Talking Point

Beijing sizes up Abbott

Will Australia’s new leader be less friendly to Chinese business interests?

AUSTRALIA-ELECTION/

Next stop, Beijing: Tony Abbott has said he wants to sign a free trade pact with China within a year

Politicians have often been keen to take the plunge to get a bit of publicity. Mao Zedong was reported to have swum so rapidly down the Yangtze in 1966 that he started getting invitations to compete at international swim meets (see WiC116). Beppe Grillo, leader of the populist Five Star Movement in Italy, made his own headlines last year by swimming to Sicily across the Straits of Messina (which looked a lot narrower on Google Maps, Grillo said afterwards). Christine Lagarde, managing director at the IMF, says the national medal she won for synchronised swimming also taught an important political lesson: “Grit your teeth and smile.”

But the swimmer supreme this month must be Tony Abbott, who is now tripling up as Australian prime minister, triathlete and volunteer lifeguard. Abbott was seen so often in his swimming trunks that his election team called a halt to further photos, declaring the campaign a “budgie smuggler-free zone”. The ploy worked: Abbott won the vote and was sworn into the top job this week. Aside from more action shots from the beach, what else can the Chinese expect from Australia’s new Iron Man?

How does Abbott’s China experience compare to his predecessor?

Kevin Rudd arrived in office with a reputation as a Sinophile and fluent Mandarin speaker. But his policy achievements with the Chinese were more limited than he would have hoped. At home he took early criticism as a Chinese stooge (his opponents labelled him “the Manchurian candidate”) before drawing susbsequent fire from Beijing after a series of rows when Australia blocked Chinese investment (see WiC22). His hosts were also left unimpressed by some straight talking during a trip Rudd made to the Chinese capital, despite his suggestion that true friends (or zhengyou) could speak freely on matters on which they disagreed. But back in Australia the sniping was that Rudd never managed to establish much rapport with his Chinese counterparts, even if he could speak their language.

Abbott starts out with a lot less expected of him, not least because of his reputation as a surf-and-sausages Aussie more at home in an Anglo-centric world than an Asian one. Perhaps overcompensating for this, he is insisting that he will pursue an “Asia first” foreign policy. “It’s not that I lack a sense of the community of values’” with English-speaking nations, he explained in an interview to the Lowy Institute that was picked up by the wider media, “But in the end your focus has got to be on the relationships that need the most attention.”

Abbott says “Asia first” is pragmatic because the decisions shaping Australian interests are now just as likely to be taken in cities like Jakarta and Beijing as they are in Washington. It also means that he will visit Asian capitals before going to Europe and the United States. Indonesia is first on the list (“in the great scheme of things, it’s our most important relationship”). But his next priority is to pay “appropriate respects” to Australia’s main trading partners, China among them.

So is the country still dependent on mining and China for its growth?

This was a point the two candidates disagreed over during campaigning. Rudd argued that the resources boom had come to an end, while Abbott saw things differently, claiming that a change in government would “reboot” the mining sector.

Certainly, Australia is entering a new era after a lengthy period of spectacular growth for its commodities firms. China played a key role in the boom, first as a leading customer but then as financial backer for many of the new mining projects intended to extract more coal, copper and iron ore.

But the concern over the last year has been whether demand from emerging markets can keep up the pace, which is why Paul Bloxham, HSBC’s chief economist for Australia and New Zealand, says that the most common question he is asked by clients is “What happens if China slows down?”

“The first thing to note is that China has already slowed,” Bloxham told WiC from his Sydney office this week. “In fact, growth has been slowing for a while, from double digit levels a few years ago to 7.5% this year. But Australia has still done very well.”

Because China’s economy is now so much bigger, it continues to be a major contributor to commodity demand, even as growth tapers off. Even so, Australian investors have been watching the economic data with concern, especially earlier in the summer when the indicators looked bleak and the Chinese banks seemed to be on the verge of a credit crunch (see WiC199). Since then the mood has improved, with better numbers for trade, investment, retail sales and production. And longer term, Bloxham seems fairly confident: “Our HSBC house view is that the commodity boom is changing shape. It’s fair to say that it is slowing down, but it’s not collapsing.”

Partly, that’s based on the premise that the new investment in mines is about to pay off, as the additional capacity boosts supply. There’s also the view that the composition of demand is going to evolve. Coal and iron ore have been the largest contributors to Australian exports in the past, feeding the infrastructure build-out across the Chinese economy (a trend that HSBC says has some way to run). But Bloxham thinks that demand for energy is going to be another major feature in the years ahead, particularly as millions more people move into cities. An example of this newer sweet spot is liquefied natural gas (LNG), with seven major projects soon to start operations in Australia. “Once they’re switched on, the increase in LNG exports is going to be massive, up by as much as 400% by 2020,” he predicts.

Bigger picture, the commodity-intensive growth path of economies like China also bodes well for the Australian economy. “The countries driving global growth need lots of natural resources,” Bloxham says. “Western countries had similar needs in the 1950s and 1960s but what we’re seeing now is that demand is coming from the emerging economies, led by China, as they build new infrastructure and as more people move into cities. That’s good news for commodity producers.”

Is Chinese demand shaping other sectors of the Australian economy?

WiC’s Focus edition on Sino-Australian ties a little over a year ago discussed whether a “resources curse” was hollowing out other parts of the economy. It also explored other areas in which Chinese demand could boost the “Lucky Country’s” economy. And as the boom subsides, there are early indications of rebalancing towards other industries like tourism, where the Chinese are already the highest-spending visitor group and are poised to overtake the New Zealanders for first place in visitor numbers.

International education, Australia’s fourth largest export last year after iron ore, coal and gold, is another focal point. It already delivers about A$14.5 billion ($13.77 billion) in export revenue, according to government figures. Again, the Chinese feature strongly, constituting 40% of international enrollments, far ahead of second-placed Malaysia with 7.2%.

Both sectors will be helped by a weaker Aussie dollar, as too will agri-business, another area getting more focus in trade terms. Sales of meat, oil seeds, cotton and dairy to Chinese customers have been growing and Abbott told an audience in Beijing last July that he had high hopes that Australia could become a “food bowl for Asia”.

But are the Chinese being sent mixed messages in respect to trade and investment?

On the same trip to China, Abbott spoke positively about foreign investment too, saying that it was “vital” for Australia and promising that any government under his leadership would welcome the Chinese on the same basis as investors from other countries.

But the Chinese aren’t convinced. They know they are welcomed as customers but they aren’t so sure that they are as popular in Australia as investors. One way in which Beijing will judge the success of its relationship with the new government is on whether Abbott delivers on his pledge of equal treatment.

Back in Australia, there wasn’t much discussion of the country’s relationship with China during campaigning, says Peter Cai, a journalist at The Age in Melbourne. The only real mention of the Chinese was an indirect one as part of the debate about restricting purchases of land by foreigners, Cai told WiC this week.

The context to this debate: growing political pressure to make it more difficult for foreign investors to take control of Australian assets, particularly in the rural economy.

Abbott himself seems to favour a tougher line and in June his Liberal Party backed recommendations for greater scrutiny of sales of domestic agribusinesses to overseas interests. He has also promised to look at “extra safeguards”, based on lowering the limits in which acquisitions can pass unchallenged. He warned: “Under a coalition government, should we win the election, the threshold for Foreign Investment Review Board (scrutiny) of foreign land acquisitions will come right down from A$200-odd million to about A$15 million.”

Of course, it’s worth asking how making it harder to source overseas investment is going to help Australia achieve its goals of becoming Asia’s food bowl. It is also likely to rile the Chinese, who are already frustrated by the insistence that any takeover involving one of its state-owned entities needs to be referred for review, whatever the sum involved.

Abbott has already admitted that Chinese investment “is complicated by the prevalence of state-owned enterprises”. But he’s shown little sign of more flexibility on the issue, warning that it was rarely in the national interest “to allow a foreign government or its agencies to control an Australian business”.

Can we expect changes in the investment rules?

Perhaps Abbott will try to soften his stance now he is in office. But he also needs to keep the National Party onside, as his governing partner in the coalition.

The Nationals have been the most vocal in warning about the foreign threat to farmland and their deputy leader Barnaby Joyce was appointed as agriculture minister in the new government this week. “What benefit is it to Australian farmers, to Australian taxpayers, if another entity buys our land to breed their cattle, exports them to their own facilities and pays tax in another country?” he asks. “We want to be a partner in the growth of the food economy in northern Australia, not just the location of it.”

The target in this instance was Indonesian money but it’s the Chinese who have felt the most singled out by the investment regulations.

Yet as WiC discussed in last year’s Focus Issue, the suggestion that large swathes of Australia’s economy are about to fall into Chinese hands looks far-fetched. Especially so for farmland: the most recent study from the Bureau of Statistics suggested that no more than 6% of Australian land was foreign-owned, little changed on the levels of the early 1980s. China’s share of the total is much smaller still.

The difficulty, The Age’s Cai says, is that the information about land sales is disputed and incomplete. Plus there’s been little discussion in Australia of what might constitute an “acceptable level” of foreign ownership. Besides, plenty of farmers seem more than happy to sell their holdings to foreign buyers. “Some of these businesses are struggling to survive financially or they have huge issues with succession planning,” Cai notes. “The next generation just doesn’t want to take on the family farm.”

In the meantime the political mood seems to be hardening, with individual cases grabbing the headlines, like last year’s sale of Australia’s largest cotton farm Cubbie Station to Chinese textile investors; or the announcement that a consortium led by Shanghai Zhongfu has got the green light for a $700 million sugar investment in the northern Kimberley region.

Could this create problems for a new trade deal with China?

Cai’s prediction is that the Abbott administration will bring down the amount at which foreign investment needs approval, although probably not as low as the A$15 million threshold that the parliamentary committee recommended.

That’s not going to be viewed too positively by the Chinese and could dent the prospects for a long awaited free trade agreement (FTA) between the two countries.

Abbott has said he wants to sign a deal within a year. But if so, there is some hard negotiating ahead: the two sides have been talking for more than eight years, and have got through 19 negotiating rounds. While Canberra prevaricates, other countries have agreed terms with the Chinese, leading to handwringing among Australian farmers that they are losing market share. New Zealand signed its own FTA with China five years ago, for instance, and its dairy exports have quadrupled. In the same period, Australian milk sales to China have grown just 20%.

In the meantime the Chinese media has been linking progress on a trade deal to changing attitudes on investment. Truth be told, comment about Abbott’s election victory in the Chinese media has been limited. But the China Daily was typical in mentioning that he must do more to get an FTA approved. Its editorial also implied that the likelihood of a deal depends on a rethink from Australia on how it handles investment from Chinese companies.

One option for progress on an FTA is to copy the Kiwis, who seem to have been more successful by avoiding the more controversial issues, stitching together a basic deal and then seeking to build in further provisions as time progresses. Australia, by comparison, has preferred to start out with a more comprehensive agreement and Abbott may struggle to move forward without a change in approach.

Cai picks out two of the most likely stumbling blocks. One is that Beijing wants investment from its state-owned firms to be treated in the same way as purchases by private companies – a stance which Abbott’s administration will find hard to countenance. The other issue is equally problematic. Because of the high costs of employing Australian workers – especially in more remote locations – Chinese investors in larger mining projects want permission to bring in their own workforces on much lower wages. “It’s hugely controversial and I doubt that Canberra will cave in to Chinese demands,” Cai says.

His conclusion: “It means that I really don’t see much chance of a trade deal being concluded any time soon.”


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