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									Should we sell out to the Chinese?
John Garnaut
October 8, 2007

CHINA'S $US200 billion sovereign wealth fund is officially nine days old and Australian
companies have already been earmarked as the fund's most likely investment targets in the
Western world.

Australian politicians have therefore been placed on notice to fast make up their minds: is the
newest and most controversial state-controlled investment fund an economic opportunity or a
strategic threat?

Credit Suisse speculated last week that Australia was second only to Russia on the fund's likely
shopping list. In fact BHP Billiton and Rio Tinto (ranked two and six respectively) are the only
Western companies anywhere in the Credit Suisse top 50 - even though the world's equity markets
are dominated by companies in the United States and Europe.

Australia has world-class resources and mining companies that China's industrial-minded leaders
are desperate to have a stake in. But the reason it has stayed on the list, when equally compelling
investment destinations have been scratched, is that Australian politicians have not reacted with
the reflexive fear and antipathy towards Chinese capital that has become common in the US and

The Howard Government has consistently gone out of its way to smooth the way for Chinese
companies to invest in Australian resources. Last week Kevin Rudd cautiously signalled he would
take the same approach. Answering questions at a business lunch, Rudd said managing an influx
of Chinese investment would be "an interesting challenge" for whoever won the election, but he
was inclined to take a "market-based approach" and defer questions of political sensitivity to the
Foreign Investment Review Board.

The simple reason leaders on both sides of politics have tended to welcome Chinese investment is
that they are answerable to an electorate that views China's economic rise as a good thing. Last
week Sydney University's US Studies Centre showed 56 per cent of Australians held a favourable
opinion of China. A recent Lowy Institute poll showed an almost identical result.

"Attitudes to China are very warm," says Allan Gyngell, executive director of the Lowy Institute.
"To Australians, China represents an opportunity, not a threat." Such attitudes are inconceivable in
almost any other Western country. Reaction to Chinese investment has been most hostile in the
US but it seems that Europe is headed in the same direction.

In June, the Pew Research Centre's Global Attitudes Project found just 42 per cent of Americans
had a "favourable" view of China, compared with 49 per cent in Britain, 43 per cent in Spain, 34
per cent in Germany and 27 per cent in Italy. And those figures are falling fast.

Says the Pew report: "Since 2005, favourable ratings for China have fallen 18 points in Spain, 16
points in Great Britain, 12 points Germany and 11 points in France."
In large part, the European and American reaction against China is driven by economic fear.
Sixty-five per cent of Italians view China's economic growth as a bad thing. The figure is 64 per
cent in France and 55 per cent in Germany.

The view from the developing world - plus Australia - could not be more different.

In oil-rich Nigeria, 75 per cent of people view China favourably, up from 59 per cent two years
ago. On the specific question of China's economic growth, 96 per cent of respondents in Ivory
Coast think it is a good thing, as do 93 per cent in Mali and 91 per cent in Kenya.

It must bemuse China's leaders that their country's economic involvement in Africa is far more
controversial in the US and Europe than it is in Africa itself.

Similar trends are evident in South America.

"South American countries view China's economic influence as a good thing, whereas the
Europeans and Americans do not," says the Pew report.

When it comes to China, Australia stands alongside Africa and South America rather than its
traditional friends in the US and Europe. Why? Because Australia, Africa and South America have
received an extraordinary mining industry dividend from China's economic awakening, but few of
the manufacturing costs. In resource-rich countries the benefits of China's rise are plainly visible
on the sharemarket, in government revenue and ultimately in more jobs and rising wages. Europe
and the US receive no net dividend from rising commodity prices but their manufacturing
industries face some very visible losses.

China's new generation of state capitalists have little experience in sending their money abroad.
They have made early mistakes - mainly by underestimating the political impact of their

The China Investment Corporation, entrusted with initial endowments of $US200 billion ($222
billion) in foreign exchange reserves, was badly burnt when it rushed out to buy a 10 per cent non-
voting share of the American private equity firm Blackstone. Other state-controlled Chinese
companies have had their overtures rebuffed in the US.

The European Union has recently hardened its stance.

"We have good reasons to ask these funds to declare what kind of assets they want to invest in,
what criteria they apply to decide their investments, and what the distribution of their investments
is," Joaquin Almunia, the EU's commissioner for economic and monetary affairs, recently told the
Financial Times.

"If they don't agree to these criteria, we can find good reasons to react in some cases."

Australia's leaders should be prepared for some tough questions in the next year or so. Sovereign
funds carry many of the transparency problems shared by private equity, with the added
complication that they are frequently controlled by secretive, authoritarian states.

Should they be bound by special investment rules? Would it be un-Australian to sell a large slice
of BHP Billiton to China?

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