ways.

Senator PATRICK: Do you think we should explicitly require companies to divulge information about these sorts of connections, not just in China but in any jurisdiction?

Ms Jiang : When we're assessing the foreign investment?

Senator PATRICK: Yes.

Ms Jiang : Yes, I think that's certainly one information we should request from the companies.

Senator PATRICK: There was the case of Bellamy's in Tasmania, where there was some speculation that the Chinese government may have restricted milk approvals in China, which had the effect of suppressing the share price here in Australia, and then a takeover was later made. I note you didn't want to really comment on the specifics. But, in general, I presume that, if the state is looking at something, they can take a very long term view and perhaps adopt a strategy in respect of foreign procurement. Would that be the case or not?

Ms Jiang : Whether a state can adopt a long-term strategy to ensure foreign investment—to ensure acquisition of foreign assets?

Senator PATRICK: Yes, to target particular foreign investments.

Ms Jiang : I'm not aware of a specific case, and I would not comment on specific cases. In general, it could potentially do that, but, in terms of the Chinese government's aims, it probably has bigger things to consider than acquiring assets. That's probably a lower priority for the Chinese government, I would imagine.

Senator PATRICK: My last question is: how does the Belt and Road Initiative and its participants—those that have signed up—influence either the CCP, as it influences procurements, or commercial entities, as they make decisions about procurements? How do those intersect?

Ms Jiang : How do the BRI countries intersect with procurement strategies?

Senator PATRICK: Or it could even be different states within a country. For example, in Australia, Victoria has a BRI agreement. Is there some effect in the way Chinese companies and/or the CCP view investment with countries or states that have entered into Belt and Road agreements?

Ms Jiang : The BRI agreement—for example, the one signed by the Victorian government—is a memorandum of understanding. It has no enforcement powers. So, even though Victoria signed up to BRI, any foreign investment from China will still have to go through proper investment screening, just like any other foreign investment.

Senator PATRICK: It's not about how we review those investments. Obviously that's standard for every investment. It's about how the Chinese view that agreement in terms of their investment decisions and strategies—so from a Chinese perspective.

Ms Jiang : From China's perspective, because BRI is a signature policy of Xi Jinping, it is quite possible that the Chinese government would look more favourably at having an economic relationship with countries that have signed up to BRI.

Senator WHISH-WILSON: I have a follow-up question in relation to Bellamy's. Does the witness believe it would be reasonable for the Australian government to put in place laws or regulations that prohibit a foreign government or a foreign-government-owned enterprise from buying an Australian company if that Australian company is a competitor to the foreign-government-owned enterprise, especially in its own market, and if the foreign government can influence the sale of products in the market, through export bans, the issuance of licences et cetera? Do you think that's a reasonable basis for the Australian government to put laws in place—if there are conflicts of interest?

Ms Jiang : You're asking whether the Australian government should prohibit a state owned enterprise from buying an Australian company that is—I missed the second part.

Senator WHISH-WILSON: A competitor with, for example, the Chinese government, as in the case of Bellamy's. Bellamy's were selling infant milk formula into China. One of its key competitors was a Chinese-government-owned business. The Australian company was struggling to get export licences. No-one provided a valid reason as to why that was the case. They suffered on the share market, and then the Chinese-government competitor bought them at a rock-bottom price. Do you think it's reasonable to have a law that prohibits the purchase of Australian companies in a situation like that, where their key competitor is a foreign government and that foreign government can influence their share price and their sales?

Ms Jiang : I think the current foreign investment framework is quite suitable for that purpose. It is flexible. When we're assessing whether a transaction is contrary to the national interest, one of the factors is competition. The ACCC does look at those transactions to see whether it lessens competition in the country. I think that is an appropriate way to mitigate those risks.

Senator WHISH-WILSON: I would note that the ACCC doesn't look at the impact of foreign competition or sales of Australian businesses in other countries. Thank you.

ACTING CHAIR: Can I ask one very quick question. You have revealed, in your answers today, a literacy about China that is often missing in Australia, and you make the point in your submission:

… Australian regulators are under-equipped to assess risks of Chinese investments, including the character of the investors.

You go on to say that a response is required in the form of 'regular specialised training for analysts working on Chinese investment or hiring more China-literate policy analysts'. How problematic is Australian regulators' current knowledge of what really goes on in China and how business operates in China?

Ms Jiang : The good thing about Australia is that we do have a lot of expertise. There are many great academics and researchers in Australia working on the issue of economic statecraft and geoeconomics. Some of the names I know include Professor Jane Golley, Professor Anthea Roberts and Dr Darren Lim at the ANU. There are also many others at universities and think tanks around Australia. The problem is that most policy officers—or case officers, in the case of Foreign Investment Review Board—in the Public Service do not possess this knowledge or analytical framework, despite its importance. I think the Public Service needs more specialised training on China related issues. This is recognised in the final report of the Independent Review of the Australian Public Service. It says that the Public Service needs more Asia literacy. I think one way to increase the China literacy in the Public Service is to recruit more—and value the knowledge and expertise of—Chinese Australians and other Australians with experience in China.

ACTING CHAIR: Thank you for your evidence, explaining the party state and its high level of interest in controlling the economy and then comparing and contrasting that with Australia. Could I ask you on notice to give consideration to the exposure draft of the bill that the government has put forward with regard to foreign investment review. I wonder if you might provide us with a detailed response to that, if you haven't already prepared one. That would be very helpful for the committee.

Ms Jiang : Okay.

ACTING CHAIR: Thank you for your evidence this morning. There may well be further questions, which will be sent to you by the secretariat. If there are, could you provide the answers by Wednesday 19 August.