Chinese Investment and Australia Forum

Date
Presenter
Mr Philip Gaetjens Secretary to the Treasury
Location
Sydney, New South Wales

Foreign investment is important for Australia

In a global context, Australia is a trade-exposed, capital importing country with a long history of welcoming foreign investment.

We have a large land mass, with a relatively small but highly urbanised population and are resource rich; this invites investment to enable us to harness these resources.

  • The fact that we have high investment rates reflects that we have enough opportunities in Australia for Australians to invest, and more for foreign investors:1 we have an abundance of investment opportunities, not a savings shortfall.
  • Foreign capital allows a wider range of investment in the Australian economy than would otherwise be possible. Without the additional foreign capital some Australian investments would be delayed or not proceed.
  • This increased range of investments in domestic assets and businesses, along with the potential for greater access to foreign markets for Australian businesses which are funded by foreign capital, can translate into increased competition, capital formation and job creation.

Whilst foreign investment has played an important and beneficial role in the Australian economy, and will continue to do so, the benefits of foreign investment are dispersed and often not obvious to the community more broadly, but we would definitely notice its absence.

  • Treasury research in 20122 looked at the impact of a sudden and ongoing reduction in capital inflows, suggesting that a reduction of net capital inflow of 1 per cent of GDP would, after 10 years, lead to GDP being 0.7 per cent lower.3

The composition of foreign investment into Australia has changed over time, both in terms of the source of foreign investment and the sectors that have benefited from this investment.

  • At the beginning of the 20th century, most foreign investment came from the United Kingdom (UK).
  • After World War II, investment surged from the United States (US), as multinationals invested in Australia's growing industries, including manufacturing and mining. This created post-war jobs, and lead to the transfer of technology and skills into Australia.
    • A great example of this is Boeing. Boeing has made Australia its largest base outside of the US, having invested about $1 billion in its Australian operations over the 90 years it has been in the country.
    • It employs more than 3,000 staff across 38 locations throughout Australia.

In more recent times, there has been an increase in investment from Asia – first, large parcels of investment from Japan, and now, increasingly from emerging economies such as China and Malaysia.

Direct investment inflows from China have risen in recent years from being almost non-existent before 2007, to around $3 billion of net inflows of Chinese direct investment per year over the last three years.

  • However the stock of Chinese direct investment in Australia was still only 4.8 per cent of the total stock of foreign direct investment in Australia at the end of 2017 (ABS).

At the end of 2017, the stock of Chinese direct investment in Australia reached $40.7 billion (ABS).

  • Chinese Investment in Australia (CHIIA) data suggests that Chinese gross direct investment inflows increased from $5.7 billion in 2014 to $8.9 billion in 2017 (inflows of $10.9 billion were recorded in 2015 and of $14.9 billion in 2016).
  • For three years in a row, China has been Australia's largest source of proposed foreign investment approvals, accounting for approximately 25 per cent of the value of all approved investment in 2016-17.
  • In 2016-17, China also accounted for 25 per cent of the value of approved proposed investment ($38.8 billion). The top three sectors for approved proposed Chinese investment were real estate ($15.3 billion, including both residential and commercial real estate); manufacturing, electricity and gas ($7.4 billion); and mineral exploration and development ($7.3 billion).

Chinese investment in Australia has delivered benefits to Australia

In recent years, foreign investment, including from China, has helped Australia make the most of the resources boom which in turn has helped China prosper, but has also contributed to growth in the non-mining sectors of the Australian economy.

  • Agriculture and food have obvious appeal to investors across Asia, while more foreign investors are becoming interested in opportunities in Australian healthcare, services and innovation.

New capital expenditure in Australian businesses will also allow for growth and productivity increases which in turn create more value, more growth and more jobs.

It is worth reflecting on what some of these investments have delivered for Australia:

  • In Australia's renewable energy sector.
    • China's largest wind energy company Goldwind has been investing in Australia since 2010. It now has three operational wind and solar renewable energy projects and four more in development across three states (NSW, VIC, TAS).
    • In August 2017, Goldwind invested $110 million to acquire one of Australia's largest wind development projects, Victoria's Stockyard Hill Wind Farm, from Origin Energy. In April this year (2018), Goldwind helped attract China's largest energy engineering company, PowerChina Resources, to take an 80 per cent stake in the new 150MW Cattle Hill Wind Farm in Tasmania.
    • Moreover, Goldwind teamed up with the University of New South Wales and provided $2 million in funding to establish Australia's first wind power test lab.
  • Chinese investment into the medical sector, by for example China Resources Corporation, Luye Medical and Heng Kang Medical Group, is generating more jobs for Australians, including through new services export opportunities. These investors are also introducing technologies to help Australia stay on the forefront of medical advances.
  • Chinese investment (Tianqi Lithium) into lithium processing in Western Australia support an estimated 500 local construction jobs and will support over 200 local full-time jobs when complete in 2019.
  • In research and health, UNSW and Chinese biotech company Beroni Group have signed a cooperation agreement to advance the development of an anti-cancer drug developed by UNSW. The investment will help fund clinical trials to explore the prevention and treatment of diseases in patients at an early stage.

Australia's investment regime is transparent, consultative and robust

Australia has an open and transparent foreign investment review framework, which assesses foreign investment applications on a case by case basis.

  • We have a non-discriminatory investment regime where proposed foreign investment above relevant screening thresholds are scrutinised against the national interest.
  • Recent changes to our regime do not undermine this principle. Rather, they enhance it by being clearer about the Government's expectations. Australia does not create 'blacklists' or 'whitelists' for foreign investment – in contrast to many countries, which exclude whole sectors of their economy from foreign investment, nearly all sectors of our economy are open to foreign investment, and where possible, we work with investors to overcome any national interest issues.
  • All foreign government investors have a $0 screening threshold for a direct interest in Australian land or an Australian entity or business.
    • For example, a United States or Canadian government pension fund receives the same rule of law treatment as China Investment Corporation (China's sovereign wealth fund).

Whilst we approve the vast majority of proposed investments, having only rejected a handful of proposals in the last decade, the Government stated in our Foreign Policy White Paper, that openness is a means to an end, not an end in itself, nor an absolute.

National security has always been an important consideration when determining whether foreign investment is in the national interest. But recently this has been given sharper focus through a more formal framework overseen by the Critical Infrastructure Centre. This reflects the changing nature of the geo-political environment, the privatisation of critical infrastructure and technological changes, including threats posed by cyber-attacks.

It is incumbent on the Government through the Critical Infrastructure Centre and the FIRB to ensure that national security and our national interest are protected through the foreign investment process

  • We do not resile from protecting our national security.
  • The Australian Government has recognised the importance of addressing risks to critical infrastructure in a considered and proactive manner.
  • The Critical Infrastructure Centre in the Department of Home Affairs provides coordinated risk assessments as an input to FIRB consideration and to proactively assess critical infrastructure assets.

Successive government policy has recognised that foreign investment is beneficial to Australia and investment should proceed unless there are reasons why it would not be in the national interest to do so.

  • The Foreign Acquisition and Takeovers Act provides for the Treasurer to decide in each case whether a particular investment would be contrary to the national interest.
  • This includes considering the extent to which investments affect Australia's ability to protect its strategic and security interests but the national interest is broader than just national security.
  • A range of factors and the relative importance of these can vary depending upon the nature of the target enterprises.4 Investment in enterprises that are large employers or that have significant market share may raise more sensitivities than investments in smaller enterprises. However, investments in small enterprises with unique assets or in sensitive businesses may also raise concerns.
  • That the vast majority of applications are approved, or approved with conditions indicates there are very few proposed investments that pose national interest concerns unable to be mitigated.
    • Treasury and the FIRB actively engage with foreign investors and where possible apply mitigating measures in order for the proposed investment to proceed.
  • The FIRB is an outward-facing and proactive institution which readily works with a variety of stakeholders.
    • During 2016-17, Treasury conducted over 270 meetings with stakeholders from across Australia, including, investors, lawyers, financial advisory firms, industry associations, think tanks, and other members of the investment community.

Amidst global trade tensions, it is important that we continue to support open and transparent trade and investment flows.

Investment is one aspect of a broader bilateral relationship

Chinese investment in Australia is only one part of our overall bilateral relationship with China, which is much broader.

The Australia China Comprehensive Strategic Partnership is one of the closest relationships that two governments can reach. After establishing diplomatic relations more than 45 years ago the relationship is has broadened and deepened.

Today, China is our largest two-way trading partner by a significant margin – two-way trade reached a new record high of $183 billion in 2017, supported by what is still one of China's most ambitious trade agreements, the China-Australia Free Trade Agreement.

China remains a key market for Australian exports, accounting for more than 80 per cent of Australia's iron ore exports, around a third of our liquefied natural gas and more than a fifth of our coal.5

  • We are already a reliable exporter of quality agricultural goods, with China accounting for around three-quarters of our wool, almost a third of our alcoholic beverages and around one quarter of our seafood product exports.
  • As China's middle class grows not only will our trade in services with China grow considerably (potentially creating hundreds of thousands of new Australian jobs) but so will China's investment in other areas in which Australia has a comparative advantage: areas such as agribusiness, health products and services, tourism and education.

Our relationship with China is also broader than economic issues.

  • Our nations are intertwined through families and friends, as the 2016 Census demonstrates, with more than 1.2 million Australians claiming some Chinese heritage.
  • We share a reciprocal respect for education, with Australian universities, colleges and schools continuing to educate Chinese students – 187,547 Chinese students were enrolled in Australian education in 2017-18.
  • We want to see each other's countries – tourism is booming in both directions with the two way flow of short-term visitors at around 2 million per year in 2017-18.

We possess an enduring interest in each other's cultures, with 36 Australia Studies Centres scattered throughout Chinese provinces and the New Colombo Plan having sent more than 4,700 Australian undergraduate students to study, work, and experience life in China since 2014.

  • This year, the Australian and Queensland ballets are touring China. Last year the Chinese National Orchestra performed at the Sydney Opera House and the Chinese National Ballet at the Asiatopia Festival in Melbourne.
  • The National Museum's iconic indigenous 'Old Masters' bark art collection is currently touring China; it has just wound up in Beijing and is now preparing to open in Shanghai. It is the first time this collection has been displayed internationally.

Good quality data and analysis helps inform debate

While the CHIIA database relates to China, it is part of a broader corpus of work to better understand foreign investment in Australia. Some recent examples of this include:

  • a report released in August 2017 by the US Studies Centre at the University of Sydney titled 'Indispensable economic partners: The US-Australia investment relationship';
  • an Austrade report released in mid-2017 on Japanese Investment; and
  • improved data on foreign ownership of agricultural land and upcoming releases on foreign ownership of water rights and a foreign residential land register.

Our relationship with China will shape Australia's economic development for decades to come.

As the Government's principal economic adviser, the Treasury has a keen interest in helping promote an informed discussion around the Australia-China relationship based on facts and sound analysis.

The CHIIA database will give us better information on the sectors in which Chinese investment is flowing into, and allow us to better explore the benefits of greater Chinese investment in Australia.

The CHIIA database provides valuable information on Chinese investment in Australia for two main reasons:

  • It includes Chinese enterprise's investment in Australia when the transaction is realised, compared with when an investment is proposed.
  • Data on ultimate beneficial ownership is included, rather than data on where the money came from before entering Australia (this is important as the immediate source of the investment does not necessarily reflect ultimate ownership of investment).
    • This method affords a more granular picture of Chinese investment in Australia.

CHIIA is a great example of collaboration between Government, academia, and industry, where diverse areas of expertise and interest have yielded a positive outcome.

Foreign investment is a complex topic, and detailed analysis to assist in achieving greater clarity is something we should all welcome.

We will be better placed to navigate the Australia-China relationship as it continues to evolve if we equip ourselves with the facts on the ground.

1 - In 2017-18 Australia's investment-savings gap was 3.5 per cent of GDP, and has averaged around 3.6 per cent of GDP per year over the last 5 years (it is useful to look at the average over a number of years, to overcome year-by-year movement).

The current account deficit was 2.2 per cent of GDP in 2016-17 and 2.9 per cent of GDP in 2017-18.

For 2016-17 and 2017-18, the S-I gap does not equal the current account balance due to statistical discrepancies. The 2016-17 S-I gap will equal the CA balance following the release of the annual national accounts later this year.

The investment savings gap is the difference between national savings and investment, and arises when there is a greater demand for investment than there is supply of national savings in an economy. The fact that Australia has an investment-savings gap doesn't mean that Australians aren't saving or investing. It just means that we have enough investment opportunities in Australia for Australians, and more for foreign investors.

2 - Gali, J and Taplin, B, (2012) The macroeconomic effects of lower capital inflow, Economic Roundup Issue 3, 2012, Australian Treasury.

3 - Note that this study refers to the impact of a sudden and ongoing reduction of all capital inflows, not just foreign direct investment.

4 - Australia's Foreign Investment Review Framework identifies national security, competition, other Australian Government policies (including tax), the impact on the economy and the community and the character of the investor as factors typically assessed in considering whether an application is contrary to Australia's national interest.

5 Exact figures are 31 per cent of our LNG and 21 per cent of our coal.