powerpoint - CCTR

mammettiredMechanics

Nov 18, 2013 (3 years and 8 months ago)

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2

Who is Clive Palmer and why is he

saying these things?



The Australian government has racially discriminated against
(China) and stopped them from investing in Australia…They've
brought in things like the Foreign Investment Review Board in
Australia, which is an outstandingly racist legislation designed
to slow down Chinese growth, and it's a national disgrace”


Clive Palmer

The Australian

29 September 2009

3

The facts do not support a racist policy

which discriminates against Chinese investors



In the past 4 years the FIRB has approved around 230 Chinese
investments worth some $60 billion, one outright rejection and
six with conditions


Over the last decade there were three high
-
profile rejections of
which one was Anglo
-
Dutch, one Singaporean and one Chinese


4

Chinese investors believe that Australia

discriminates against them


Survey by Australia’s
Lowy Institute
found Chinese believe
investment discrimination by Australia is driven by:


Media driven nationalism


Perception that state related investors are not focused on
commercial objectives


Concerns about China as both owner and customer


Concern with China’s growing geo
-
political clout


Such perceptions stem largely from the failure of a series of
high profile resource deals

5

A serious policy debate, but we can

s
till laugh

The topics and structure of this
presentation

1


Analyze the magnitude and structure of China’s overseas
direct investment in general and to Australia in particular

2


Explain the workings of the FIRB and detail its track record
in approving and rejecting investment proposals

3


Consider characteristics that make Chinese investment
different to other foreign investment to Australia

4


Discuss the Chinalco Rio Tinto transaction as a case study to
better understand Australia’s FDI policy

7

Key facts relating to China’s overseas
direct investment

1


China’s ODI has increased in recent years, but is still
much smaller than FDI (bigger recipient than investor)

2


Australia is the largest beneficiary of China’s overseas
direct investment

3


Mineral resources are the largest part of China’s
Australian ODI, but this is not the case overall

4


China has encountered problems in countries other than
Australia and usually with natural resource investments

Over time, China has attracted far

more FDI than ODI

$0
$20
$40
$60
$80
$100
$120
2003
2004
2005
2006
2007
2008
2009
2010
Value (US$ billion)

FDI
ODI
9

Official data would suggest Australia

is a very minor beneficiary of China’s ODI

0%
1%
2%
3%
4%
5%
2003
2004
2005
2006
2007
2008
2009
2010
Share of China’s ODI

10

Australia is ahead of all other countries

in attracting Chinese overseas direct investment

$0
$100
$200
$300
$400
Australia
USA
Nigeria
Iran
Brazil
Canada
Other
FDI (US$ billion)

Heritage Foundation 2005
-
10

11

Mineral resources are a significant,

but not the largest part of China’s ODI

0%
20%
40%
60%
2003
2004
2005
2006
2007
2008
2009
2010
Share of China’s ODI

12

Iron ore and copper make up 60% of

China’s mineral resource sector ODI

0%
20%
40%
60%
80%
100%
Iron ore
Cu
Al
Pt
C
Au
Other
13

The Heritage Foundation has identified

a further US$122 billon of troubled investment

$0
$20
$40
$60
$80
$100
$120
$140
Agriculture
Energy
Finanace &
property
Metals
Technology
Transport
2006 to 2010

14

Australia not the only difficult destination,

but natural resources are mostly a problem

Total value

(US$ billion)

Most troubled

sector

Most troubled

destination

2006

34.5

Energy

Iran

2007

13.7

Agriculture

Philippines

2008

33.2

Finance

Germany

2009

33.1

Metals

Australia

2010

7.6

Metals

USA

15

Summary of key issues relating to

China’s Australian bound ODI

1


While its level of investment is growing, China is still a
minor player in Australia’s FDI

2


Almost all the proposals submitted to the FIRB are
approved, though some have conditional obligations

3


Minerals resources account for 56% of Australia’s FDI,
but almost all of Chinese investment

4


Mineral resources differ significantly from other forms of
investment

16

FIRB statistics not a reliable indicator

of Australia’s foreign investment inflows


Data do not cover investments below legislated thresholds


Includes proposals that are approved in a given year, but may
not be actually implemented or could be implemented in a later
year or over a number of years


Can include approvals for multiple acquirers of the same target
asset


Because of time, I have not been able to access additional data
published by Australian Bureau of Statistics


17

Its Australian investment is growing,

but China is still a relatively small investor

2007

2008

2009

2010

USA

29%

26%

22%

28%

UK

9%

17%

11%

21%

China

2%

4%

15%

12%

Japan

3%

3%

12%

4%

Singapore

12%

6%

1%

3%

Europe

27%

34%

24%

31%

Asia (other)

7%

7%

18%

10%

No of transactions not value

18

Even on a value basis, China is a

significant but not the largest investor

$0
$40
$80
$120
$160
USA
UK
China
Japan
Switzerland
Other
Share of FDI (A$ billion)

A sample of China’s biggest Australian deals

Date

Target

Acquirer

Value (US$ m)

March 10

Arrow Energy

Petro China

A$3,500

April 09

Felix Resources

Yanzhou Coal

$2,755

April 09

Mining assets

Minmetals

$1,386

Feb 09

Fortescue

Hunan Valin

$765

March 08

Oil & gas assets

China Petrochemical

$560

March 09

Mining assets

China Metallurgical

$515

Feb 08

Soco Yemen

Sinochem

$465

Feb 08

Mining assets

China Metallurgical

$370

Aug 08

Mining assets

Shenhua

$261

Aug 09

Aquila Resources

Baosteel

$237

20

FIRB approvals involving mineral

resources represent 56% of all approvals

$0
$3
$6
$9
$12
$15
$18
Mineral
resources
Real estate
Resource
processing
Services
Manuf.
FIRB approvals ($ billion)

21

About half of China’s FIRB approvals

involve mineral resources

$0
$3
$6
$9
$12
$15
Mineral
resources
Real estate
Resource
processing
Services
Manuf.
Agriculture
Finance
Tourism
FIRB approvals ($ billion)

22

Mineral resources differ significantly

from other forms of investment


Usually associated with economic rents


Involve a wasting resource


Capital intensive and asset specific investment


In many countries, including Australia, minerals are owned by
the people


Transfer pricing is an issue:


Opaque global prices


Intermediate products and integrated companies

23

Analysis of FIRB annual reports reveals

the vast majority of proposals are approved

2007

2008

2009

2010

Rejected totally

0.03%

0.10%

0.03%

0.04%

Approved

99.97%

99.9%

99.97%

99.96%

Unconditionally

90.00%

85.0%

75.0%

90.0%

With conditions

10.oo%

15.00%

25.00%

10.00%

24

Australia does not rank too badly on the

OECD FDI restrictiveness index, but China…

0.000
0.125
0.250
0.375
0.500
China
Non
OECD
Australia
Brazil
World
USA
OECD
1=Closed,0=Open

25

Summary of key issues relating to the
administration of Australia’s FDI

1


Australia has a long tradition of accepting foreign
investment, especially in the resources sector

2


A clearly defined approval process, with the final
decision made by a politician, however rejection is rare

3


Entities with >15% foreign government ownership are
subject to lower thresholds and additional criteria

4


Investments are approved if they are found to be in
Australia’s national interest

26

Because of the benefits, Australia has

always welcomed foreign investment


From settlement in 1788, the development of Australia’s mineral
resources have depended on foreign capital and technology


Almost all of the great Australian mines have been developed
because of the availability of foreign capital and technology


Foreigners own 50 to 70% of Australia’s mining industry


While Australia now has the technology, it still is very
dependent on foreign capital AND markets


Foreign investment must ultimately benefit Australia’s long term
interests i.e. National Interest Test (Net benefit in Canada)


Beijing’s own restrictive FDI policy confirms that, like Australia it
has a national interest test. (Coca
-
Cola and Carlyle).


27

Understandably, the national interest

is an opaque standard that changes over time


Introduced in 1986


Burden of proof rests with the Government
NOT

the investor


According to Treasurer Swann, reasons include:


Preserving national security


Preserving government revenue


Investor will not respect Australian law and business practice


Reduce competition or result in excessive competition


Consistent with government policies


Character of investor


Rarely used but basis for rejecting Shell, Lynas, WISCO and SGX

28

Current regulations regarding foreign
investment are detailed in the FAT Act (1975)


Foreign Acquisitions and Takeovers Act (1975) requires investors
obtain approval to acquire > 15% of a company worth > $219 m


FTA with US means higher thresholds for US companies


Irrespective of size, entities owned >15% by a foreign
government require approval


Sensitive areas include media, banking, telecommunications,
civil aviation and real
-
estate for which there are special rules


Decision made by Treasurer (political decision) on FIRB advice


30 days to make a ruling but can be extended to 90 days


Process seems to be flexible with each case examined on its
own merits while consultation is welcomed

29

Applications are becoming more complex

and require more than the maximum 90 days


If likely to exceed 90 days applicants are asked to withdraw and
resubmit applications


No comprehensive data on withdrawn applications nor
withdrawn and resubmitted, but FOI fillings show no obvious
bias against Chinese investment


Between November 2007 and January 2011, 349 proposals
withdrawn of which 66 were from China (15 government) and
35 from USA


During 2010, 10o withdrawn of which 6 from China (5
government) and 11 USA


High proportion of withdrawals in early years could reflect
lack of familiarity with the process

30

Not in the national interest, but very

reasonable grounds for outright rejections


2001:
Shell

additional stake in the Woodside LNG JV
rejected

by
Treasurer (sic.) because of the belief that further development
could be sacrificed for other Shell projects


2009:
China Nonferrous Metal Mining Group
proposed 51.66%
stake in rare earth hopeful Lynas rejected unless reduced to
<50% and minority board representation. China controls >95% of
market and acquisition would reduce competition
Withdrawn


2009
: WISCO’s
planned purchased of Western Plain Resources
iron ore project
rejected

because of close proximity to Wommera


2011:
SGX

takeover of much larger ASX
rejected
because of
perceived loss of economic and regulatory sovereignty. 23% non
-
voting Singapore Government ownership in SGX


31

Applications from foreign government

entities are judged on additional criteria


Entities include companies as well as sovereign wealth funds


The extent an investor’s operations are independent from the
foreign government


Whether the investor is subject to adequate regulation in other
jurisdictions


That the investment not hinder competition or lead to undue
concentration or control in the relevant industry sector


Investment taxed same way as other commercial entities


Investment will not impact Australia’s national security


Whether the investment impact Australian exports, research etc

32

Summary of key arguments for

treating Chinese entities differently

1


Most Chinese investment involves SOEs where no clear
distinction between commercial and political objectives

2


Chinese entities increase the possibility of transfer
pricing between related entities

3


Reciprocity: foreign companies, including Australian
cannot invest in China’s resource industry

4


SOEs etc have little experience in operating with open
society multi
-
stakeholder and strong institutions

33

Chinese companies are different from

most other enterprises investing in Australia


Vast majority (95%) of Chinese investment involves SOEs where
there is no clear line between commercial and political
objectives


Many Chinese investors have little experience with the
administrative processes associated with rule of law
jurisdictions so have difficulty working with the FIRB process


Transfer pricing is a problem in the mining industry and more
so with integrated companies and state owned enterprises



34

Reason to believe that SOEs sacrifice
commercial efficiency for political imperatives


NDRC selection of Chinalco to thwart BHP move on Rio confirms
political interference and suggests that Beijing does not want
companies to compete with each other outside of China


Party secretary is the most important position in an SOE and it
is usually a joint appointment with the enterprise chairman.


Party personnel department controls political and commercial
appointments





35

There are many cases where the Party

rotates people between industry & government


Wei Liucheng from CNOOC to Hainan Governor


Zhang Qingwei from Aerospace to Minister of Technology


Guo Shengkun from Chinalco to vice
-
governor Guangxi (now
Party General Secretary)


Xiao Yaqing from Chinalco to State Council where he is
secretary to
Vice Premier, Zhang
Kejiang



Li Xiaopeng from Huaneng to vice
-
governor Shanxi


Fu Chengyu from CNOCC to Sinopec





36

Even the largest Chinese companies

are not experienced at operating outside China


When operating in China, SOEs really have only one, but very
powerful stakeholder


The large number of Chinese projects withdrawn from the FIRB
system in 2007 and 2008 suggests a learning process


Chinese companies seem to have shifted from criticizing the FIRB
to complaining about compliance over environment, heritage and
labor regulations


Overseas problems (Ramu, Chambishi etc) can be traced to
attempts at replicating the China model i.e. confining negations
to political elite while ignoring local stakeholders




37

Even outside China, national strategic

objectives seem to trump commercial objectives


Hanlong

chairman (Liu Han) reported as saying Beijing backs his
takeover of Sundance Resources (ASX) as it would give China
an opportunity to influence the price of iron ore


Similar statements by Shen Heting regarding MCC’s involvement
in the Sino Iron project in WA


Representatives of government organizations ranging from CISA
to the NDRC supported Chinalco’s move on Rio because it
would lower the price of iron ore


The mining industry affords ample opportunity for transfer
pricing and it is hard to police infringements


A Chinese SOE increases the risk of transfer pricing

38

Sino Iron project demonstrates Chinese

can bring their own perils with them


CITIC Pacific purchased Cape Preston project from Palmer in
2006 for $200 million


Planned cost of $1.4 billion and 2009 delivery blown out of the
water because CITIC’s partner, MCC has no Australian (developed
country?) experience


Problems being solved by employing more labor and MCC critical
of Australian Government for not approving import of laborers
from China


MCC has suggested that problems with
their project stem
from
Australians managing Australians




39

Lack of reciprocity is a reasonable

argument against Chinese resource FDI


Much of China’s mining industry is out of bounds to foreign
investors, including Australians


Outside the resource sector, China is also very tough on
foreigners wanting to invest in its local companies. Coca
-
Cola
and Huiyuan Juice, Carlyle and Xugong


China’s discrimination is a powerful rallying point for nationalists


Because China discriminates against foreigners, does this make
China racist?


Rosen and Hanemann argue that China has grown stronger by
opening its doors wider FDI and US should do the same. But is
Australia different? Are resource investments different?

40

Chinese perceptions are driven by

several high profile failures

41

Summary of the key issues surrounding

the Chinalco transaction with Rio Tinto

1


Rio Tinto under significant financial pressure following
disastrous purchase of Alcan

2


Chinaclo’s (an SOE) initial proposal to increase its Rio
stake was approved, subject to some conditions

3


Proposal withdrawn when bailout plan collapsed under
shareholder opposition and improved financial markets

4


Treasurer never had to decide on various strategic
alliances

42

The Rio Tinto
-
Chinalco transaction is

widely known but not well understood


During GFC Rio came under significant financial pressure
because
it overextended
to purchase Alcan


Rio’s circumstances compounded by a hostile bid from BHP


In a daring and well executed share market raid, Chinalco
snapped up 9% of Rio to become its largest shareholder.


Chinalco (an SOE) and NOT Chalco the listed subsidiary


Chinalco threw Rio a lifeline in exchange for additional shares,
board representation and
strategic stakes

in a number of key
operations


Chinalco permitted to grow to 14.99%, subject to not raising it
again without fresh approval and not seeking a board position

43

Chinalco’s planned alliance with Rio

Tinto failed because the deal was unsound


Fierce opposition from Rio shareholders who were annoyed with
their management and were positioning to vote it down


Improved financial climate confirmed that Rio could improve its
balance sheet with shareholder equity


Proposal withdrawn so FIRB did not have to make a decision,
but approval given to Chinalco increasing its stake in Rio up to
14.99% and not seeking to appoint a director

44

Urandaline Investments

PO Box 100, Biggera Waters

Queensland 4216

Australia

Phone+61
-
7
-
5528
-
5595 Cell +61
-
409
-
198
-
173

ChinaMetal@Urandaline.com.au

www.Urandaline.com.au

45

Minemtals’ legally enforceable

conditional approval protects national interest


Operate as a separate business with commercial objectives, HQ
in Australia and managed locally


Sales team based in Australia with arm’s length pricing


Maintain or increase production at nominated mines
subject to
economic conditions


Comply with Australian IR laws and honour employee
entitlements


Maintain and increase levels of indigenous employment

46

Hunan Valin share holing in FMG

also has enforceable undertakings


Hunan’s Board nominees will comply with FMG’s director’s code
of conduct as well as submitting a standing notice on potential
conflict of interest relating to marketing, sales, pricing, costs etc


Hunan and any person nominated to FMG Board will comply
with information segregation arrangements

47

Yanzhou Coal’s purchase of Felix

Resources is another conditional transaction


Acquisition through Yancoal, an Australian subsidiary


Two Australian directors


Yancoal to list in 2012 at which time Yanzhou to reduce stake to
70%


Arm’s length dealing on coal sales to China

48

Process


Confidentiality can be justified on basis that some applications
seek advance approval for possible investments that have yet to
be revealed to the stock market


49

Chinese companies have come a long

way since the failed Noranda deal


2004 Minmetals US$4 billion bid for Noranda which foundered
on Canadian opposition and decision paralysis by NDRC


Acquisition completed in September 2005 by Xstrata for
US$19.2


In past 4 years FIRB has approved 230 Chinese investments
worth $60 billion, no outright rejections, but 6 with conditions


Foreign exchange reserves are no longer an issue and decisions
made by NDRC and not State Council



50

Australian companies have not been

active investors in China


Australian investment in China is a paltry $11 million


Services make up 70% of the Australian economy and China has
yet to open this area to foreign investors

51