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Microsoft PowerPoint - China Australia FTA Aug 04

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					Direct investment in an
Australian- China FTA
How much does it matter?
Chief Economist, Australia & New Zealand: John Edwards
Tel: (61 2) 9255 2477
john.k.edwards@hsbc.com.au


Australian China Free Trade Agreement Conference
Sydney
August 12 - 13 2004




       Why investment matters
           Stronger investment ties will sustain and
          entrench the trade relationship between
          Australia and China
           Australia’s interest is in encouraging Chinese
          investment in Australia to strengthen
          commitment to Australian resources
           Australia investment in China will deepen and
          widen Australian business experience of the first
          or second biggest national economy in the
          global economy




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    Australia and China now invest abroad at
    roughly the same rate as they receive
    foreign investment

     For China last year inward direct investment approximately
    USD60bn, matched by outward direct investment of around
    the same value


     For Australia last year inward direct investment was only
    half of outward direct investment




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Foreign direct investment in Australia (transactions)
                                                   $m

       30000



       25000



       20000



       15000



       10000



       5000


          0
               1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002   2003




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Australian direct investment abroad (transactions)
                                                                                $m

         30000


         25000


         20000


         15000


         10000


             5000


               0


         -5000
                      1989     1990   1991     1992    1993   1994      1995   1996   1997     1998    1999     2000     2001     2002    2003



 5




     In 2003, 2001 direct AIA exceeded FIA
                                                                           $m

     30000


     25000

     20000


     15000

     10000


      5000

         0


     -5000
               1989     1990     1991     1992    1993    1994    1995     1996   1997      1998    1999      2000     2001     2002     2003

                                        Foreign invest in Aus (trans)                    Australian inv abroad (trans)



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      AIA level is increasing faster than FDIA level
                                                           $m

       250000



       200000



       150000



       100000



        50000



            0
                1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

                                  Level of Au FDI abroad        Level of FDI in Australia



  7




Australian direct investment in China still small
         Transactions 2003
         To China $48m
         To Hong Kong $681m
         Total Australian direct investment abroad
         transactions 2003: $25,000m

         Level 2003
         In China $255m
         In Hong Kong $3,400m
         Level of direct Australian investment abroad
         2003: $169,455m
  8
         Source ABS
China’s direct investment in Australia also small
       Direct investment transactions in
       Australia 2003
       From China $28m
       From Hong Kong -$144m
       Total FDI transactions $13,000

       Levels of FDI in Australia 2003
       China $471m
       Hong Kong $2,561m
       Total level $243,000m
       Source ABS
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       Why so little direct investment?
         Most offshore investment in China is manufacturing designed for home market
       in Japan, Europe, US. Australia not a big volume manufacturing economy.
        Disappointing first wave – Australian FDI level in China $501m in 1996/97, half
       that today (Foster’s, Pac Dun, Cadbury Sc., BTR)
        Australia and China have only recently begun investing abroad in a big way
        Australian business hitherto finds it easier to transfer model to developed
       country market – especially US and the UK (Westfield, Brambles, Rinker, James
       Hardie, etc)
        China’s investment driven by regional manufacturing integration as well as
       resource security
        Different motives
                 Australian firms want to use a business model developed in a small
             country market, and/or get closer to customers.
                   China businesses often looking to downstream or upstream integration
             i.e. connected with trade.
        But also, there are impediments


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         Australian direct investment in China

          Fosters example discouraged consumer products for China
         market
          Current examples:
                Manufacturing for Australian market utilising lower
               labour costs (Pacific Brands- now supply contracts)
                BlueScope - specialist steel products
                BHP Billiton
                Macquarie - specialist mortgage market, property
                Education providers
                Engineering, mining and construction services

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 China investment in Australia

     Portland
     North West Shelf joint venture
     Future?
        Energy
        Mining
        Agriculture
        Education
        Tourism




12
Impediments to Australian direct investment
in China
  Lack of clarity about rules eg valid claim to mining discovery, export
license for mining production
 Usual requirement for local partner, often majority
 Uncertainty over profit repatriation, tax rules, foreign exchange rules
 Uncertain redress in event of difficulty
 Arbitrary local decisions eg infrastructure tolls
 Contracts difficult to enforce against powerful partners like PLA
 WTO arbitration insufficient if local courts will not enforce
 Corruption
 Takeover Exclusions – eg media, telecommunications, banking
 Opaque regulatory environment
 Concern over IP protection

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     Impediments to Chinese direct investment
     in Australia
      Exclusions or limits on banking, telecommunications, media,
     aviation, airports, shipping.
      FIRB notification for $50m and above in takeovers, and $10m
     for green fields (value of entity)
      FIRB notification for all govt or govt agency investment
      FIRB notification on urban land, esp. residential real estate
      FIRB notification for all tourism proposals
      FIRB conditionality eg sometimes local board or CEO, other
     performance requirements
     Preferential treatment for US (and Japan, New Zealand?)


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What might change? Recent precedents
 Thailand Australia FTA saw mining foreign ownership lifted from
49% to 69% for Australia
 Australia-US FTA lifts FIRB threshold from $50m to $800m,
eliminates greenfield notification (but no change in exclusions in
Australia)
  Australia and China already have an investment agreement
allowing for govt to govt disputes resolution. What chance
investor-state?




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Types of possible investment agreements


Beef up existing agreement

Limited Investor- state arbitration
Full on Chapter 11
             national treatment, non discrimination, MFN
             disputes appeal to arbitral tribunals
             no performance rules (with exceptions)
             reservations

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     Possible investment changes in China-
     Australia FTA
      Beijing recognition of a strategic economic partnership
     with Australia
      Formal , established and specialised government to
     government dispute settlement
      Increase in foreign ownership limits in some Chinese
     industries
      Extension to China of Australian FIRB arrangements for
     the US
      National treatment, up to a point



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     •Issue of Nara, CER,
     •In practice, whatever is agreed with US is
     for everyone?




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