Investment a likely hotbed in FTA talk
The Australian, Canberra
Investment a likely hotbed in FTA talk
By Rowan Callick, China correspondent
30 June 2008
Canberra’s decision — or non-decision — about Sinosteel’s move on Murchison came as less of a surprise within China than it did in Australia.
For essentially it’s about the extent to which the deal has political — or to use the quaint Canberra circumlocution, "strategic" — ramifications. In China, politics is still everywhere.
Sinosteel, a large government enterprise with an original focus on trading the raw material inputs for China’s steel industry, has for many months been tracking Midwest, on which the much smaller Murchison Metals has also been making moves.
Now the game has been placed on hold for three months while the Foreign Investment Review Board puzzles its way through the implications.
This is happening as the sets of negotiators for the two countries get down to brass tacks over a Free Trade Agreement, following the rev-up that the political leaders have given the talks.
Australia’s team reported 10 days ago that the discussions that week, the first since last October, had been the most positive since talks began more than three years ago.
In the second half of 2008 we enter crunch time for the FTA. Trade Minister Simon Crean would like to see two more rounds of talks, with some concrete outcomes for business announced ahead of the full agreement.
Investment is a big focus for the FTA — for both sides. The problem for Australian business is not just that it faces multiple informal obstacles in investing in the very areas in China in which it is likely to do best — including resources — but that it is locked out of large economic sectors altogether.
In many sectors there are formal caps restricting foreigners to a junior stake — for instance, the 20 per cent limit on international holdings in Chinese financial institutions.
It would be misleading to say that the Sinosteel referral to the FIRB is somehow linked to the FTA talks. But it does point to the potential for investment to become a big issue between the two countries.
The FTA with the US made big strides on mutual investment. It should not be beyond the wit of Australia and China to do the same.
Sinosteel received some kudos in certain quarters in China for launching the first hostile bid a Chinese company had made in Australia — for Midwest, controlled by very canny Malaysian interests. But it is also important to note that there has never been a single hostile bid in the whole modern history of China’s stock exchanges in Shanghai and Shenzhen. There, all controversies or challenges are fixed up behind the scenes.
Chinese companies have much to offer in Australia — capital, expertise and, of course, markets.
Sinosteel, by its track record, is clearly among the contributors. It has demonstrated this through its joint venture Channar iron ore mine with Rio Tinto in the Pilbara, with the annual profits now equalling the entire capital cost of the original development.
But there is a widely held assumption in Australia that China is evolving in a direction that takes it closer to a Western template, both economically and politically, through some form of universal financial magnetic field.
But there is, in fact, little evidence of this.
The Government is steadily consolidating the number of large, state-owned enterprises (SOEs) that report centrally — from the present 150 or so to fewer than 100. This is adding immensely to the pressure they feel to perform.
Naturally, every SOE manager wants to be the one in the driver’s seat when required to merge. For instance, Huang Tianwen, the feisty executive chairman of Sinosteel, had 10 years in the deputy’s chair at Minmetals and has no intention of playing second fiddle again.
Huang is an excellent businessman. But that is not enough for success in China. You also have to be an excellent politician. He is naturally, then, also the head of the Communist Party organisation within his own company.
The role the party plays in China’s business world is still inadequately understood, and is generally shielded from the public gaze.
Last week, for instance, I visited the scintillating, highly automated, green campus of Huawei, one of China’s biggest and most successful privately owned companies. Maybe, in fact, the biggest.
This is a business that came from seemingly nowhere 20 years ago to challenge Ericsson, Cisco and Siemens as the world’s leading supplier of telecommunications equipment. And not just a supplier. Unusually for a Chinese company, it is also a major innovator.
It has more than 70,000 staff around the world, and almost half of them work in research and development.
It is based in Shenzhen, the extraordinary city of 13 million that has grown up alongside Hong Kong in the past 30 years, the classic brainchild of Deng Xiaoping’s reform era. The average annual income of every person — man, woman and child — in Shenzhen has reached $US10,000.
Both Shenzhen and Huawei are models of the new China.
Huawei has a unique ownership structure in China, being owned by its employees and founders, led by Ren Zhengfei, a People’s Liberation Army veteran. Yet if one keeps probing issues of board appointment and review, deep within the corporation the existence of a shadow body comes into focus: the party committee.
Yes, the old danwei, or work unit template, overlays even such a 21st century company developing 21st century technologies. And while the party committee might not dominate decision making, one can be sure that in any really controversial issue it will have the final word.
Xiao Yaqing, the executive chairman of Chalco — China’s aluminium, and increasingly also diverse minerals, champion — developed his career on a base of immense technical credibility.
But he is also an alternate member of the central committee of the party, and as such a prominent and deeply committed politician — one of the most powerful 371 people in China.
This is a Chinese Government that is increasingly looking to have lost its appetite, as well as its capacity, for reform — even as it prepares to celebrate the 30th anniversary, in December, of the extraordinarily successful "kai fang" (opening up) epoch driven by Deng Xiaoping.
The imminence of the Beijing Olympic Games is provoking intrusive clampdowns on ordinary life and on business in China, beyond the host city, which are considerably constricting the economy.
A friend, John McAlister, an erudite American running a research company offering solutions to China’s chronic water problems, is only one of many thousands forced to leave the country as the visa regime is changed and tightened. He is shifting his business to Bangkok.
The politics of control will always take priority.
A fortnight ago, Zhang Qingli, the party secretary in Tibet and thus the most powerful person in the region, made a speech in launching the Olympic torch relay in Lhasa during which he said: "We will certainly be able to totally smash the splittist schemes of the Dalai Lama clique and safeguard the stability of Tibet and national security so as to contribute to the success of the Beijing Olympic Games."
More than one party member acquaintance of mine has lamented the embarrassment of having such an over-the-top throwback to the old rhetoric running the show in such a high-profile area.
The International Olympic Committee has also urged, in a letter to the Beijing Organising Committee for the Olympic Games, "a clear separation between sports and politics".
But the Government couldn’t even see that there was ground for such a complaint from the usually cautious IOC. Spokesman Liu Jianchao said that Tibet party chief Zhang was simply fostering "a stable and harmonious environment for the Olympics".
Sport, politics, business — there simply can’t be any meaningful separation of these in China.
That does not mean Australia should do any less business with China — it would be good to see more investment both ways, to help cement the strong trading relationship. But we do need to be clear about what sort of structure we are dealing with.
