By All Means Necessary (19 page)

In the months that followed, debate raged across Canada over whether the takeover should be approved. Strong support for the deal was met with hostility similar to that encountered in many parts of the developing world where China increasingly invests. “Canada is open for business, ” declared one member of Parliament from the leading opposition party, “but Canada is not for sale.”
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Debates and decisions like the one forced by CNOOC's attempt to buy Nexen are increasingly common outside the developing world. The last decade has seen a boom in Chinese investment into resource production in major developed countries. These countries typically raise a fundamentally different set of issues from investment in developing countries even as they provoke some common
fears. The major developed resource producers—Australia, Canada, and the United States—have highly diversified economies. They also have relatively strong governance for environment, labor, and fiscal issues, extending not only to rules but also to enforcement. But the politics of Chinese resource investment in these countries is still often fraught and complex. Moreover, strategic concerns—these countries are typically wary of becoming subject to Chinese leverage—can play a much larger role than in most of the developing world.

China's role in Australia's energy and minerals sectors has skyrocketed over the last decade. China overtook Japan in 2005 as the top buyer of Australian iron ore. By 2011, it was importing nearly eight times as much iron ore as ten years before, a full 69 percent of all Australian iron ore exports. Purchases of bauxite have similarly jumped, rising from near zero in 2004 to make China Australia's top customer in 2007; by 2011, it was buying an extraordinary 85 percent of Australian bauxite exports. Even in coal, an area in which China is largely self-sufficient, trade has risen sharply. Coal imports, a modest four million tons a year as recently as 2007, reached nearly forty-seven million tons in 2009, just short of 20 percent of Australian coal exports, making China second only to Japan, long Australia's primary customer.
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In the future, as Australia emerges as a leading producer of LNG, China is expected to become a major buyer. These developments have unfolded against a broader shift in Australian exports: in 2002, China overtook Japan as Australia's top partner in overall two-way trade, with flows reaching A$76.4 million between 2008 and 2009.
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The two countries have proven to be a strong match. Australia's large natural resource endowments but small manufacturing base pair with China's smaller resource holdings but stronger industrial capacity to take raw materials and turn them into intermediate goods like aluminum and steel. Australia's proximity to China also lowers transport costs for bulky materials. And Australia is
poised to continue this role for the long haul, with the world's second-largest reserves of iron ore and fifth-largest reserves of coal. Australia's position is enhanced by the quality of its materials: Western Australia's hematite ore (a form of iron ore) requires fewer processing steps than other varieties, and Australian black coal is highly desired for its low sulfur level.
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Australia is also well placed to supply natural gas to China; gas is considerably more expensive to transport than oil is, which makes the fact that Australia is closer to China than is the Middle East a competitive advantage. Australian natural gas shipments also have the virtue of not having to transit the narrow straits of Malacca or Hormuz, which the Chinese worry could be blocked by the United States, Iran, or others.

The Australian economy has benefited strongly both from direct exports to China and from higher prices for those commodities it sells to others. According to a 2013 report from the Reserve Bank of Australia:

Strong growth in Asia, particularly in China, has had a profound impact on the Australian economy over the past decade. Most notable so far has been the boom in the resource sector, with commodity prices and hence Australia's terms of trade rising to historically high levels over a number of years.
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The benefits have, however, been uneven. In May 2012,
Bloomberg News,
noting that the Australian dollar rose 44 percent from the end of 2008 to 2012, observed that “the mining industry is thriving, but other industries—most of the nation, actually—are struggling.” Much of that struggle has been driven by factors well beyond the natural resources trade; nonetheless, the resource boom undoubtedly contributes by driving up the Australian dollar, making nonresource exports less competitive in the world.
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Increased trade with China has gradually been supplemented by direct Chinese investment in energy and minerals, following the pattern set by Japan in the 1960s and 1970s. Australian government data covering attempts to invest at least A$100 million in distinct projects
show a strong increase starting in 2006–07, leading to a peak of A$26.6 billion worth of proposed investment from China approved in 2008–09. (Australia tracks investment approvals on a July 1–June 30 year.) Chinese investment fell as the financial crisis took hold, but it still stabilized well above historic levels, in the range of A$15 billion annually. Chinese investments in Australian mineral resources also increasingly make up the vast majority of approved direct investments from China: in 2008–09, 98.8 percent of approved deals were in the minerals sector, and more than three-quarters of the investments in 2009–2010 as well as more than half in 2010–11 were also in minerals exploration and production. This contrasts with 2007–08, when barely 5 percent of Chinese investments in Australia were in energy and minerals. But despite large relative gains, China still makes up only a small fraction of new inward investment in Australia. In 2009, the peak year for Chinese investment, the total of new U.S. investment in Australia was A$93.8 billion; by contrast, only A$7.8 billion came from China.
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China is not the first resource-hungry power to confront resource-rich Australia. It has long been a destination for investment by distant powers in mineral resources. During the 1880s, British investors poured money into the Australian minerals sector, in what has been described as the “first wave” of deals in extractives.
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During the 1960s and 1970s, Japan acquired Australian mineral assets; Nippon Steel made numerous investments in the Pilbara region, while abundant coal reserves helped meet increasing Japanese demand for energy.

During that last wave, in 1975, amid ambivalence about Japanese investment, Australia enacted its Foreign Acquisitions and Takeovers Act (FATA). In the years since, FATA has required that a Foreign Investment Review Board (FIRB) review all Australian asset acquisitions worth more than A$100 million. Urban real estate purchases are also reviewed, and they constitute the majority of cases the FIRB handles, but we ignore them in the discussion here since their statistics obscure developments in the natural resources sector.

The FIRB evaluates investments for their consistency with the “national interest.” The term was left undefined until 2010, but it now includes considerations of national security, competition, impacts on tax revenue and environmental objectives, and economic and community consequences.
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Reviews also cover the “character of the investor”—the investor's commitment to transparent and well-supervised operations driven by commercial rather than political goals. The all-encompassing nature of this new definition of the national interest allows policy makers to retain great discretion over future assessments.

Precedent is thus more illuminating. Australia rarely rejects non–real estate investments: prior to 2011, when it blocked a buyout of the Australia Securities Exchange by the Singapore Stock Exchange, it had not rejected a takeover since Shell Australia Investments (a subsidiary of the Anglo-Dutch multinational) attempted to buy Woodside Petroleum in 2001. (The Australian government feared Shell would not develop the property promptly.)
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Beyond actual failures, though, the threat of rejection has led companies to withdraw attempted investments and applications for their approval, leading to quasi-rejections that do not register in official statistics or reporting.

Chinese investment attempts have largely been treated like other ones: they have mostly been approved, and buyouts of small mines proceed with particular ease.
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But five deals since 2007 were approved only with conditions related to corporate governance and control. An attempt by Sinosteel to gain approval for a takeover of Murchison Metals, an iron ore producer, was approved on condition that the Sinosteel share be kept below 50 percent, reflecting a broader Australian concern about regional market concentration.
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A 2009 attempt by Anshan Iron and Steel Group to raise its share of iron ore producer Gindalbie Metals was approved subject to requirements that the firm support a particular infrastructure project and that there be no change to the ownership structure of a pellet plant the two firms planned to build together in China. This second condition reflected a pattern that scholars have identified in Australian policy: governments of varying political persuasions
have been willing to push for some sort of reciprocity when opening the market to Chinese investors. Two other acquisitions—one in thermal coal and the other in iron ore—were approved with conditions on corporate governance, including the composition of boards of directors. One of those—a 2009 buyout of coal producer Felix Resources by Yanzhou Coal—also required that part of the firm be partially relisted on the Australian stock exchange by 2012, a condition that was ultimately met. A fifth acquisition was modified to exclude ore deposits in a sensitive defense-related area before being approved.

Two other deals were withdrawn after they appeared likely to be rejected or to have conditions imposed that were unacceptable to the bidders. The Chinese company Wuhan Iron and Steel's (WISCO's) 2009 attempt to take a 50 percent stake in Western Plains Resources was sunk because of the iron ore producer's proximity to a sensitive defense area. More intriguingly, China Nonferrous Metals Corporation withdrew after it became clear the Australian government would not allow it to acquire a majority stake in the rare earth metals miner Lynas Corporation. The decision reflected strong Australian concerns about Chinese dominance in rare earth production. Rare earth metals are not particularly rare in the earth's crust, but production is currently dominated by China, and known reserves of some especially valuable rare earths (“heavy rare earths”) are highly concentrated geographically.
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Analysts have mostly concluded that scarcity of rare earth metals is not a long-run problem: substitutes can be developed and deployed, and more fundamentally, new mines can be opened. If Chinese companies were to purchase a large number of prospective rare earth mines outside their territory, though, the latter source of security would be removed. This explains Australia's decision to bar CNMC from purchasing a controlling stake in Lynas Corporation. Indeed in 2011, after CNMC's bid failed, Australia's FIRB approved a bid by Japan's Sojitz Corporation to take a stake in Lynas at a value of $325 million. Japan, unlike China, is not seen as a threat to global markets for rare earths.

China's early deals in Australia attracted attention but were still relatively low-key. But conflict within Australia over Chinese resource investment came to a head following a February 2009 attempt by Chinalco to invest $19.5 billion in the mining giant Rio Tinto, a sum that would have nearly doubled the already-record volume of Chinese investment in Australia that year. Chinalco (together with a small investment by Alcoa) had successfully invested $14 billion (gaining a 9 percent stake) in Rio Tinto the previous year.
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The new investment would have consisted of $7.2 billion in purchases of convertible bonds and $12.3 billion in minority stakes in specific mining assets, including the world's largest bauxite mine in Queensland and a major iron ore mine in Western Australia, along with significant copper mines in Chile and the United States.
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The deal would have raised Chinalco's stake in Rio Tinto to roughly 18 percent, and Chinalco executives would have taken two board seats.
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The deal came at a time when cash-flush Chinese companies were looking for big opportunities to invest in natural resources. It would have helped provide a hedge against the high iron ore and bauxite prices that were hurting steel makers and aluminum smelters, though it would not have come close to fully hedging direct Chinese exposure. Some speculated it would also have made a merger of Rio Tinto with BHP Billiton (the other Australian mining giant) far more difficult, protecting Chinese iron ore consumers from any risk that those two firms would combine and exercise massive market power.
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Proponents of allowing the deal to go through emphasized the broad benefits of open trade and investment. Others went further by arguing that the deal would give Australia strong access to the Chinese market. For example, Peter Drysdale, an economist at the Australian National University, argued that investments by a Chinese state-owned enterprise in Australia would further open up Chinese markets to Australian firms. Had the deal been successful, he claimed, it would have heralded “the first great Anglo-Australian-Chinese mining and metals company, probably headquartered in Australia.
This company would have been positioned to play a lead role in the Chinese market.”
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The Australian government did not actively object to the investment, but it did not lend enthusiastic support either. Instead it emphasized that the deal was an entirely financial decision fitting the government's broader vision for free trade. During the public debate over the deal, the top economic official in the left-of-center Labor government emphasized claims that foreign direct investment had created some two hundred thousand jobs.
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