Plenty of reasons to be concerned about China
Posted by Author on December 3, 2010
Barry Ferguson, via Sydney Morning Herald, December 3, 2010-
We need to be aware of the broad sweep of history in the evolution of our foreign investment policy, writes Barry Ferguson.
IN THE past 18 months, concerns have been expressed about China’s increasing interest in Australia. These concerns have resulted from China’s growing involvement in our natural resources, purchases of residential real estate by Chinese nationals in a heated local market, and ultimately from Australia’s growing dependence on the Chinese economy.
This is not the first time in our recent history that such concerns have been raised. The rapid rise of the Japanese economy in the 1960s and 1970s fuelled similar fears. While the Japanese threat subsided and the worst fears about Japan Inc. were never substantiated, the concerns were real at the time and deserve (re)consideration today.
At that time the issues raised included:
■How the insatiable Japanese thirst for raw materials might play out politically and economically.
■How Japanese customers participating in natural resource ventures might use the commercial detail acquired against the Australian owners in supply negotiations.
■Whether commercial-in-confidence information secured by one Japanese company would be shared with others through the close involvement of the Japanese government in the international expansion plans of Japanese companies.
■The creation of business enclaves – primarily tourist businesses – that excluded Australian participation.
I believe we should add three further concerns about the Chinese expansion. The first is that the Chinese government is a major stakeholder in many large Chinese businesses, fuelling concerns about China Inc. The second is that the Chinese government has a different legal system and has demonstrated a willingness to use the full weight of its power to further its commercial (as well as political) interests. And, thirdly, the prospective scale of China’s expansion dwarfs anything we might have expected from the Japanese.
I believe the third of these deserves the most attention. We are especially vulnerable because of the likely scale and duration of the Chinese threat. That such a threat could materialise should be no surprise as the global political and competitive landscape is created by the large players – the large countries, their companies and the global institutions they have created. Small countries can easily become collateral damage.
The large countries promote free markets and free trade and create global institutions, not because of the elegance of any underlying political or economic theory but because they are in their interests. While Australia can be a net beneficiary of distortion-free trade, it is the neglect of the associated capital account implications and its implicit assumption of the sustainability of “free” trade that should be of concern.
A small country that has no regard for the cumulative impact of foreign investment – on asset ownership as well as on capital account flows – might one day find the share of wealth generated accruing to residents irretrievably diminishing and that residents have become foreign employees and tenants in their own country.
It is reassuring to know that “the government determines what is contrary to the national interest by having regard to the widely held community concerns of Australians” (see the Foreign Investment Review Board website). It could be more reassuring if the government made its interpretation of these concerns public from time to time.
Given the size disparity between Australia and China, it is important that the cumulative effects of all decisions relating to particular industries, locations, and markets (including real estate) be taken into account. These cumulative impacts should be considered in terms of their effect on the optimal rate of consumption of our natural resources, their ownership and the competitive effects, and the impact of foreign ownership of other fixed resources, such as land.
I would also like an acknowledgement that social effects are considered. I am mindful of the outcry over the prospective establishment of a dedicated tourist resort for Japanese at Yeppoon near Rockhampton in Queensland in the 1980s. There were also, I believe, at the time private talks at government level about the establishment of retirement villages for elderly Japanese in Australia.
And finally, underlying all of this there needs to be proper safeguards to avoid the downsides on the commercial confidentiality issues where the investment involves access to commercial information that could prejudice the competitive position of other Australian-based ventures in international markets. We need to take a particularly aggressive approach to these sorts of investments because breaches of confidentiality undertakings can only (a) take place after the event, and (b) when the damage has been done. Rectification is not possible.
Clearly the recommended changes should not be China-specific. However, in the foreseeable future, China is the only credible threat in this context and we should not be embarrassed to acknowledge this. If we are to improve our national capacity to generate wealth, we must move from a starting policy position of automatically accepting what we are offered by the rest of the world, unless we can convince ourselves that we shouldn’t, to one of needing to convince ourselves that we should.
In conclusion I should observe that the indigenous occupants of this country might look upon the current situation with some irony with the prospect that the European invasion of their country could be followed by an Asian invasion several centuries later.
In the broad sweep of history, such a series of events would not look out of place and we need to have regard to the broad sweep of history in the evolution of our foreign investment policy.
Barry Ferguson is a former senior Victorian public servant.
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