Recent events suggest that western countries continue to be challenged by Chinese foreign direct investment.
The weight of Chinese capital that has been employed in global foreign direct investment (FDI) following the Global Financial Crisis has been huge. As at the end of 2012 it is estimated $600 billion has been invested outside China by Chinese entities as FDI. Australia has been the largest single recipient of that FDI with more than $35 billion of FDI.
Australia struggled earlier than most to deal with the regulatory ramifications of this flood of investment. In 2008 and 2009 the Australian Foreign Investment Review Board sought to develop transparent principles to regulate investment by State Owned Enterprises in Australian businesses, primarily in the resources sector. The development of relatively standard conditions around that kind of investment are now clearer, particularly through the imposition of conditions in sensitive transactions in the areas of introducing local partners into the investment, governance arrangements including Australian participation in management, ongoing arrangements to protect against non-commercial dealings and retention of stock exchange listings. Those kinds of arrangements can be seen in the terms of the 2012 approvals of the $3 billion Yancoal merger and the $250 million Cubbie Station agricultural acquisition.
It is worth contrasting how other western countries have struggled with the same issues over the last year or so.
In the United States Chinese companies can feel with some force that there may not be a completely level playing field. The extraordinary 2012 House Intelligence Committee Report on Huawei suggesting security risks in its telecoms infrastructure comes to mind. Under the CFIUS regime the President retains power to prohibit investment based on national security grounds. In 2012 Barrack Obama signed an executive order prohibiting two Chinese nationals from acquiring several wind farms in Oregon and requiring the dismantling of Chinese equipment on the sites, on the basis of a perceived national security threat because the wind farms were in restricted airspace adjacent to a naval bombing range. Litigation challenging that decision this year has to date been unsuccessful. In early 2013 the proposed acquisition of A123 Systems, a battery maker, by Wanxiang Group was subject to strong Congressional resistance based on arguments that there was a risk to national security because the battery technology is used by the US military. Ultimately CFIUS approval was obtained. In the current Sprint merger transaction with Softbank of Japan, there is again complaint from some Senators that the transaction should be prohibited because Softbank uses Chinese infrastructure in its Japanese mobile network.
The Canadian foreign investment regime has also struggled with SOE investment in 2012 in connection with energy company investments, with the $5.2 billion acquisition by Petronas of Malaysia of Progress Energy and the $14 billion acquisition by CNOOC of Nexen. The Canadian foreign investment regime requires that foreign investment be of net benefit to Canada. Ultimately these two transactions were approved in December 2012 on the basis of various conditions similar to the types of Australian conditions noted above. The approval of these investments has also been coupled with the adoption of a variety of changes to the foreign investment regime in Canada including on its policy in dealing with SOE investment. The Industry Minister also announced at that time that future investments by SOE’s in Canadian oil sands businesses will only be found to be of net benefit in exceptional cases, suggesting further investment by SOEs in that sector are effectively off limits.
In New Zealand 2012 was marked by litigation skirmishing around the sale of a substantial dairy farm operation known as the Crafar Farms, to a private Chinese investor. Certain Maori trusts and private New Zealand investors attempted to challenge the Ministerial approval of the sale given under the Oversees Investment Act on the basis the Ministers misdirected themselves on the review criteria specified in the legislation that the investor must have business experience and acumen relevant to the investment in New Zealand. Ultimately the New Zealand courts upheld the Ministers decision to approve the investment.
These cases demonstrate that many western countries are challenged by the policy issues that arise from Chinese FDI. It is absolutely imperative that these issues be satisfactorily resolved in order that China can take its rightful place as a leading global economy. It behoves all western nations to work together to develop fair and transparent rules around these issues.