By George Gilligan & Megan Bowman, University of New South Wales

MELBOURNE/SYDNEY: 9 May 2013 - Most Australians are aware that China is by some distance Australia’s most important trading partner, but official Department of Foreign Affairs and Trade (DFAT) data demonstrate this quite starkly.  In terms of two way trade China is top with 19.9%, followed by Japan in second with 11.9%, the US third with 8.9%, South Korea ranked four with 5.4% and Singapore rounding out the top five with 4.6%. These rankings are emblematic of profound changes in the global economy that will accelerate during the Asian Century that we are now in.  These developments are reshaping which countries are becoming the most powerful players in the global economy and will impact specifically upon Australia’s economic well-being now and in the future. 

Of particular importance are the decoupling effects of fundamental changes in East: West capital flows with attendant global imbalances regarding the management of exchange rates and reserves.  The most obvious example of this is the rapidly increasing global economic influence of China.  For example, China has increased its foreign reserves from $21 billion in 1992 (5% of its annual GDP) to $31,202 billion in 2012 (45% of its annual GDP). The huge increases in China’s economy and its foreign reserves are testimony to strong underlying growth trends which commentators and analysts expect to continue.

Using a sample of 122 countries accounting for more than 95% of global GDP, Jorgenesen and Khuong have predicted that if current growth trends are maintained, then by 2020 China will have replaced the US as the world’s largest economy with 20.08% of global GDP (up from 13.92% in 2010).  In the same period the US share of global GDP is expected to fall from 20.14% to 17.44%.  This changing of the economic guard as it were in terms of the global economy is not confined merely to China and the US because there are regional forces at work as well, especially in Asia.  For example, the G7 (Canada, France, Germany, Italy, Japan, UK & US) share of global GDP is expected to fall from 40.62% in 2010 to 33.30% in 2020 and the Asia 7 (China, Hong Kong, India, Indonesia, Singapore, South Korea & Taiwan) share to rise from 25.16% in 2010 to 33.18% in 2020.  The US and China dominate their respective groupings.  The US share of G7 GDP is estimated to be 49.59% in 2010 and 52.385 in 2020.  China’s share of Asia 7 GDP is estimated to be 55.35% in 2010 and 60.52% in 2020. 

If these trends transpire into reality, and they do seem likely, then it represents a direct 7%+ transference of total global GDP from the G7 to the Asia 7 in only ten years and further concentration of the strategic significance of China and the US in their respective groupings.  This constitutes a dramatic shift in economic power and history demonstrates that these economic shifts influence change in other arenas such as foreign policy, strategic alliances and regulation in multi-lateral contexts.

All three of these areas help shape how to regulate inward investment policy which is of crucial national interest to a capital hungry country like Australia. At times tensions can arise about approval processes for inward investment proposals, especially if they come from countries which have significant numbers of state capital actors such as Sovereign Wealth Funds (SWFs) or State Owned Enterprises (SOEs), even if individual applications for approval may be lodged by private companies.  This is not just an issue for the Australian Government, but for governments around the world, especially in more developed economies. Greg Golding writing on the Centre for Law Markets & Regulation (CLMR) portal earlier this week discussed this issue in relation to the US and the difficulties it is having in managing inward investment from China.  Golding examined the decision of President Barack Obama to prohibit Rails Corporation, (a company controlled by executives from Chinese company Sany Heavy Industry Company Ltd), from owning wind farm projects in Oregon.

The Canadian Government too has shown its hand recently following increased investment by Chinese SOEs in Canada, issuing revised investment policy guidelines to the Investment Canada Act which provide explicitly that: ‘investors will be expected to address in their plans and undertakings, the inherent characteristics of SOEs, specifically that they are susceptible to state influence.’ Accordingly, entities that are ‘owned, controlled or influenced, directly or indirectly by a foreign government’ must satisfy the Canadian Minister of Industry that the project is commercially oriented and free from political influence.

In Australia in recent years there have been inward foreign investment decisions made by the Australian Government that have been considered unfair by Chinese interests.  These include: in 2008 Chinese SOE Chinalco’s attempts to take a significant stake in major Australian miner Rio Tinto; in 2009 China’s Minmetals Non-Ferrous Metals Co Ltd were prevented from making a 100% acquisition of Oz Minerals if it included the Prominent Hill mining operations located within the Woomera Prohibited Area in South Australia; and in 2012 Chinese telecommunications company Huawei being prevented from participating in significant tendering for involvement in Australia’s National Broadband Network (NBN). Underpinning these decisions and others are concerns within the Australian Government and Australian intelligence agencies about perceived linkages between Chinese businesses and China’s Government, especially the activities of Chinese SWFs and SOEs.

The disquiet from China about such decisions has received renewed media attention recently following the high-profile Australian Government delegation to China in April 2013 led by Prime Minister Julia Gillard that undertook trade and other inter-governmental negotiations.  Trade Minister Craig Emerson: ‘..has admitted that talks on a free-trade deal with China have stalled because of a dispute over restrictions on investment in Australia by Chinese state-owned enterprises.’ It is clear that this issue will play a prominent role in Sino-Australian relations for years to come.  There is substantial need and scope for increased empirical investigation of the scale and impacts of state capital both in Australia and overseas, because there is much that is not known or well understood.  The CLMR will contribute to debate on these issues through its state capital research project which is investigating the effects of state pools of investment activity in Australia.