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International relations

Rocky China ties seen driving Australia foreign investment reforms

Planned rules set to counter espionage fears as cyberattack jolts Canberra

China's Landbridge Group holds a 99-year lease to the Port of Darwin -- the sort of deal Australian critics say warrants closer scrutiny.   © Reuters

SYDNEY -- Australia's announcement earlier this month that it would tighten its foreign investment rules as a national security measure set off a wave of speculation that China, its biggest trading partner, was the primary target.

Now the business community is awaiting the draft legislation, expected in July, followed by a six-week industry consultation period. Some experts are already calling this the biggest regulatory overhaul in decades.

"The government's proposed changes, if passed, will be the most comprehensive reforms to Australia's foreign investment review framework in more than 20 years," said Allens, a major law firm.

Canberra has not singled out any particular country, but it is no secret that Chinese investment has stirred unease in Australia in recent years. The reform drive comes just as the two sides spar over Australia's push for a probe into the origins of COVID-19 and China's apparent retaliation with trade penalties.

Australian Prime Minister Scott Morrison's revelation on Friday morning that the country was under a major cyberattack by a "sophisticated state-based actor" -- without naming the source -- also had many experts pointing fingers at China, raising fears of a dangerous turn in the relationship.

The updated investment rules, expected to take effect on Jan. 1, are to be implemented by David Irvine, the chairman of Australia's Foreign Investment Review Board and a former ambassador to China. He is also a former chief of Australia's security intelligence services, lending a counter-espionage tone to the review board's work.

"The reform package includes measures to strengthen the existing framework with enhanced national security review of sensitive acquisitions; extra powers and resources to ensure foreign investors comply with the terms of their approval; and amendments to streamline investment in non-sensitive areas," the FIRB said in a statement issued after Treasurer Josh Frydenberg announced the changes.

Sensitive businesses include media, telecommunications, transport, defense and military-related industries, the extraction of uranium or plutonium, and the operation of nuclear facilities. The forthcoming legislation may also include tech startups.

Upon implementation, a permanent $0 threshold will be imposed on all foreign investments in sensitive fields. This means that any such investment, including a non-controlling share, can be examined under the new rules no matter how small. The treasurer will also gain "last resort" powers to impose deal conditions or force a divestment even after the FIRB has approved a transaction.

All this could undermine smooth operation of the 2015 Australia-China free trade agreement, particularly Chapter 9, which provided for a framework for streamlined investment approvals to be set up within three years -- though this has not been completed.

Peter Jennings, CEO of the Australian Strategic Policy Institute, welcomed the new measures in a paper titled, "China will be surprised how long it took us to act on foreign investment laws."

A Chinese containership sails out of Sydney in 2016: China is Australia's largest trading partner.   © Reuters

He said in an interview that Australia's rule tightening is part of a multinational, but largely uncoordinated, effort to resist what he sees as China's aggressive pursuit of intellectual property in Western democracies.

"Having got to this point, I think that what's going to happen is there's now going to be a bit of coordination and sharing of experiences so that we don't allow ourselves to be divided and conquered in the way that frankly we were being, up until the last year or two," Jennings told the Nikkei Asian Review.

"I don't think there's any intellectual property on the planet that they are not interested in," he said of China. "Broadly, this manner of intelligence gathering, non-covert but open business engagement, is all about securing access to intellectual property of any type."

Jennings -- who on Friday was quoted by local media as saying China was clearly behind the hacking attack -- noted that Australia has also allowed Chinese companies to control critical infrastructure in a manner that Beijing would never allow foreign companies.

The best example of this laissez-faire approach may be the Northern Territory's granting of a 99-year lease on the Port of Darwin to China's Landbridge Group for 506 million Australian dollars ($347.7 million). This gives the company operational control of major infrastructure that also happens to be near the U.S. Marine Corps Rotational Force's quarters.

Jennings argues that the Australian government, at a time when the diplomatic atmosphere is less tense, should buy the lease back from Landbridge Group and sell it to a long-term Australian investor such as a pension fund.

Professor Clive Hamilton, a prominent academic and author of several books that harshly criticize the Chinese Communist Party's alleged activities in Australia, said the new FIRB rules reflected Canberra's concerns over Beijing's use of its economic might in what he called a "war for supremacy."

"I think the new rules reflect a growing anxiety within the federal government about the possibility of foreign interference and espionage in Australia as a result of foreign investment and acquisitions, an anxiety based on a deeper understanding of the way in which the Chinese Communist Party weaponizes economic relationships for political gain," Hamilton said.

By the numbers, China still trails far behind the biggest investors in Australia. The U.S. alone accounted for a leading 25.6% of ownership, out of the AU$3.8 trillion worth of Australian assets in foreign hands in 2019. China, in ninth place, and Hong Kong, in fifth, together held a modest 5.7%.

But critics like Hamilton urge caution because, they say, Chinese businesses are subject to the dictates of the state, and the state uses them for political and strategic ends.

"We now have a huge accumulation of evidence that it has used those businesses around the world for exactly that purpose. That's why Western nations have in particular excluded Chinese companies, state-owned and private, from getting anywhere near strategic assets," Hamilton said.

"They've done it much too late and so in Australia, for example, Chinese companies, some with links to the CCP, own large parts of our electricity and gas distribution networks, not to mention our ports."

But for Richard Holden, professor of economics at the University of New South Wales, the new rules are likely rooted in more mundane domestic politics rather than any particular need to fend off China.

"They're responding to a general concern that when asset prices are depressed there is a potential for certain investors to snap up bargains," Holden said.

"The rules were drawn up quickly, even hastily, to avoid a potential political issue, including with some members of parliament who have in the past expressed concerns about Chinese interests or interests associated with China buying up Australian assets, especially farmland."

Such land-buying would a problem for the ruling coalition's junior partner, the Nationals, and its rural base.

Holden said he thinks the rules are a "short-term reaction" and "something of a placeholder."

The Australian government, he suggested, is walking a tightrope as it deals with a U.S. administration that shows disdain for international institutions. U.S. President Donald Trump's preference for "bilateral negotiations, or negotiations and threats" is "bad for the United States and it's surely not good for Australia," he said.

Holden agreed that Australia's siding with the United States in its attempt to have an international inquiry into the source of the COVID-19 pandemic does not make Canberra's relationship with Beijing any easier. But he sounded optimistic about a thaw, albeit one that may not be immediately visible to the Australian public or media.

"The Australian foreign minister and the trade minister will have a constructive dialogue with their [Chinese] counterparts and reach a kind of detente around these issues on both sides," he predicted, "and get back to a better footing."

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