Monday, April 27, 2009

Keep an open mind on China investments

Allan Fels and Fred Benchley - March 9, 2009

The yellow peril is back. In early cold war days, it was the threat of Chinese communism delivered at the barrel of a gun. Now it's Chinese cash from the barrels of their state-owned companies.

The recent alarm for Australia's national interest has been triggered by three proposed investments: Chinaclo into Rio, Hunan Valin into Fortescue and China Minmetals into Oz Minerals. All the Chinese players are state owned, and China, of course, is an authoritarian communist state.

The Chinese are not just state owned, they are also major buyers of Australian resources. The fear is that through its Australian resources investments, China will be able to force down resource prices and hence, Australian export receipts.

"This (Chinalco's $30 billion bid for 18 per cent of Rio) will help China break the duopoly in Australian iron ore supply over time," said Shan Shanghua, the chief of China's steel industry association.

To the alarmists, the Chinese are buying near the bottom of the market, as if this was their fault. Scandalous. Pretty soon they'll be acting like real capitalists.

There's no doubt, according to this viewpoint, that Australia's national interest is best served by blocking, or imposing very tough conditions, on these Chinese investments.

There is, however, a higher level of national interest that must be taken into account. It involves the wider Australian economy and the nation's future in Asia.

China is not just our largest trading partner, it also has the greatest potential to pull Australia through the current downturn. When the global recession bottoms, it will be Chinese demand that will drive Australia's recovery.

But the rise of China to economic superpower status requires a very calculated Australian response. The Chinese investment proposals must not be viewed in isolation.

Australia wants a free trade agreement with Beijing that opens the Chinese market to Australian investment, particularly in financial services. Freer investment will be a two-way process.

As well, China will increasingly become home for manufacturing that cannot cope with Australia's high-cost structure. Pacific Brands confirms this trend.

Australia and China are moving towards a symbiotic relationship. China wants resource security; Australia wants economic security.

The Chinese investment proposals are not simply about short-term manipulation of resource prices. While China, like any buyer, would welcome lower prices, it is not in their interest to destroy markets.

China will not become one of Australia's "great and powerful friends" as Britain was and the US has become. China doesn't favour security pacts, anyway.

But China will be a "great and powerful" resources and economic partner.

The trick for Australia will be to manage our security alliance with the US while at the same time deepening our strategic economic relationship with China. Diplomats call it "walking both sides of the street". It is a walk that will require Australia to think deeply about its real national interest.

But saying "no" to Chinese investment based on the narrow interpretations of national interest paraded so far could be disastrous.