A state of gridlock

August was an awkward month for Sino-Australian relations, beginning with Mack Horton’s dismissal of Sun Yang, his Olympic swimming rival, as a drug cheat (see WiC336).

The criticism of the Chinese star riled the country’s nationalistic netizens even more than it did its newspaper editors, earning Horton more than half a million rebukes on a single photo in one of his social media accounts.

But the Global Times likewise found the time to castigate his remarks as typical of the “white supremacy” that it detects in some of Australia’s other attitudes towards its Asian neighbours.

“Actually Australia has always been a ‘second class citizen’ in the West, and many people from Western Europe – especially the UK – feel condescension to Australians,” it countered rather tartly.

The mood in the media wasn’t improved by the rejection of a major Chinese bid for an electricity grid in New South Wales shortly afterwards, when Australian Treasurer Scott Morrison blocked an A$10 billion ($7.6 billion) offer for 50.4% of Ausgrid from State Grid of China, which had partnered withHong Kong’s Cheung Kong Infrastructure (CKI) on the proposed takeover.

“National security issues were identified in critical power and communications services that Ausgrid provides to businesses and government… no suitable mitigations have been identified that would, for the proposed transaction structure, appropriately address the identified risks,” Morrison said.

The veto was immediately dubbed as “protectionist” by China’s Ministry of Commerce, which suggested it could put Chinese firms off making further investments in the ‘Lucky Country’. It also comes at a time in which the British have delayed a decision on the building of a Chinese-backed nuclear plant, so the news of the Ausgrid failure saw the state newspapers livid once again.

“Behind the hurdles lies the dangerous mindset of China-phobia,” fumed a commentary by Xinhua. “To suggest that China would try to kidnap the countries’ electricity network for ulterior motives is absurd and almost comical.”

What were the concerns over the Ausgrid bid?

Morrison wouldn’t say, evasively telling reporters “the only person who is security cleared in this room to be able to hear the answer to that question is me”.

Australian newspapers have speculated that the primary fear was that control of the grid would allow its operator to shut down much of Australia’s internet, although the electricity distributor has denied that it provides “critical” communication services to businesses and government.

The Chinese were bidding for an electricity distribution network, or the ‘poles and wires’ that transmit power to businesses and households. But Canberra’s concerns echo those that have prevented Huawei from bidding for contracts for the national broadband rollout in the past, on fears that some kind of ‘kill switch’ might be flicked on the telecommunications network (see WiC96 for an earlier article on American opposition to Huawei on the same grounds).

In Ausgrid’s case the bidders can be forgiven some of their frustration, however, as State Grid already owns parts of an electricity grid in the Australian Capital Territory, as well as stakes in three other networks in the state of Victoria.

CKI, the utility investor controlled by Hong Kong’s richest man Li Ka-shing, also has majority ownership in other power networks in Victoria and South Australia.

State Grid said it was deeply disappointed by the decision, after being invited to bid by the New South Wales government and following all of the conditions set by the seller during the tender process.

CKI also sounded indignant at being classed as a security threat. “Our investment in Australia is significantly more than that of Hong Kong and mainland China, and over 90% of our profit contributions are generated outside of Hong Kong and mainland China,” it said, concluding that the Australian government “must have reasons behind the obvious” for rejecting the takeover.

At the very least, the bidders can reasonably ask why their offer for the New South Wales grid was rebuffed this time when the other deals were waved through.

What’s Australia’s position on Chinese investment in general?

In many cases it has ‘taken the cash’, most notably in the decision to sell a 99-year lease on the Port of Darwin to Landbridge, a Chinese-owned firm, last year (see WiC305).

Malcolm Turnbull’s government was then forced to defend the deal after reports that the Americans were furious that they hadn’t been informed earlier, especially as Washington has stationed a contingent of US Marines in the town.

But allegations of unfair treatment for Chinese investors were revived this year when Canberra vetoed the sale of the Kidman cattle empire on national interest grounds (the purchase of a dairy farm in Tasmania did get the green light, though: see WiC315).

Sales of Australian farmland seem particularly sensitive and Foreign Investment Review Board (FIRB) interest is triggered at lower prices for takeovers from Chinese buyers than for equivalent bids from Europe or North America.

Admittedly, some of these proposals are getting more scrutiny because some of the Chinese acquirers have some form of state ownership, requiring automatic review from the FIRB.

Nonetheless, in the Ausgrid case it’s worth asking why regulators didn’t intervene earlier if they believed that the sale constituted a national security threat.

A clearer set of guidelines about the nature of the “national interest” in cases such as these would be helpful as well, reducing the scope for complaints that the Chinese are being singled out by the last-minute vetoes. The challenge is that the government has wanted to keep the guidelines blurred, in part to reduce offence to others, but also to give itself leeway when difficult cases emerge.

Is political tension at work too?

Diplomatic relations between the two countries have been relatively stable, although Beijing wasn’t pleased when Canberra welcomed the ruling of an international tribunal in the Hague in July, which challenged China’s more assertive activities in the South China Sea.

The support for the ruling stirred yet more scorn from the Global Times, which chastised Australia as “not even a paper tiger… only a paper cat at best”.

Previously the two countries had been talking up trade ties after signing a free trade agreement that should open the door to deeper investment activity between them.

But Australia’s domestic political situation may be becoming more of a factor after the Turnbull coalition was weakened in July’s national elections.

The reshuffle has emboldened some of the smaller parties, including the National Party, which has been more outspoken in opposing a number of the Chinese bids for Australian assets.

Pauline Hanson, who once claimed that Asians were in danger of swamping Australia, is leading another group of independent legislators.

“Why would communist China want to own our electricity?” she asked in a post on Facebook about the Ausgrid bid. “Are you concerned? You should be.”

Elsewhere, the Australian media has been looking at political donations from Chinese tycoons and querying whether there is a new effort to influence decision-making at government level.

It’s worth asking whether the A$5.5 million in contributions ‘discovered’ between 2013 and 2015 really constitutes a hijacking of the political process. Nonetheless, an investigative report from the Australian Broadcasting Corporation has concluded that the Chinese are “easily the largest source of foreign-linked donations”. However, when you look at the list of donors, aside from state-backed Everbright Group (the firm currently bidding for Liverpool football club in the UK), barely any of the names look to have government connections, or even be from the nation’s highest profile Chinese tycoons. Indeed, one of the Chinese-owned donors ABC lists is the Bon Bon bakery chain.

The same report also draws attention to the spread of Chinese influence in the Australian press, including the (fairly turgid) eight-page pullout from China Daily that now features in publications from Fairfax Media each month (“It goes deeper still, with major English-language newspapers here effectively publishing propaganda,” ABC darkly warns of the Sino threat).

Other alarming events include a network in Melbourne and Sydney that has been hosting events celebrating the life of Chairman Mao and the crowd of about 1,500 Australian-Chinese residents that gathered to protest against the Hague ruling on the South China Sea.

Huang Xiangmo, the chairman of property firm Yuhu, who has made financial contributions to both the main parties in Australia, has even been moaning that donors aren’t getting any bang for their buck.

“The Australian-Chinese community is inexperienced in using political donations to satisfy political requests,” he told Global Times this week. “We need to learn… how to have a more efficient combination of political requests and political donations.”

Huang also complains that the media doesn’t make any distinction between lobbying activities from Australian-Chinese, Chinese from the mainland and the Chinese diaspora from other parts of Asia.

The main mistake, however, is that the press associates all the donations with the Chinese state. “Without any evidence the Australian media links all donations with the Chinese government,” Huang said. “They [the media] even use Cold War thinking to describe this conspiracy theory”.

Could Chinese investors give Australia a miss?

This was one of the warnings from the Ministry of Commerce in Beijing, which has predicted that the Ausgrid debacle will undermine Chinese interest in investing in Australia.

The authorities have said the same before, including in the aftermath of Chinalco’s failed bid for Rio Tinto in 2009 (at the time it was state-owned Xinhua that was incandescent, comparing the Australian behaviour to that of a “dishonourable woman”; see WiC19).

Generally, the spats don’t seem to have curtailed the appetite for Australian assets much. Currently the Chinese account for a small share of the total stock of foreign investment in Australia, a long way behind the US and the UK, the largest holders of Aussie assets. Chinese investors are becoming much more of a feature, however, with the latest data showing almost A$47 billion in proposed deals in 2014-15, almost twice as much as the US, the next largest contributor.

All the same, further rows like this month’s aren’t likely to improve Sino-Australian ties. It’s also clear that some Australians aren’t comfortable with the investment trend, with a poll from the Lowy Institute – a local think tank – underlining the sense of ambivalence again this summer. Perhaps significantly, the under-45s in the survey were more likely to describe their country’s relationship with China as Australia’s most important. That wasn’t the case for older respondents, who leaned towards the US as the most significant partner. But 60% of the survey still regarded Chinese investment in negative terms, and there were particular concerns about Chinese intentions in agriculture, ports and national infrastructure.

The Ausgrid network will now go back out to tender, with media reports that foreign investors will be limited to owning no more than 15% of the electricity distributor and that they won’t be able to take operational control.

Bigger picture, Australia needs to adopt a more predictable position on Chinese investment – and something better than the prevailing stance, which Tony Abbott, the former prime minister, once described as determined by a mixture of “fear and greed”.

That need is getting more pressing as the relationship between the two countries changes, with the Chinese no longer content to be merely customers for Australia’s metals and mining industries.

Instead they want to invest in Australia as well – and not just in its commodities, but in sectors like services and utilities, reflecting their ambitions to move up the global value chain.

For their part, the Australians know that there is a huge opportunity to profit from the spending power of China’s burgeoning middle classes. Businesses won’t want their political leaders to squander the moment by sending negative signals on investment, and compromise the chance to sell more milk formula to Chinese parents, welcome more Chinese families on holiday, and educate more Chinese students at Australian schools and universities.

So perhaps it is timely that a new study from the Australian National University and a think tank linked to China’s National Development and Reform Commission has just been published, urging a rethink on bilateral ties.

Specifically it calls for a reset on investment relations, proposing a new agreement inspired by an Australian treaty with the Japanese in 1976 that helped to soothe similar investment tensions in an earlier era.

Another proposal is the ditching of the “national interest” discretion given to Australia’s Treasurer and the case-by-case approval method for foreign takeovers.“This is a vital opportunity for both countries to think about how to shape the future course of our relationship in a deliberate way, establishing some common reference points rather than simply muddling through,” the authors have urged.

But with many independent senators like Nick Xenophon (a vocal opponent of the State Grid bid) holding strong opinions about Chinese investment – and now wielding disproportionate influence after the fractious summer elections – that may be wishful thinking.

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