Chapter 9 - Investment
9.1
Until recently, China
has not been an attractive prospect for foreign investors. IMF analysts noted
that:
Capital inflows, in particular, were minimal in the 1970s and
1980s, impeded by capital controls and the reluctance of international
investors to undertake investment in a socialist economy with weak institutions
and limited exposure to international trade.[638]
9.2
The investment environment in China,
however, has gradually improved as reforms designed to entice foreign investors
to its shores have taken effect. Although China
now promises more and better investment opportunities for foreign companies,
especially through an improved investment environment, substantial obstacles
exist that discourage foreign investors. This chapter considers the investment
environment in China.
It looks at China's
policy toward foreign investment, the nature and extent of Australia's
foreign investment in China,
the barriers to investment in China,
China's 'go global'
strategy and its approach to investment in Australia.
Foreign investment in China
9.3
Although the Chinese government places a range of
limitations on foreign investment,[639]
it is making a concerted effort to attract and make better use of foreign
investment. On joining the WTO, China
undertook to take significant measures to reform regulations with regard to
direct foreign investment. In 2004, China
approved the establishment of 43,664 foreign direct-invested enterprises, an
increase of 6.3 per cent over the previous year. Contracted foreign capital through
foreign direct investment stood at US$153.5 billion, representing a 33.4
increase.[640]
9.4
China
has also promulgated laws governing foreign direct investment (FDI) that offer
generous tax treatment for foreign firms.[641]
9.5
Mr Harrowell,
Hunt and Hunt Lawyers, noted that China
has progressed through a number of stages since the introduction of the open–door
policy. He stated:
First and foremost, whilst the door was open to foreigners, when
they went through the door there was very little commercial infrastructure,
there were very few corporate laws and a very unfamiliar, alien environment, if
you like, for foreign investors. China
was perceived as a very high risk market for investors.[642]
9.6
Hunt and Hunt Lawyers told the committee about some of
the more substantial steps taken by the Chinese Government to reform their
regulatory system, maintaining that they 'represent significant relaxations on
previous restrictions on foreign investment and trading in China'.[643] They submitted that:
Regulations such as the 'Tentative Procedures' (of March 2003),
the 'Administration of the Establishment of Foreign Investment Export
Procurement Centres Procedures' (November 2003), the 'Procedures for Foreign
Invested Commercial Enterprises' (April 2004) and new 'Franchising Regulations'
(January 2005) demonstrate provisions, which allow increased direct foreign
investment.[644]
Australia
investing in China
9.7
Australian investors are likely to benefit from China's
endeavours to attract foreign investment. They, however, have traditionally baulked
at investing in Asia. The Governor of the Reserve Bank has
remarked on the contrast between the closeness of Australia's
trading relationship with Asia and the lack of closeness
in Australia's financial
integration into Asia. He noted that Australian
enterprises have 'always been more comfortable running businesses in the United
States, Europe
(especially the United Kingdom)
and New Zealand'.[645]
9.8
This observation has direct relevance for Australia's
investment in China.
Although Australia
has strong and growing trade links with China,
which is now one of Australia's
major trading partners, the level of investment does not reflect this degree of
engagement. It should be noted, though, that Australian investment in China
has been rising since the 1980s. DFAT explained:
The upward trend in investment clearly supports increased trade
flows with investment on the ground, but more generally is a response to China's
improving business environment and the impact of numerous relatively small
investments by small and medium sized Australian companies, chiefly in China's
manufacturing sector. Large Australian companies have been making substantial
investments in China
for many years; the rising investment trend among smaller companies is a much
more recent development.[646]
9.9
It was of the view that 'the upward trend in bilateral
investment is likely to continue and investment flows are expected to start to
become a better indicator of the scale of the bilateral economic engagement'.[647]
9.10
The Australian Industry Group observed, however, that while
Australian investment in China
totalled $1.2 billion at June 2003, it had plateaued in recent years. Given the
size and rapid growth in Australia–China trade, the investment figures are
'modest'. In 2003–04, Australia exported over $9 billion worth of goods to
China and over the same period imported over $15 billion. Statistics provided
in evidence clearly show the difference between the strong trading links in
goods and the weaker ties in investment. While China
is Australia's
second largest export market and the second largest source of imports, it is
the 18th largest investment destination for Australia
and the 14th largest investor in Australia.[648] There is no doubt that investment
has not expanded at the same rate as the trade relationship.
9.11
The Minerals Council of Australia attributes the
relatively modest two–way direct investment to the barriers and practical
obstacles to foreign direct investment.[649]
Indeed, DITR advised the committee that some Australian businesses are wary
about investing in China.[650]
9.12
The following section looks at the impediments that
operate to discourage FDI in China.
Barriers to investing in China
9.13
As noted earlier, China
has over the last two decades gradually improved its investment environment.
Even so, China
recently acknowledged that it needed to continue to utilise foreign capital
energetically and rationally. In March 2005, it gave a commitment to:
...encourage foreign investors to invest in new and high
technology industries, advanced manufacturing industries, modern services,
modern agriculture and environment–friendly industries and to participate in
the reorganization and technological upgrading of state-owned enterprises. We
will encourage and attract multinational corporations to set up R&D and
purchasing centers, regional headquarters and advanced manufacturing bases in China.[651]
9.14
A number of
impediments to trade identified in chapter 4, apply directly to the flow of
Australian investment into China.
They include the complex legal system, the level of government involvement in
foreign investment, and the lack of consistency in applying and enforcing the
law. The following section looks at these disincentives to foreign investors
and other factors, particularly restrictions on travel that discourage Australians
from investing in China.
Legal framework
9.15
Two IMF analysts concluded that 'in terms of the
overall legal regime, it is not obvious that China
makes for a particularly attractive FDI destination'. They pointed to explicit
restrictions written into laws and regulations as well as other restrictions
that are an important part of the overall investment climate in the minds of
investors. They referred to corruption and bureaucratic red tape which raise
business costs and are part of the implicit disincentives for investment.[652] They concluded:
...while the Chinese laws and regulations offer many legal
incentives to attract FDI, they should be placed in context along with many
implicit disincentives as well as explicit legal restrictions in order to form
a more complete assessment of the overall investment climate.[653]
9.16
In chapter 4, the committee described a multi–layered
legal structure comprising a complex system of laws, rules and regulations in
which governments at all levels had a presence. It identified shortcomings
across a broad and diverse range of law, including bankruptcy or insolvency
law, contract law and IP law. In some cases the regulatory regime and legal
system discriminated against foreign firms especially in the enforcement of
law.
9.17
The minerals and resources sector in particular
highlighted the impediments to investment in China.
In chapter 7, the committee found the disincentives to invest in the minerals
sector particularly strong. It noted that, at almost every turn, Australian companies
confronted obstacles to investment from restrictions on approvals for
exploration and mining rights, limited trading rights and, as noted above, a
lack of certainty with legal processes. Rio Tinto indicated that little FDI had
gone into the minerals and energy sector, citing reasons related to 'the
adequacy of legal systems, views on property rights and prospectivity'.
Multiple layers of regulation
9.18
The committee also found the interference by government
at the municipal or provincial level a major hindrance to the operations of
foreign companies in China.
This applied equally to investment. Two IMF commentators concluded that market
access and supplier access are 'the most important factors affecting FDI
flows'. They wrote:
If China's
central government is serious about redressing regional inequality, it must
address the issue of local protection and high internal trade costs.
Dismantling interprovincial barriers, and improving transport infrastructure
will increase market and supplier access for both Chinese and foreign
producers, attracting entry of new firms.[654]
9.19
Hunt and Hunt Lawyers cited the multiple layers of
investment regulations by different levels of the Chinese Government as a major
obstacle for Australian entities wishing to invest in China.[655] It would 'encourage the reform of
the different types of regulation affecting the establishment of operating
companies to enable more direct investment' stressing that the regulations
should be transparent and not subject to unilateral change.[656]
Mandatory use of local labour
service companies and dispute resolution
9.20
Hunt and Hunt Lawyers also regarded the requirement for
companies to use local labour service companies as a significant restriction on
direct investment. As a cost to business, they suggested that the current restrictions
should be revised so that direct employment would be 'liberalised to parties
beyond those currently able to do so'.[657]
They suggested that there should be an 'Investor/State dispute resolution
provision to protect individual investors'.[658]
Committee
view
9.21
In chapter 4, the committee concluded that there were
grounds for Australian businesses in China
to consider China
a 'risky place to do business'.[659] It
found aspects of the legal and regulatory environment complex, time-consuming,
expensive, uncertain and at times discriminatory. Corruption figured as a major
concern for foreign companies in China.
This environment also discourages Australian investors. In addition to these
general hindrances, chapter 7 chronicled the long list of impediments for
foreign businesses wishing to invest in the minerals sector in China.
Indeed, the Minerals Council claimed that 'there are restrictions to minerals
investment in China
at nearly every point in the process'.[660]
The committee reiterates its earlier findings that the Australian government
must continue to work in both the bilateral, regional and multilateral context
to encourage China
to remove its barriers to trade and investment.
9.22
The committee has urged the government to increase its
efforts in bilateral, regional and multilateral fora to encourage China
to remove its barriers to trade and investment, especially 'beyond the border
barriers'. It has also made recommendations to assist Australian companies establish
and conduct business in China.
These recommendations are relevant to investment in China.
See recommendations 1, 2, 3, 7, 13, 14 and 16.
Restrictions on travel to conduct
business in China
9.23
Australian business people also encounter difficulties
in gaining entry to China.
Hunt and Hunt Lawyers submitted that there needs to be some relaxation to the
current visa restrictions to accommodate increased business investment and
international provision of services. They stated:
There should be better accommodation in the provision of the
visas. Applicants for business visas should not be obliged to wait in person
for many hours in lines at [a] Chinese Consulate for their visas.[661]
9.24
DIMIA also noted that Australian business people going
to China face a
number of hurdles.[662]
9.25
Presently, the main scheme operating to facilitate the
travel of business people is the APEC business travel card. It is a short–term
business visa that allows for business activities such as feasibility studies,
signing contracts and business meetings to be conducted. Both China
and Australia
belong to this reciprocal scheme which allows people to obtain a three year
entry right to the respective countries for stays of up to 90 days.[663]
9.26
Australia
is a lead country in promoting the scheme and devising better ways to
facilitate business travel in the region. DIMA works closely with Austrade and
DFAT to ensure that the APEC business travel card is widely promoted.[664] It noted:
...we are in a fairly unique position
because within the auspices of APEC there is a group called the business
mobility group. Its charter...is essentially to find ways in which we can promote
the movement of business people across the region.[665]
9.27
According to DIMIA, the business mobility group is chaired
by Australia
and is seeking not only to expand the number of countries participating in the scheme,
but to achieve greater reciprocity in entry requirements for business people of
APEC economies.[666]
Committee
view
9.28
The committee recognises the work being done through
APEC to facilitate business travel throughout the region, especially by Australia
as one of the lead countries in the business mobility group.
Opportunities for investment in China
9.29
The committee notes that, despite the impediments to
trade and investment in China,
many Australian companies are venturing into China.
In noting the demands to be created by the 2008 Olympic Games, the Illawarra
Regional Development Board (IRDB) can see opportunities for Wollongong–based
companies to use their expertise in areas such as software development and
heavy engineering with Chinese companies. The Board has taken the initiative
and provides a model for other regions or business groups in developing
business and investment connections with China.
The Wollongong City Council submission explained that:
The IRDB has taken a pro-active role in fostering business and
investment links with China
and Chinese companies. Late in 2004 IRDB General Manager Peter
Pedersen joined a delegation which included
Wollongong City Council Economic Development Manager Bob Doyle and Illawarra
Business Chamber President Terry Wetherall
who presented a united front to press the region's interest in doing business
with China.[667]
9.30
They would also like to see Austrade officers take a
more active role in linking Australian companies directly with potential
Chinese partners. IRDB General Manager Peter
Pedersen believes 'the Chinese market is so
broad that it would be helpful to have assistance finding the "right"
partners'.[668]
Committee
view
9.31
Clearly, Australian businesses considering investing in
China would
benefit from further reforms in China
that would make the investment environment more conducive to foreign investors.
The Australian government could also take measures to assist Australian
investors in China
by increasing its efforts to make travel to China
easier and to ensure that all Australian businesses are aware of and can take
advantage of the associations that the various government agencies have
established in China.
China's 'go
global' strategy
9.32
China
has adopted a 'go-global' strategy. It wishes to encourage Chinese enterprises
to invest and do business in other countries and intends to accelerate the
implementation of its 'go global' strategy.[669]
The 2005 report on China's
economic and social development plan stated:
We will strengthen planning and industrial policy guidance for China's
investment abroad, improve supporting fiscal, tax, financial, insurance and
foreign exchange policies, and encourage qualified enterprises to invest
abroad.[670]
Chinese investment in Australia
9.33
Chinese investment in Australia
has increased markedly in recent years, though from a low base. DFAT stated:
Chinese enterprises have invested in about 225 Australian
projects up to the end of December 2003, with a cumulative contractual
investment value of about $2.2 billion and an actual value of $59 million. Most
of this investment is in resources, energy and processing commodities, but
manufacturing and real estate also attract significant investment.[671]
9.34
The interest from China
has been across the board. DITR stated that, investment comes from state owned
enterprises in areas like iron and steel, coal, engineering, construction, and
railways as well as private companies in China,
either alone or in various partnerships.[672]
9.35
According to Invest Australia,
the total stock of Chinese investment into Australia
to the end of 2003 was $2.86 billion. The investment was mainly in the mining,
mineral processing, manufacturing, leather processing, wool processing,
property and agricultural sectors.[673]
Both state–owned enterprises and Chinese private companies, either alone or in
partnerships, were investing in Australia.
They included:
...the Channar iron ore mine in the Pilbara region of Western
Australia and the Portland Aluminium smelter in Victoria.
Investments are also diversifying into other sectors such as manufacturing, real
estate, mineral exploration and wool processing.[674]
9.36
The Australia Business Council, also noted that investment
is mostly in the resource development, minerals processing, real estate and agriculture
sectors. It anticipated that the Chinese 'will increasingly seek to invest
downstream in resources ventures in particular in order to have an investment
involvement in the different stages of the production chain'.[675] With regard to the minerals sector,
the Chinese investor in Australia
is interested not only in accessing supplies of raw materials to export to China,
but 'extends down the value added chain into the processing of materials'.[676]
9.37
Although interest is broad, Chinese investment in Australia
was described as lumpy due mainly to its newness. Invest Australia
explained:
...there is not much history of China
as a whole investing anywhere, let alone in Australia.
In fact, Chinese investments into Australia
were the first major Chinese investments abroad in the world. The Chinese
investment into the Portland aluminium
smelter was the first major Chinese investment offshore anywhere.[677]
9.38
Invest Australia
is active in promoting Chinese investment:
We have people in China—we have officers in Beijing and in
Shanghai—and we are working directly with companies in China to explain to them
the benefits of investing in Australia and to help them to convert that
interest in investing into reality here. We then help them to make visits to Australia.
We make introductions to companies here. We make introductions to state governments
here. We help to facilitate that investment flow wherever we can. Because the
history of significant Chinese interest in investing abroad is reasonably
short, they are taking some time to understand the investment environment in Australia
and the opportunities available here, but we are starting to see a ramp up in
our activity...[678]
9.39
At this stage, the committee notes China's
interest in importing Australian uranium. The question arises whether Chinese
companies would seek to invest in this industry and the impediments, if any, to
do so. In answer to this likelihood, the Australian Treasurer, the Hon
Mr Peter Costello,
pointed out that Australia
has a foreign investment approval process which requires that anyone seeking to
buy an Australian company to operate in Australia
must be 'screened and approved'. He stated further:
In addition to that, where it is a sovereign government, it's scrutinised
even more carefully. So it's quite a difference between whether it's a private
company or a sovereign government. Private companies are handled under FIRB and
the existing law. Sovereign governments raise whole new policy questions which
would have to be determined if it were a State-owned company that sought to
engage in the activity.[679]
9.40
It should be noted that China
has cited the FIRB as a barrier to investment in Australia.
It noted that the dominant criterion of foreign investment is 'Australian
National Interests'. A Chinese report on Foreign Market access stated:
But it's considered that the 'Australian National Interests'
criterion is enabling excessive discretionary power, and certain examination
and approval procedures are short of transparency, which have impeded the access
of foreign capital into Australia.[680]
9.41
Mr Costello was of the view that there were no reasons
for anyone to buy a uranium mine in Australia because 'they can buy uranium
from an Australian company—BHP—subject, of course, to entering into nuclear
safeguards which ensure that it's used for peaceful purposes.[681]
9.42
The Illawarra Regional Development Board is keen for
Chinese companies already operating in Australia,
and those considering doing so, to invest in the Illawarra region. The
Illawarra Business Chamber (IBC) was also actively engaged in promoting local
business. In November 2004, IBC President Terry
Wetherall visited China
with a Wollongong business, civic
and tourism delegation to the Fijian International Friendship Cities Conference
to publicise the diversity of opportunities for Chinese investment and trade in
the Illawarra region.
9.43
As noted earlier, the Wollongong Council and associated
boards and organisations provide an example of a region with the initiative, drive
and enterprise to capitalise on the opportunities that China
has to offer. They show clearly that there are gains to be made from China's
prosperity, but that much planning and hard work are required for success.
Restrictions on travel to conduct
business in Australia
9.44
The committee discussed the ADS in the previous chapter
and the APEC Business Card earlier in this chapter. Australia
also operates the Sponsored Business Visitor Program. Under this scheme State,
Territory and Commonwealth Government agencies, as well as specified business
organisations, provide formal sponsorship for individuals and business
delegations for short-term business visits to Australia.[682]
9.45
According to DIMIA, China
is Australia's
largest source of business visitors. It stated that between 1 July and 31 December 2004, business visitor
visas were granted to Chinese nationals 132 per cent more than the next highest
source country (the US).
It stated that 62,160 Business Visas were granted to Chinese nationals in
2003–04 which represented a 26 per cent increase over the previous year.[683] They told the committee that:
... if a free trade agreement is negotiated with China,
the pressure on us to provide a visa service that is both fast and efficacious
will increase. We are continuing to look at ways in which we can change our
visa processing model with respect to business visitors from China,
to make that process faster. Part of that is to look at possible electronic
options in that area.[684]
9.46
The Illawarra Regional Development Board expressed
concern at the government's ADS regulations which in its view dampens the
opportunities for Australian companies to do business with the Chinese
provinces whose residents find it difficult to obtain visas to Australia.[685]
9.47
DIMIA has indicated that Australia
could do more to facilitate the travel of Chinese business people to Australia.
The committee believes that the Australian government should not wait until a
free trade agreement is reached to provide easier access to Australia
for Chinese business people. It acknowledges the work that Australia
has done in encouraging APEC members to support the APEC business card but
believes that greater effort must be given to facilitating travel between China
and Australia.
Recommendation 11
9.48
The committee recommends that the Australian
government:
- review
the visa requirements for Chinese people seeking to conduct business in
Australia with the intention of improving their access to Australia; and
- confer
with the relevant Chinese authorities to improve access conditions for
Australians intending to visit China to conduct business. This matter of easier
access to China for Australian business people should be a priority in the Free
Trade Agreement (FTA) negotiations but Australia should not wait for the
finalisation of this process to reach agreement with China.
Conclusion
9.49
Australia
and China are
at a juncture in their trade relations that is leading them toward a much
stronger and expanded relationship. Indeed, both countries are actively
pursuing negotiations toward a bilateral Free Trade Agreement (FTA). This move
signifies a desire to build not only a closer economic relationship but also a
closer political one.
9.50
The following chapter examines this development toward
a Sino–Australia bilateral trade arrangement, its implications for Australia's
other trading partners in the region, and its commitment to multilateral free trade.
It sets the scene for further discussion on the proposed FTA and its
implications for Australia
and Australia's
trading partners in the region.
Part III
Building trading links through formal and informal trade arrangements
Trade agreements are a formal, structured and public way of
improving trading relationships. This part of the report looks firstly at the
proposal for a free trade agreement between Australia
and China. It
then examines other factors, including cultural differences, that influence the
trading relationship. Finally it considers matters that have the potential to
strain the relationship such as disagreements over human rights issues and
labour standards.
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