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Australia has been a popular target for Chinese outbound investment over the last decade, especially in the mining and resources industries. The Federal Treasury’s Foreign Investment Review Board (“FIRB”), which is based in Canberra, has the role of assessing such investment proposals in the “national interest”. For the most part, FIRB has adopted a liberal attitude towards approvals, grounded in rules and policies which are well-publicised and transparent.

On 17 February 2008 the newly elected Federal Treasurer, Wayne Swan, issued a new policy concerning foreign investment in Australia. The new Principles guiding consideration of foreign government related investment in Australia (“the Guideline”) will be used to screen foreign government-related investment in Australia, including investments of sovereign wealth funds. Coming as it does at the same time as the international shock surrounding Chinalco’s acquisition of 12% of Rio Tinto, the Guideline is likely to generate speculation and concern in the China-Australia business circle. Will the new policy become Australia’s “great wall” against Chinese investment?

In this newsletter we revisit Australia’s foreign investment legal framework; summarise major Chinese investment projects in Australia over the last few years; explain the new foreign investment policy; and explore its implications for future Chinese investment projects in Australia.

Fundamentals of Australia's foreign investment regime         

Foreign investment in Australia is regulated primarily through the Foreign Acquisitions and Takeovers Act 1975 (C’th) (“the Act”). Under the Act, certain forms of foreign investment must first be notified and approved by the Treasurer before they can be established. For example, new businesses involving an investment by foreign persons of more than AUD 10 million, acquisitions of substantial interests in existing Australian businesses with total assets of over AUD 100 million, or where the proposal values the business at over AUD 100 million, must be notified to FIRB before going ahead.

In addition to the framework established by the Act, foreign investment may also be subject to certain restrictions under rules which are specifically applicable to particular sectors (eg, media, banking, airports, aviation and urban real estate).

Under the Australia-United States Free Trade Agreement, eligible US investors benefit from more relaxed rules in relation to notification, and the investment value threshold which must be exceeded before approval is required for non-sensitive sectors is AUD 913 million, which is much higher than for investment from other countries.

Drivers, motives and players in Chinese investment in Australia          

In the second half of 2007, China became Australia’s largest trading partner. Chinese investment in Australia has largely been driven by the dragon’s insatiable demand for resources, such as basic ores and energy. China’s rapid industrialisation, urbanisation and modernisation program has motivated active commercial engagements in resource-rich areas such as Western Australia, Queensland and the Northern Territory. The Chinese central government’s “go abroad” strategy, and its intention to diversify the country’s huge asset reserves, have provided strong encouragement for an increasing outward focus by Chinese companies.

The major Chinese commercial and investment projects in Australia over the last six years are described in the following table:

Year Company Project Reported Value
2002 Shanghai Baosteel Group Hamersley Iron joint venture with Rio Tinto in Pilbara, Western Australia AUD 7 billion
2003 China Huaneng Group Acquisition of 50% stake in Ozgen, Queensland USD 227 million
2003 Wuhan Iron & Steel Group Tangshan Iron & Steel Group Maanshan Iron & Steel Co Ltd Jiangsu Shagang Group Wheelarra joint venture with BHP Billiton, Western Australia AUD 11.6 billion (export contract value)
2005 Sinosteel Corporation Iron ore exploration joint venture with Australia’s Midwest in Koolanooka and Weld Range, Western Australia AUD 1.5 billion
2006 Jinchuan Grouop Acquisition of 11% stake in Australia’s nickel manufacturer Aleegiance Mining, Tasmania AUD 1.7 billion
2007 Hunan Nonferrous Metals Corporation Browns Oxide project joint venture with Australia’s Compass Resources, Northern Territory AUD 72 million (initial investment projection)
2008 Jinchuan Group Acquisition of 11% stake in Australia’s Fox Resources AUD 17.9 million
2008 China Investment Corporation Acquisition of less than 1% stake in ANZ, NAB and the Commonwealth Bank On Market

And the interest continues apace, with ChemChina attempting to takeover Nufarm at the end of last year with an offer of AUD 2.75 billion, and recent reports that China’s Shougang Group has purchased, through its Hong Kong-listed subsidiary, a 19.7% stake in Australia’s Mount Gibson Iron Ltd (currently the subject of Takeover Panel proceedings, with the target seeking an order prohibiting the completion of the proposed transaction).

Six new issues to be considered before approving foreign government investment           

The new Guideline focusses on foreign government-related investment proposals. Foreign government-related investment proposals are said to be those made by investors who are “owned, controlled or linked to foreign governments (eg, state-owned enterprises and sovereign wealth funds) and may not operate in accordance with normal commercial considerations and may instead pursue broader political or strategic objectives that could be contrary to Australia’s national interest”. It sets out “additional” factors that need to be considered by FIRB, over and above those that apply to private sector proposals. The Guideline lists six issues that will be considered in examining proposed investments by foreign governments and their agencies:

  • Whether an investor’s operations are independent from the relevant foreign government – for example does the prospective foreign investor operate at arm’s length? do the prospective investor’s government arrangements facilitate control of a foreign investment? are there any non-government interests? if so, what are their size and composition?
  • Whether an investor is subject to and adheres to the law and observes common standards of business behaviour – for example, does the investor have clear commercial objectives and is it subject to adequate and transparent regulation and supervision in other jurisdictions? does the investor have good corporate governance practices?
  • Whether an investment may hinder competition or lead to an undue concentration or control in the industry or sectors concerned – for example, does the investment proposal comply with Australia’s competition policy regime?
  • Whether an investment may impact on Australian Government revenue or other policies -for example, will the foreign government entity investment be taxed on the same basis as other commercial entities? is the investment consistent with the Australian government’s overall environmental objectives?
  • Whether an investment may impact on Australia’s national security – for example, could the investment affect Australia’s ability to protect its strategic and security interests?
  • Whether an investment may impact on the operations and directions of an Australian business, as well as its contribution to the Australian economy and broader community – for example, do the investment proposals by an acquiring entity include any restructuring of Australian business (key interests in this regard would include impacts on imports, exports, local processing of materials, research and development, and industrial relations)?


The Guideline is a very important policy development but it does not represent a sudden change to a protectionist stance against foreign investment. The Guideline stresses that Australia maintains a welcoming attitude towards foreign investment, in recognition of the substantial benefits that it can provide to our community.

At the same time, the Guideline has no doubt been generated by the significant level of Chinese investment, and by a level of public concern about the degree to which open market principles operate in the governance and objectives of Chinese companies. It is here that things start to get complicated because, as our client representation experience tells us, there are many misunderstandings, misconceptions and stereotypical attitudes about China and how its economy and its companies operate. The Chinalco investment in Rio Tinto is a good example, in that concerns about the involvement of the Chinese government appear to have diverted attention from equally valid policy concerns about the anti-competitive outcomes of a BHP takeover of Rio Tinto, which are outcomes that Chinalco’s stake now prevents or at least postpones.

Australian businessmen and administrators are not familiar with Chinese corporate models and company structures, and that lack of familiarity can make it difficult to overcome preconceived notions of State government involvement in almost any Chinese company. For example, the representation of employees in contributing to company policy in Western companies is seen as an indication of good governance. However, when similar representation in Chinese companies takes place through a Supervisory Board, comprised of representatives including workers and Party functionaries, a different view can be taken.

Another example is where a State, provincial or local level government in China has sought to encourage market-oriented commercialisation, and to shed itself of non-performing assets, by placing those assets into specially designed business vehicles. This is sometimes achieved by converting the asset value into shares, with the government then remaining as a shareholder in the nominal sense. The irony here is that administering authorities in other countries then interpret the government shareholding as evidence of interference in the affairs of the company, when the intentions of the government in agreeing to the conversion in the first place were opposed to the notion of continuing interference and control.

There are also significant differences between “state-owned” and “state-controlled” enterprises in China. Many large Chinese state-owned enterprises (“SOEs”) have transformed their governance and management to market economy norms, guided by sophisticated Western-style laws and principles. Occasionally the commercial power of SOEs will force the Chinese government to adjust its own administrative practices to accommodate market-oriented initiatives.

Having said that, the concerns arising from the emergence of China-based sovereign wealth funds are understandable. Major Chinese outbound investments will continue to be made by SOEs. The Guideline does not offer a definition of “national interest”: the national interest will continue to be determined on a case-by-case basis. The Guideline will allow the Treasurer to exercise considerable discretion in most circumstances. Thus continuing education, proper explanations of the changing practices in China and adequate presentations of company data and modes of behaviour will be even more important in obtaining FIRB approvals in the future. It is also unclear whether the Treasurer will attempt to introduce on-going compliance obligations for foreign government-related investors, by approving proposals subject to satisfaction of certain conditions (such as has been formalised in the US).

The Chinese value the long-term friendship of the Australian Labor Party with China, and have made it known that they welcome and appreciate the new Australian Prime Minister’s ambition to lift the Australia-China relationship to a “fresh new level”. However the new Guideline articulates foreign investment policy concerns which deserve very close attention. Good preparation and well-documented applications to the Canberra-based FIRB will be essential for Chinese companies to obtain the all-important approvals to carry out their Australian ambitions.

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.

© Moulis Legal 2008