Investors Wary Of Chinese Money

The results of the survey.

The results of the survey.

When the Chinese Government made a surprise cash offer to buy Australia’s biggest sugar business earlier this month, it not only sent the board of CSR into a spin, it opened up an unsavoury but necessary debate about Australia’s foreign investment policy with China.

Until now, China had targeted Australian property, mining and energy businesses. But bidding for sugar in such an aggressive manner was an indication that Beijing's "going out" policy in regard to investing in foreign companies was about to be unleased.

Australia has always relied on foreign capital. Indeed various governments have bent over backwards to offer tax incentives to attract overseas investment.

What makes China different cannot be blamed on xenophobia. Where most foreign investment is funded from private interests, whose main motive is profit, Chinese investment is controlled by the government — a communist regime intolerant of dissent.

Investor Pulse (a joint venture between marketing research group Colmar Brunton and BusinessDay) asked a panel of 2000 investors their thoughts on China buying Australian business, their attitude to the Foreign Investment Review Board, and the impact of the Stern Hu affair, which has gone on for six months, and involved the arrest of four senior Rio Tinto executives by Chinese authorities, accusing them of corruption over iron ore dealings. The arrests came just weeks after Rio reneged on a deal to hand control of the company to state-owned Chinalco.

Problem for policymakers

The results of Investor Pulse were both controversial and illuminating and will scare the living daylights out of policymakers. The resounding conclusion is that Australian investors have a problem with Chinese investment.

It found that 81 per cent of surveyed investors believed that "human rights should play a role in Australia’s evolving economic relationship with China".

The Stern Hu affair and the more recent Google threat to pull out of China are both salient events, shifting 25 per cent and 30 pe cent respectively of investors’ attitudes towards China.

There are fundamental disagreements between Australian investors and their Chinese counterparts. If the relationship remains purely economic, which seems likely, expect to see regular and sharp convulsions that are a risk to mutual trade.

An analogy is the security relationship with Indonesia, which can be measured by the two countries’ mutual strategic interests. Yet a fundamental lack of ties at the person-to-person level leaves it vulnerable to regular upheaval that demands constant diplomatic all-of-government effort.

In the case of China, policymakers may take some comfort from a near 50-50 split among investors on whether a free-trade agreement makes sense. The biggest benefit of such a formal document might be the stability provided by a legal framework rather than anything strictly economic.

A large majority, nearly 40 per cent, see Chinese firms as typically "under government influence" and therefore a potential threat to the "national interest". Another 42 per cent think Chinese firms already own too much or we shouldn’t sell assets to "pay for our debts". Only 19 per cent of investors believe China "is just another trading partner" and "free markets enhance prosperity", as well as helps "keep the peace between nations".

These results among Australia’s most investment-focused citizenry should disturb Chinese firms and policymakers alike. Whether true or not, China is perceived as an unfair player in the markets.

This alarmist sentiment is no doubt exacerbated by the fact that in the past few weeks Chinese companies have won approval for a $3.5 billion takeover of Felix Resources, a $US498 million ($550 million) acquisition of Indophil and six approvals for mining companies in November.

In the past year China has spent a record $US25 billion on 17 acquisitions in Australia and 21 strategic stakes. Since the Rudd Government came to office in November 2007, it has approved more than 110 Chinese investment applications (including in business and non-business sectors) worth more than $39 billion, suggesting acquisition sizes are rising.

Investment process opaque

It appears that the Foreign Investment Review Board (FIRB) plays a big role for this perception. When investors were asked if the current FIRB structure and policy process was satisfactory, just 9 per cent agreed. A little over one-third of investors believed that the FIRB’s behind closed-doors deliberations were necessary to protect “decisions from a populist backlash” and an overwhelming majority of 56 per cent felt FIRB should be a "more public process".

And when it comes to transparency, FIRB was found lacking. Five per cent of investors felt FIRB rules for foreign investment were clear. Another 45 per cent felt recent changes by Wayne Swan gave the rules greater clarity but were "still unclear", while 50 per cent of investors saw foreign investment rules as "unclear". It seems opaque Chinese firms coupled with an opaque investment approval process is a recipe for disaster.

But most surprising, is the lack of support for Chinese investment at the more personal level of residential housing. After all, high levels of Chinese demand for property has been a key contributor to the property market remaining strong.

In a report on China Daily in January, the headline read: "Australia is now a hot real estate market for Chinese investors". The report said after the UK and New Zealand, China is third in the line-up of countries that sends immigrants to Australia. Last financial year, more than 70,000 Chinese arrived in Australia to live permanently, including a steady stream of business migrants and a growing number of students.

In March, Chinese businessman Jiang Mei bought one of the most expensive houses ever sold in Sydney, an inner-city, Point Piper house for $32.4 million.

When asked if they agreed with last year’s Federal Government decision to liberalise investment for foreigners into Australian housing, only 27 per cent agreed that the principle of free markets should apply to housing and that it would "drive up prices". A stunning 45 per cent agreed that “property prices are too high already”, as well as 28 per cent felt that "Australians should own Australian houses".

Currency peg questioned

The Chinese image problem extends to macroeconomics where the Chinese currency peg is regarded as a justification for Australia to "protect its industry", according to 31 per cent of investors. More worryingly still, 40 per cent think we should already be protecting manufacturers.

Only 29 per cent agreed that regardless of the Chinese currency peg, a continuation of the prosperity Australia experienced in the past 20 years was dependent upon a commitment to free markets. Investors were almost evenly split on whether the current round of increased trade tension between the US and China would worsen.

Whenever Canberra has confronted a fork in the road with China it has taken it. However, ad hoc policy is not cutting it with investors.

Australia needs a forward–looking economic engagement framework with China that includes fundamental reform of the FIRB process, human rights dialogue and positions on macroeconomic settings like currency pegs. Such will offer clear rules for Chinese firms and a clear message to hold investor support.