Tuesday, August 4, 2009

How do Australia's Foreign Investment Rules Apply to China?

Australia's government announced yesterday an easing of foreign investment rules. The rules have apparently come under criticism recently for causing delays that may be overly burdensome to foreign investors.

One recent deal, the proposed purchase of a controlling interest in Aussie miner Rio Tinto by Chinese metals company Chinalco, was canceled during Australia's review process. According to Reuters, some critics have complained that the delay caused by Australia's review process injected doubt and uncertainty, possibly causing Rio to cancel the deal before a decision was rendered. There is, of course, no evidence to support this speculation.

The Reuters story also points out that the changes to Australia's rules only affect private investment. Sovereign investment, that is, investment by foreign governments, is still subject to the same rigorous review process. So in fact, this change in rules would have had no effect at all on the Rio Tinto purchase. Chinalco is owned by China's central government, and its proposed controlling purchase of Rio was only a small part of the $12 billion in Chinese state investment into Australia proposed during the first five months of 2009.

One question not addressed is how exactly Australia will distinguish between "public" and "private". Among most countries with market economies, the question is not so difficult to answer.

For example, if Ford Motor Co. from the US wanted to buy an Australian parts company, this would be considered "private" investment. But if General Motors wanted to buy the same parts company (and assuming it were able, which I know is a bit of a stretch) this would be considered "public" since GM's majority shareholder is the US government.

But how would these rules apply to Chinese companies?

For example, Lenovo, maker of the Thinkpad on which I write this post, is a publicly traded company. If it wanted to buy an Australian software firm, surely it would be considered private, right? Not exactly. When you follow the trail, you find that Lenovo's controlling (though not majority) shareholder is the Chinese Academy of Sciences, a government-controlled thinktank.

What about Geely Motors? Geely is traded in Hong Kong, and its controlling shareholder is the company's Chairman, Li Shufu, a private Chinese citizen. I think this case would be more clear cut, and indeed, apparently Australia thought so when they allowed Geely to buy DSI, an Australian maker of drivetrains.

However, as I pointed out in a recent post about Geely, the line between "public" and "private" in China can be blurry. Despite the private ownership of Geely, China's State Council apparently maintains the right to sign off on Geely's strategy for expansion.