This article is part of a series for the Australia-UK Asia Dialogue, co-hosted by the Lowy Institute and Ditchley Foundation, and supported by the Department of Foreign Affairs and Trade and the Foreign and Commonwealth Office.
Although both have been very open to foreign investment, Australia and the United Kingdom have for decades championed quite different regulatory approaches. In the UK very few foreign investment proposals require government scrutiny. In Australia, at least in principle, a great many do – though the result in both cases is to permit the vast majority of investments.
Increasingly, however, the UK and Australian approaches to foreign investment are becoming more alike, driven in both countries by the same policy perplexity. Both recognise the increasing importance of China's economy, both wish to welcome a growing global surge of China direct investment into their economies, and both wish to do so on terms that take account of the special character of China investment. That is, investment from China is often from state-owned industries, is assumed to be part of a larger strategic and government-directed plan of economic expansion, and, whether rationally or otherwise, is sometimes troubling to not only Australian and UK national security agencies, but also the major security partner of both countries, the US.
Since China is such a big, fast-growing economy, UK and Australian attitudes to Chinese investment are necessarily a part of their approach to the world's most flourishing economic region, Asia. On the regulatory control of foreign investment and especially foreign investment from China, therefore, Australia and the UK have much to discuss. It is one of the tender spots in both countries' adjustment to China's increasing economic weight.
Australia's economic relationship with China is now deeper and more extensive than the UK's. Australia since 2005 has received very much more Chinese foreign direct investment, largely because China's early interest in offshore direct investment was predominately in minerals and energy. According to the American Enterprise Institute, at US$101 billion Australia has received over twice the US$48.3 billion received by the UK over the 2005-2017 period (these AEI numbers may disagree in detail with the national authority numbers, but they have the advantage of being easily compared).
Australia is now second only to the US in the stock of China's outward direct investment, and in earlier years was often in front of the US. In both the UK and Australia the relatively low level of investment stock compared with older investors such as the US obscures the rapid nature of its growth. On Australian official numbers, a decade ago China direct investment in Australia was still negligible; since then China direct investment has grown 80-fold. Today the stock of Chinese investment is a quarter of the stock of US direct investment in Australia, compared to an eightieth ten years earlier.
Reflecting differences in their economic structure, Chinese investments in the UK and Australia have taken different directions. In Australia it is principally about resources (including farming), though it now importantly includes harbours, energy generation and distribution, and property development. In the UK, by contrast, it is principally about property. That industry accounts for nearly a third of Chinese direct investment in the UK, compared to one sixth for energy. Financial services are also important, with the standout China Development Bank investment of US$3 billion in Barclays.
For all the warmth of recent UK-China economic relations, China is also a far more important trade partner to Australia than it is to the UK. China accounts for a third of Australian goods exports, and a very considerable share of customers of its tourism and education services. For the UK, the US is by far its largest export market, followed by the large European economies. China is still well down the list.
While Australia has long insisted that all major foreign investment proposals must be presented to the Foreign Investment Review Board (FIRB), the UK has maintained far less intrusive scrutiny. The most important control is through merger laws, which apply equally to domestic and foreign businesses. The tests include national security, stability of the financial system, media quality and plurality and standards. There are regulatory rules on transport, energy and banking and insurance, applied usually in a non-discriminatory way by the applicable regulators. Defence-related proposed acquisitions have typically been dealt with by exception. Even under the 2002 Enterprise Act, intervention requires 'exceptional public interest grounds'. By contrast, the FIRB may recommend the Treasurer refuse any major merger or acquisition or for that matter greenfield investment on undefined 'public interest' grounds, with no substantive appeal to a court.
For all the differences in form, Australian and UK foreign investment regimes are closer than they appear. Though it scrutinises most major foreign investment proposals, the FIRB refuses very few of them and publicly portrays itself as a very light regulator. And while the UK regime is formally largely non-discriminatory, in recent years foreign investment proposals have met with greater scrutiny. In June the May government announced a new regulatory framework specifically to apply national security considerations to critical infrastructure proposals. The merger public interest test on national security, formerly applied only in the defence industry, has now been extended to non-defence industries. Both changes in the UK may presage a move to a specific foreign investment scrutiny regime closer to the Australian model.
The recent unease in both countries is driven by increasing security concerns over Chinese investment, especially in critical infrastructure. In 2016 the Australian Treasurer refused a Chinese investor proposal to acquire NSW energy distributor Ausgrid. In the UK there was considerable debate over the Hinkley Point nuclear project, in which a French Chinese consortium is a major investor and developer. The UK has now responded with greater scrutiny over 'critical infrastructure' foreign investment proposals. For much the same reason and in the typically translucent style of Australian foreign investment regulation, the Turnbull government in April appointed David Irvine as the chairman of FIRB. Irvine was formerly the head of Australia's foreign and domestic intelligence agencies. Earlier, the Turnbull government created a Critical Infrastructure Centre tasked to protect against hostile disruption, including through foreign ownership.
The UK and Australia have to some extent converged on foreign investment scrutiny, and largely in response to national security concerns over Chinese direct investment. But that is certainly not the end of the policy discussion, or of the issues which give rise to it. Neither country wishes to discourage direct investment from or slow the growth of trade with China. In both countries, economic officials recognise that China will become the single biggest national economic power in the world, if it is not already. They recognise, too, that it is China and not the West which will decide whether, when and to what extent China is prepared to privatise state-owned industries or loosen the central role of the Communist Party, and that China's economic model will not change on the West's say-so. And, finally, they recognise that while Australia may be the number two recipient of China direct investment and the UK number eight, the US has since 2005 received considerably more China direct investment than the UK and Australia put together, and continues to accept it in large volume. The US may scold its allies, but has had little hesitation in its own embrace of China's vast economy.
