Playing the long game on China

The political storm surrounding Chinese investment in Australia has abated. However it is certain to erupt again when investment flows between Australia and the Asian giant inevitably increase as the trade relationship deepens further.

China is by far Australia’s biggest trading partner, accounting for the best part of a third of our export income in 2016. And while mining has dominated the growth of exports over the past decade, earnings from services and agriculture have more than trebled, while manufactured exports have doubled. 

That trade relationship will continue to expand with the growth of China’s middle class. However, it is becoming increasingly clear investment flows will play an important role in determining Australia’s share of the Chinese market.  

Perhaps, therefore, we should use the current period of relative calm to consider ways to strengthen our foreign investment policy to meet the political and economic challenges ahead.

" We should use the current period of relative calm to consider ways to strengthen our foreign investment policy." Alan Mitchell

That should include the possibility of making the Foreign Investment Review Board (FIRB) statutorily independent, like the Productivity Commission.

That’s not because the board is necessarily in danger of being politicised, but because a more independent and transparent FIRB would be better equipped to inspire public confidence at a time of heightened anxiety and difficult choices.

Old school

Popular hostility to foreign investment is not new. In his excellent book, Takeover: Foreign Investment and the Australian Psyche, the economics editor of The Australian newspaper, David Uren, reminds us of the 1980 bomb attack on a Japanese tourist development in Queensland.

However, the wider public has accepted the importance of foreign investment in supporting Australia’s high living standards.

The Treasury says foreign investment currently finances a gap between Australia’s domestic saving and investment equal to about 4 per cent of nominal gross domestic product.

It has estimated a reduction in capital inflow and investment equal to one per cent of GDP would reduce Australia’s gross national income by about half a per cent each year over a ten-year period.

Of course, we don’t need foreign direct investment, with its accompanying foreign ownership and control to fill that gap – as long as we are prepared to accept the more changeable moods of foreign lenders and portfolio investors.

Nor do we necessarily need Chinese direct investment if direct investment is available from the US, Europe and Japan. 

However US, European and Japanese investors will not necessarily hold the keys to the Chinese market.

The essential link between Chinese investment and trade is most obvious in agriculture. Increased investment in Australian agriculture will be needed to take full advantage of the expanding Chinese market. Farm consolidation is necessary to support more the professional management and state of the art plant and equipment required to lift productivity and rates of return.

The top 25 per cent of broad-acre farms (ranked by rate of return) currently account for almost 55 per cent of production, while the bottom 25 per cent of farms account for less than 10 per cent.

A substantial proportion of that investment should come from China. Why? Because Chinese food manufacturers and retailers will be investing heavily to meet rapidly evolving Western tastes in China’s new middle-class.

They will need reliable and highly flexible supply chains, which will require close working relationships with Australian managements as well as substantial investment at the Australian end.


Like the Japanese steelmakers before them, China’s food industry will need to secure control of the natural resource and the expertise that goes with it, either by negotiating elaborate supply contracts or by the acquisition of Australian producers.

Vertical integration minimises transaction costs and maximises flexibility and will be the preferred option of many of the largest Chinese food importers.  

If Australia does not accommodate the needs of China’s food industry, the likelihood is other countries such as Canada and New Zealand will.

Australian farmers also will find themselves competing against Chinese producers, and there can be a substantial gap between the theory and practice of Chinese market access. Just ask Bellamy’s or the US beef producers. Australian agriculture may be grateful for having partners with political clout in Beijing.      

However, it is not only Australian agriculture which stands to benefit from the free flow of foreign investment, including Chinese investment.

Australia’s private hospital industry is excitedly exploring the new investment opportunities promised by the new China-Australia Free Trade Agreement. Healthcare should be in the vanguard of Australia’s high-end service exports to China’s new middle class.

The success of service exports is vital for Australia. With the shift in manufacturing from the advanced economies to Asia, countries like Australia are more dependent on services for employment and trade.

Fortunately, services represent the fastest growing component of global trade. But the delivery of professional and business services such as healthcare requires a permanent presence in the export market. It needs foreign investment and partnerships.

It is estimated around 70 per cent of Australian service exports to the US are sold by majority Australian-owned affiliates.

The investment needed to export services to China has been made more possible by the FTA but, again, there is the gap between the theoretically possible and the reality created by China’s politicians and regulators.

A US government report to Congress earlier this year warned “barriers, often imposed through non-transparent and lengthy licensing processes, prevent or discourage foreign suppliers from gaining market access through informal bans on entry, high capital requirements, branching restrictions or restrictions taking away previously acquired market access rights”. 


If Australia is seen by China to be unfairly discriminating against its investment, Australian investors and exporters might find themselves facing a higher wall of obstruction in China.

If, for reasons of national security, the Australian government believes it must restrict Chinese investment in critical infrastructure such Ausgrid, then it is all the more reason for welcoming Chinese investment in other parts of the economy.

Yet Chinese investment in agriculture, for example, has been politically highly contentious.

The Australian government needs to take a stronger leadership role in the debate. The FIRB also could do more.

Unfortunately, the FIRB’s detailed advice to the government must be confidential. However, perhaps it could follow the example of the New Zealand Overseas Investment Office which publishes summaries of its decisions.

More importantly, a statutorily independent FIRB with adequate resources and a strong sense of public accountability could make the process far more transparent.

It could use its annual report as well as research and discussion papers to engage the public in the foreign investment policy making process.

That of course would not end the highly emotional debates, but it would give the more dispassionate majority of voters a stronger sense of who and what to believe.

It thereby would give the government more political space to make sensible decisions, and leave it more open to criticism when it does not.   

The FIRB’s annual report should contain, among other things, a detailed statistical score card of its recommendations, including the number of times the government’s decisions went contrary to its advice.

Of course, increased transparency would provide fuel for the FIRB’s critics as well as its supporters. But, as we know from the tariff debate, that’s a necessary part of building an informed and durable consensus.

It is a long-term investment, but a necessary one.

Never has Australia had a major trading partner and investor like China: an emerging super power outside the western alliance with an increasingly rivalrous relationship with Australia’s major ally.

Adjusting to China is a long-term project.

Alan Mitchell is a former economics editor of The Australian Financial Review.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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