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Australia, China need to establish cooperative framework in trading ties
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08:32, July 17, 2009

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Australian economist and professor Peter Drysdale has said that "Anxiety over the growth of foreign investment in resources by China is unfounded", adding that "Australia and China need to establish a cooperative framework in trading relation as soon as possible".

In an exclusive interview with Xinhua, Peter Drysdale, professor of the Crawford School of Economics and Government in the Australian National University, said the surge of Chinese investment into the Australian resource sector focused attention worldwide on the issue of China as a new investor in the country. Had it succeeded, the Chinalco deal, involving an 18 percent (19 billion U.S. dollars) stake in Rio Tinto, would have been the largest single Chinese corporate acquisition overseas to date.

Professor Drysdale refers to the failed joint venture deal that Australia's Rio Tinto unilaterally scrapped of its marriage with Aluminum Corp. of China, or Chinalco, on June 5 due to reported reasons that the Chinalco rescue package was facing growing opposition from shareholders and the Rudd government's "concerns".


"Anxiety over the growth of foreign investment in resources by China is unfounded," Drysdale said, adding that "it is important to avoid investment protectionism and establish a cooperative framework--bilaterally, regionally and globally--where these issues can be resolved."

He said, Australia has perhaps the most efficient mining sector in the world. This is due to its openness to foreign investor competition and participation, because that brings with it, and fosters, the technology, management know-how and market links that are essential ingredients in the development of a world class, internationally competitive industry.

"It is strategically important that Australia and other developed market economies welcome participation of Chinese state-owned firms rather than remain cautious about it," he said.

Domestically, state owned enterprises (SOEs) in China are increasingly subject to the disciplines of the market. They enjoy preferred access to domestic credit through the state-owned banking system but on terms that are increasingly commercially based, he added.

"Many countries spanning different economic and political systems have implicit and explicit state involvement in enterprises (for good or ill) and the state is often actively engaged in representations on behalf of its national enterprises (especially but not only in developing economies).

When Japanese investors took a stake in Australian resources some were state owned and most made decisions and received significant subsidised funding within a framework closely constrained by the state. Most large financial institutions in developed market economies (including Australia) are now bound to the state in various ways. "

There is a complex of political economy issues that will have to be resolved both within China, and in cooperation between China and her major economic partners. In aiming to guarantee for itself the resources and technology it needs as a developing nation and to transform its industrial giants into truly globally competitive players, China has fallen victim to misapprehension about the dangers that Chinese SOEs may pose to other states' national sovereignty, he said.

"Increased international cooperation on them will bring benefits to both the investor and the host-nation alike, especially because granting foreign direct investment (FDI) market access to a transitional market economy like China has scope to influence positively the dynamics of institutional change beyond the mere matrix of pecuniary and fiscal opportunity," Drysdale added.


Peter said the motivation for Chinese foreign direct investment(FDI) projects is twofold. Firstly, Chinese investors in the resources sector aim to secure stakes in projects that are linked to supplying rapidly growing markets in China.

Secondly, Chinese investors perceive going into FDI as an investment in their future, as the Australian (or other foreign) projects and firms in which they invest bring management know-how and technology, and have a positive impact on Chinese firm operational efficiency and corporate standing.

He said the "going out" strategy for Chinese enterprise promoted by the Chinese government over the last few years has encouraged this. Chinese enterprises need to go abroad to compete against foreign competition in the home market and internationally.

On the other side, FDI in the resource sector offers various advantages to host countries including the provision of capital, technology, know-how and access to markets. These benefits are substantial to Australia, for example, given the scale, longevity and technological complexity that typify resources investments.


Professor Drysdale argued that "the character of state owned enterprises (SOEs) in China is evolving very rapidly. For example, when China invested in the Channar iron ore mine in the 1980s, it did so through the Ministry of Minerals and Metallurgical Industry. Steel and other enterprises under that umbrella have now been fragmented into several competing entities and corporatized, with some listed on both the Chinese and international stock exchanges."

"Changes in corporate governance include the establishment of non-executive boards and executive independence in the day-to-day operations of most state owned enterprises. Some SOEs, however, are more independent in their operations than others," he said.

Since 2003, the State-Owned Assets Supervision and Administration Commission (SASAC) has been responsible for exercising the ownership of SOEs on behalf of the Chinese government. SASAC also carries forward the reform of SOEs, their governance, consolidation and privatization. This is an active and ongoing process aimed at making SOEs conform to normal commercial market disciplines, Drysdale said.

Still, some believe that ownership of enterprise by the state and the presence of political cadres in the senior management of these enterprises in China should disqualify them from being subject to the normal rules and regulations applied to other foreign investors in host countries like Australia and elsewhere. Drysdale argued that "this is not only a matter of public comment. It has been a policy consideration in Canada for some time, and is also now a matter of explicit policy consideration in Australia."

Drysdale said "state ownership is a fuzzy issue, and it would seem unwise to stereotype state ownership in China when it is in fact changing rapidly and has fewer and fewer of the negative characteristics popularly attributed to it."

Drysdale believes only through fuller participation in the Australian market and other developed markets abroad SOCs could subject themselves to the disciplines of robust and well-governed market institutions. Applying special conditions for these investments would reinforce the perception of the primacy of regulatory solutions over market solutions, and help sustain the dominance of the bureaucracy over the market in China and drive Chinese investment to other destinations in Africa or Latin America where there are less robust institutions to host it.


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