China's Investment in Australia: A Critical Analysis of Australia's Foreign Investment Review Mechanism

• Author: Jiang Huiqin and Zhou Weihuan
• Pages: 188-223

188 TSINGHUA CHINA LAW REVIEW [Vol. 10:2

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CHINA’S INVESTMENT IN AUSTRALIA:

A CRITICAL ANALYSIS OF AUSTRALIA’S FOREIGN

INVESTMENT REVIEW MECHANISM

JIANG Huiqin

ZHOU Weihuan

Abstract

This article reviews Australia’s foreign investment review mechanism (FIRM) and its central

element, the Foreign Investment Review Board (FIRB) process. It argues that four factors about

the mechanism may remain as barriers to Chinese investment in Australia after the China –

Australia Free Trade Agreement (ChAFTA) took effect in December 2015, namely the

discretionary "national interest" test, the less favorable treatment to Chinese investors in some

major areas of investment, the widespread concerns on investment by Chinese state-owned

enterprises, and the strengthened enforcement framework under the FIRM. It recommends that

Chinese investors endeavor to observe Australia’s foreign investment policy and practice, and

actively engage with the FIRB to avoid adverse decisions, unnecessary delays in decision-

making, o r inadvertent non-compliance. Meanwhile, t he Chinese government should seek to

reduce or remove these investment barriers in the current review of the investment rules under

the ChAFTA.

I. INTRODUCTION

After a decade of rapid growth of Chinese investment in Australia,

Australia is now the second largest recipient of China’s outbound

direct investment (ODI). 1 While China is only the seventh largest

investor in Australia and the value of Chinese investment remains

marginal in comparison to investment from the United States (US) and

the United Kingdom (UK), Chinese investment has shown great

potential to grow at the fastest pace among all foreign investment in

Australia.2 With the conclusion and implementation of the China –

Australia Free Trade Agreement (ChAFTA) in December 2015, the

governments, businesses, and other stakeholders of the two countries

are becoming increasingly positive towards the bilateral economic

relationship and its further development. Overall, the ChAFTA

benefits Chinese investors in that it improves market access and the

predictability of Australia’s regulatory environment. Thus, the

ChAFTA serves as an important complement to China’s outbound

investment policies, which aim to promote Chinese investment in

countries including Australia for strategic assets, raw materials, high-

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1 See KPMG and The University of Sydney China Studies Centre (KPMG and USYD Centre),

Demystifying Chinese Investment in Australia: Update May 2017, KPMG AND USYD CTR. 2, (2017)

www.demystifyingchina.com.au/reports/demystifying-chinese-investment-in-australia-2017.pdf.

2 Australian Government, Department of Foreign Affairs and Trade (DFAT), Which Countries Invest in

Australia?, DFAT (2017), http://dfat.gov.au/trade/topics/investment/Pages/which-countries-invest-in-

australia.aspx.

2018] AUSTRALIA’S FOREIGN INVESTMENT REVIEW MECHANISM 189

quality food and services, advanced technologies and know-hows, and

so forth. Three factors including the investment complementarity

between China and Australia, the supporting domestic policies of both

nations, and the ChAFTA will operate jointly to motivate more

Chinese investors to conduct business activities in Australia.

Nonetheless, the challenges that Chinese investors may face in

Australia should not be underestimated, among which Australia’s

foreign investment review mechanism (FIRM) has raised considerable

concerns amongst Chinese investors and the Chinese Government

during the ChAFTA negotiations. 3 The Chinese Government

considered the Foreign Investment Review Board (FIRB) process –

the central element of the FIRM in practice – as a major barrier to

Chinese investment in Australia, and took great efforts to negotiate a

deal with more favorable treatment to Chinese investors. However, the

achievements of the negotiations were limited, and the FIRB process

is likely to remain a formidable barrier to Chinese investors.

Therefore, a good understanding of the FIRM in general and the FIRB

review process in particular is essential for prospective Chinese

investors.

The principal legislation under Australia’s FIRM is the Foreign

Acquisitions and Takeovers Act 1975 (Cth) (FATA 1975) and its

implementing regulations, which were introduced in response to the

increasing foreign investment and growing foreign ownership in the

early 1970s. 4 The legislation is complemented by the Foreign

Investment Policy issued and amended by the Australian Treasurer

from time to time and implemented by FIRB (FIRB Policy). Most of

the existing studies on the FIRB process have focused on its historical

development and political justifications.5 Others have discussed the

uncertainties of the FIRB process,6 which is merely one of the many

elements which may affect Chinese investors. Few scholarly works

have explained the FIRM in detail by far. This article attempts to fill

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3 DFAT, Australia – China Free Trade Agreement - News, DFAT, http://dfat.gov.au/trade/agreements/

chafta/news/Pages/news.aspx. This page provides (limited) official information on each round of the

ChAFTA negotiations. China’s concern on Australia’s investment regime and approval system can be

seen in the second, third, fifth, eleventh and twelfth round of negotiations.

4 BARRIE DYSTER & DAVID MEREDITH, AUSTRALIA IN THE GLOBAL ECONOMY: CONTINUITY AND

CHANGE 214 (Cambridge Univ. Press, 2d ed. 2012).

5 See, e.g., Australian Government, the Treasurer, Australia's Foreign Investment Policy, FOREIGN INV.

REV. BOARD (FIRB) (January 2013) 1, http://www.firb.gov.au/content/_downloads/AFIP_2013.pdf;

Wayne Swan, Australia, China and This Asian Century, THE TREASURY (2008),

http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=speeches/2008/021.htm&pageID=010&min=w

ms&Year=2008&DocType=1.

6 See, e.g., Jeff Rae, Counting the Cost of Regulation, Austl. Open Inv. Future Symposium (Dec. 4, 2008)

at 6; Stephen Kirchner, Capital Xenophobia II: Foreign Direct Investment in Australia, Sovereign Wealth

Funds, and the Rise of State Capitalism 1, 7 (St Leonards, N.S.W. : Centre for Independent Studies, 1st

ed. 2008); Andrew Lumsden, The "National Interest Test" and Australian Foreign Investment Laws,

Corrs Chambers Westgarth (2011), http://www.corrs.com.au/publications/m-and-a-alerts/national-

interest-test-australian-foreign-investment-laws/.

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this gap in the literature by discussing four major factors about the

FIRM which may remain as barriers to Chinese investment in

Australia despite the existence of ChAFTA, and which the Chinese

Government should tr y to address in the current review of the

investment rules under the ChAFTA.

This article proceeds as follows. Section II offers an overview of

the pattern of Chinese investment in Australia during the 15 years

before the ChAFTA entered into force. It highlights the major trends

and notable features of Chinese investment in Australia. It also shows

that the investment complementarity between Australia and China and

their domestic policies have been the major driving forces for the

continued growth of Chinese investment in Australia. Section III

introduces the FIRM and the FIRB review process, and then explains

the major rules and modifications of the relevant regulations and

policies introduced around the time when the ChAFTA came into

effect. The section argues that these rules and modifications may pose

significant challenges to Chinese investment in Australia. it further

provides brief recommendations on how Chinese investors may

overcome these challenges. Section IV concludes.

II. CHINESE INVESTMENT IN AUSTRALIA: AN OVERVIEW

In 2017, Australia secured 26 years of consecutive growth and

positioned itself as the world’s 13th largest economy.7 Australia has a

significant gap between national investment and national savings, and

foreign capital is indispensable to sustain its economic growth and

prosperity.8 Therefore, the Australian Government has consistently

promoted foreign investment and endeavored to maintain an open and

friendly market. For example, in the White Paper titled "Australia in

the Asian Century", the Australian Government stated:

The Government welcomes foreign investment into

Australia. Foreign investment supplements domestic savings

and provides additional capital for economic growth, supports

existing jobs, and creates new opportunities. It helps boost

productivity by introducing new technology, providing capital

for infrastructure, supporting global value chains and markets,

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7 Australian Government, Australian Trade and Investment Commission (ATIC), Why Australia:

Benchmark Report, ATIC (2017),

https://www.austrade.gov.au/International/Invest/Resources/Benchmark-Report.

8 Deloitte Access Economics, Partners in Prosperity: The Benefits of Chinese Investment in Australia,

AUSTL. CHINA BUSINESS COUNCIL (June 2017), at 19, http://acbc.com.au/admin/images/uploads/Copy

1DIT173216_CHN_Invest_Report_05.pdf.