Price of business the issue when China comes shopping

Hamish McDonald Asia-Pacific Editor
July 26, 2008

CHINA has a stupendous $US1800 billion ($1880 billion) in foreign reserves, a big chunk of it parked in US Treasury bonds that have lost their relative value dramatically because of the steady rise of the Chinese yuan against the US dollar.

Understandably, the Chinese have been looking at alternatives, one of which is investing in the producers of the raw materials their economy needs or in direct start-ups to open new supplies of these materials.

This is producing a rapid qualitative change in China's economic ties with Australia. As well as rapidly eclipsing Japan to become our biggest trading partner, China is now becoming a significant investor. Two years ago, cumulative Chinese investment in Australia totalled $3.5 million. Last year, investment applications from China hit $10 billion, and they may reach $30 billion this year.

This has put some tricky decisions on the plate of the Treasurer, Wayne Swan, who can veto the foreign purchase of more than 15 per cent in local companies on "national interest" grounds, without having to be too specific.

China's big state corporations or its new sovereign investment fund, with $400 billion to play with, have the capacity to buy controlling stakes in leading companies, even a BHP Billiton, and thereby dominate the supply side of the market in this country.

This year's $US14 billion raid on Rio Tinto by Chinalco grabbed 9 per cent of its equity in one overnight swoop, though the intention was to foil BHP Billiton's attempted merger/takeover.

As Mark Thirlwell and Malcolm Cook of the Lowy Institute point out in a recent study, this presents a new challenge to governments such as Australia's which want the private sector and markets to run the productive part of the economy, and which advocate openness to foreign investment. But this also puts new bargaining power in the hands of Swan. Until now, China has been on the receiving side of international investment, needing to concede few favours to foreigners and overseas Chinese desperate to get a foothold in its domestic market. Now it needs to argue for fair treatment for its own foreign investments.

Swan and his colleagues should be taking the opportunity to seek closure of outstanding investment disputes. Many of these require top-level intervention from Beijing to overrule local power cliques that have taken smaller investors to the cleaners.

Take the case of the Chinese-Australian businessman, Ng You Kie, a distributor of big European beer brands in China who, in 1995, was invited to invest in a brewery by the municipal government of Shaoguan, a historic town in the north of Guangdong province. He put $12 million into a

51 per cent stake, adding several million more in working capital and bank guarantees to bring its Vigour brand beer on to the market.

The local government partner never completed the paperwork to make it an official foreign investment, and two years later installed its own general manager, under whom the enterprise rapidly ran up big debts. Ng briefly gained control in 2002 and attempted to extricate some of his working capital.

He was charged with embezzlement, getting an eight-year jail term from the Shaoguan city-level court, which under the Chinese system is essentially directed by the same Communist Party branch that runs the city government.

Intervention by a senior Hong Kong official, Donald Tsang (now Hong Kong's chief executive) and medical advice about a serious spinal condition got him out of jail and China in August 2004, but he still has a jail sentence hanging over his head.

Despite an opinion from six of China's most eminent commercial law jurists that the embezzlement charge is wrong, the Chinese Supreme People's Court has not replied to a request for an appeal. The Shaoguan city government has used a local court to derail one arbitration case. A month ago, China's official trade and investment arbitration commission ordered the city to pay 23 million yuan ($3.5 million) to Ng, but enforcement will probably depend on the same courts that created the original problem.

Ng has tried to use publicity. China's Legal Daily pointed to the anomalies, as has Hong Kong's Asia Week.

In February, the Australian edition of the Hong Kong-based newspaper Sing Tao carried a sympathetic front-page account of his predicament. The next day, Sing Tao printed a "notice of this newspaper withdrawing a report", saying "it seems the story came from one side only" and was "unfair to the Shaoguan municipal government".

Sing Tao staff are reluctant to talk about why they did not simply print a response from Shaoguan. It apparently took one call from a Sydney immigration agent representing Shaoguan, and fear of disapproval from China's massive consulate-general here, to get an abject withdrawal. Ng says it has made him fearful, even in Sydney. "The fear comes from the apparent reach of the Chinese Government into Australia," Ng said, "that a small city like Shaoguan has the influence to suppress news in Australia."

It is possible strings were pulled with Sing Tao's proprietor, the Hong Kong cigarette tycoon Charles Ho, who is on the standing committee of the Chinese People's Political Consultative Conference, a prestigious forum in which capitalists build influence with the communist leadership.

But Ho wears another hat, as director of the huge Chinese oil company Sinopec now investing billions around the world, including exploration licences in Australia. If Sinopec applications come across Swan's desk, he could remind the Chinese that the investment climate cuts two ways.