George Gilligan & Megan BowmanSenior Research Fellow & Research Fellow

Centre for Law, Markets & Regulation

What's the State of Play? The Effects of State Capital Investment

in Australia and Regulatory Implications

Structure of Paper

• Introduction – State Capital and the Changing Global Economy

• International Regulatory Issues• Inward Capital Investment to Australia

• Researching State Capital: A Snapshot from Ground Level

Introduction – State Capital and the Changing Global Economy 1

• Globalisation - ↑ Interdependence between jurisdictions & ↓ economic sovereignty?

• Globalisation further elevates national deficits & surpluses → ↑macro-economic imbalances

• Absolute centrality of political economy issues regarding State Capital

• State Capital – Back To The Future?• Gunboats & Redcoats & Linkages of Investment

Capital: State• East India Company (EIC) - 1600• Dutch East India United Company - Verenigde

Oostindische Compagnie (VOC) -1602• Hudson Bay Company (HBC) - 1670

Introduction – State Capital and the Changing Global Economy 2

• Contemporary state capital actors do NOT play EIC, VOC or HBC militaristic/governmental role but DO facilitate sovereign’s economic & political influence

• ↓ liquidity on capital markets & ↑ strategic importance of state capital as sources of liquidity with longer-term investment horizons

• GFC fall-out, e.g. nationalising/part-nationalising failing banks;• Entwined regulatory/investment role of the state becomes more

cloudy• Potential conflicts as:• an active investment actor;• a detached and independent regulator;• a recipient of inward investment from both state and non-state

sources; and• the promoter of the national interest• West → East global imbalances & ↑ of China, e.g. foreign reserves • $21 bn in 1992, 5% of GDP → $31 bn in 2012, 45% of GDP

Introduction – State Capital and the Changing Global Economy 3 - % share of global GDP

(Jorgensen & Vu 2010)

2010 2020

China 13.92% 20.08%

US 20.14% 17.44%

G7 (Canada, France, Germany, Italy, Japan, UK & US)

40.62% 33.30%

Asia 7 (China, Hong Kong, India, Indonesia, Singapore, South Korea & Taiwan)

25.16% 33.18%

China as % of Asia 7 GDP

55.35% 60.52%

US as % of G7 GDP 49.59% 52.39%

Introduction – State Capital and the Changing Global Economy 4 - Actual and projected top 20 economies based on

GDP in PPP terms (PwC Economics, 2013)

2011 2030 2050

PPP rank Country GDP at PPP (2011 US$bn)

Country Projected GDP at PPP (2011 US$bn)

Country Projected GDP at PPP (2011 US$bn)

1 US 15,094 China 30,634 China 53,856 2 China 11,347 US 23,376 US 37,998 3 India 4,531 India 13,716 India 34,704 4 Japan 4,381 Japan 5,842 Brazil 8,825 5 Germany 3,221 Russia 5,308 Japan 8,065 6 Russia 3,031 Brazil 4,685 Russia 8,013 7 Brazil 2,305 Germany 4,118 Mexico 7,409 8 France 2,303 Mexico 3,662 Indonesia 6,346 9 UK 2,287 UK 3,499 Germany 5,822 10 Italy 1,979 France 3,427 France 5,714 11 Mexico 1,761 Indonesia 2,912 UK 5,598 12 Spain 1,512 Turkey 2,760 Turkey 5,032 13 South

Korea 1,504 Italy 2,629 Nigeria 3,964

14 Canada 1,398 Korea 2,454 Italy 3,867 15 Turkey 1,243 Spain 2,327 Spain 3,612 16 Indonesia 1,131 Canada 2,148 Canada 3,549 17 Australia 893 Saudi

Arabia 1,582 South

Korea 3,545

18 Poland 813 Australia 1,535 Saudi Arabia

3,090

19 Argentina 720 Poland 1,415 Vietnam 2,715 20 Saudi

Arabia 686 Argentina 1,407 Argentina 2,620

Introduction – State Capital and the Changing Global Economy 5 (DFAT, 2013)

Goods(a) Services(b) Total(c)(d) % Share

1 China 113.6 7.4 121.1 19.9

2 Japan 68.4 4.0 72.5 11.9

3 United States(e) 38.1 16.1 54.2 8.9

4 Republic of Korea 30.4 2.2 32.7 5.4

5 Singapore 20.5 7.1 27.7 4.6

6 United Kingdom 14.3 8.7 23.0 3.8

7 New Zealand 15.3 6.3 21.6 3.5

8 India 17.5 2.9 20.3 3.3

9 Thailand 15.2 3.3 18.5 3.0

10 Malaysia 13.1 3.0 16.0 2.6

Total two-way trade(b) 499.1 109.1 608.2 100.0

of which:

APEC(e) 367.7 63.9 431.6 71.0

ASEAN10 68.4 19.9 88.4 14.5

EU27(c) 60.0 21.3 81.4 13.4

OECD(c)(e) 225.9 55.0 280.9 46.2

Australia's top 10 two-way trading partners 2011 ($ billion)

Introduction – State Capital and the Changing Global Economy 6 (Coleman, 2013 using SWFI

data)

Introduction – State Capital and the Changing Global Economy 7 – Measurement Issues

• The figure for China's largest fund "is a best guess estimation”

• Discourse on state capital - some parallels with the discourses on white collar crime and financial crime, e.g. both heavily reliant on “best guess estimations” as well as:

• definitional & classification uncertainty;• diffusion of effects;• powerful actors not welcoming scrutiny;• problematic re gathering hard data → measurement

difficulties;• so difficult to evaluate regulatory responses;• empirical uncertainty symbiotic with ambiguity &

ambivalence re state capital?

Introduction – State Capital and the Changing Global Economy 8 - Sovereign Wealth Funds

(SWFs)• Wide rage of definitions re SWFs, e.g.:• Lowery (2007): ‘..a government investment vehicle which is

funded by foreign exchange assets, and which manages these assets separately from official reserves.’;

• IWGSWF [now IFSWF] in their GAPP (2008): ‘SWFs are defined as special purpose investment funds or arrangements, owned by the general government. Created by the general government for macroeconomic purposes, SWFs hold, manage or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets.’

• Jen (2007) SWFs have five basic ingredients: i) sovereign; ii) high foreign currency exposure; iii) no explicit liabilities; iv) high risk tolerance; and v) long investment horizon.

Introduction – State Capital and the Changing Global Economy 9 – SWF Operators

• Extremely diverse, e.g.:• authoritarian one party states;• sophisticated democracies;• highly developed European oil/gas exporters (e.g. Norway,

Russia)• less developed oil/gas exporters in the Middle East (e.g.

UAE, Kuwait);• manufacturing/trading entrepots in Asia (e.g. China, Korea

Singapore);• broad-based commodity exporters (e.g. Australia, Chile);• smaller emerging economies (e.g. Mauritania, Uzbekistan).• SWFI (2013): 40% in Asia; 35% in the Middle East; 17% in

Europe; 3% in Africa; 3% in the Americas; and 2% in other areas of the world.

Introduction – State Capital and the Changing Global Economy 10 –

State Capital & Regulatory Environments• State capital actors likely to become more prevalent &

larger• ↑ly influential recyclers of global finance but shaped by

global macroeconomic imbalances themselves• Post GFC = lower returns in investment returns in

developed economies → state capital as ↑ conduits → emerging markets

• Post GFC = global appetite for risk ↓• Regulatory trends → ↓ emphasis on light touch regulation• The state to be an ↑ly active investor in financial markets

& • ↑ly active overseer of their design and regulation (e.g.

G20, FSB)

1 International Regulatory Issues 1• State capital ↑ly varied & aggressive in their investment

strategies → ↑ fears of financial protectionism in recipient countries

• e.g. US Dubai Ports World (2006) – Bush administration approved deal, but rejected by House Panel 62: 2 (March 2006)

• Management of seaports already foreign owned by P & O (UK), media pressure: public hostility: protectionist sentiment

• 2008 → Confluence of GFC: liquidity shortages: state capital (especially SWFs) as liquidity sources: multi-lateral regulatory activism of SWFs themselves (facilitated by IMF & World Bank)

• May 2008 – Washington DC = 25 SWFs → IWG• October 2008 – Santiago = Generally Accepted Principles and

Practices (GAPP) – The Santiago Principles

International Regulatory Issues 2

• Kuwait City – April 2009 IWG evolved → International Forum of Sovereign Wealth Funds (IFSWF)

• July 2011 – IWFSWF Members Survey (80% participation): ‘..it was not reasonable or possible to expect uniform compliance with the GAPP from all IFSWF Members.’ = Reflection of political reality?

• Can top-down regulatory infrastructure work?• E.g. OECD Multilateral Agreement on Investment (MAI) in 1998• OECD Members bound by agreements such as Declaration on

International Investment and Multinational Enterprises & Code of Liberalisation of Capital Movements, BUT Non-Members are not → gaming of protocols

• So intermediation NOT new regulatory institutions?• Evolutionary approach congruent: market realities & ↑ process

legitimacy?

International Regulatory Issues 3 –Beauty Parades 1 (Spa, Belgium 1888)

International Regulatory Issues 4 –Beauty Parades 2 (Wodaabe Tribe Niger)

International Regulatory Issues 5 –Beauty Parades 3

• Competitive ‘regulatory beauty parade’ environment as recipient jurisdictions compete for capital, regulatory infrastructures are a crucial part of that competitive process

• Some regulatory uniformity, e.g. G20/FSB measures• Recipient country approval regimes → monitoring & partial

control of inward investment, legitimate protection of national interest

• State capital actors as downstream users of commodities, acquisition of foreign assets → implications for recipient countries re:

• corporate governance; competition & tax policies.• Australia Senate Economics References Committee (2009): best

way to regulate foreign investment is ‘robust domestic legislation.’

• Continuing balancing act of robust legislation: beauty parade….

2 Inward Capital Investment to Australia 1• Foreign Acquisitions and Takeover Act 1975 (Cth) (FATA) &

Foreign Investment Policy administered by the Foreign Investment Review Board (FIRB) - a non-statutory body

• FIRB’s functions advisory only, decision-making with the Treasurer.

• Ongoing authorisation (effectively a delegation) = 94% + proposals decided under this delegated authority (FIRB 2011-2012)

• Little controversy, rejection statistically low, e.g. FIRB 2010-2011:

• 10,865 applications; 10,293 approved 43 rejected, 390 withdrawn; 139 deemed exempt

• Real estate dominant: 9,771 of the approvals & 42 of 43 rejections

• Until recently little controversy, really only rejection of Shell’s 100% acquisition of Woodside (2001)

Inward Capital Investment to Australia 2

• Recent years = ↑ high profile coverage of Chinese investment in Australia especially regarding resources assets (scaremongering?). For example:

• 2008 - Chinalco : Rio Tinto• 2009 - China Minmetals Non-Ferrous Metals Co Ltd acquisition of Oz

Minerals (issues re Prominent Hill Mine in Woomera Prohibited Area)• Treasurer Wayne Swan imposed restrictions in both Chinalco &

Minmetals cases• 2012 Huawei prevented from significant tendering in National

Broadband Network (NBN).• Jingoism always lurking in the DNA of Australia’s inward investment

discourse?• ‘The Foreign Acquisitions and Takeovers Act was put in place in 1975,

when there was a huge backlash against Australia being sold off to the Japanese.’ (FIRB Chair Brian Wilson – 2012)

• ‘..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.’ (Trade Minister Craig Emerson – April 2013)

Inward Capital Investment to Australia 3

• FIRB Approved Proposed Investment: 2011/12 • (Deal Value in $Aus billion & Number of Contracts)• Total Deal Value = 170.71 $Aus billion• Total Number of Contracts = 10,703

 

Top 5 countries by proposed investment value

   

U.S.A 36.613 268United Kingdom 20.343 1,018China 16.190 4,752Japan 13.920 324Canada 8.871 131

Sources: FIRB Annual Report 2011/12

3. Researching State Capital: A snapshot from ground level

3.1 Context: Foreign acquisition by SOEs - a contentious issue

• Strength of State capitalism- SOE capitalisation = significant element in 3 of the

BRIC countries;- One third of FDI from emerging economies 2003-

2010 = SOE

Share of SOE capitalization on the MSCI national stockmarket index: % of total, June 2011

Source: The Economist, 21 January 2013.

Context, cont.

• Weakened state of Liberal Capitalism- Vulnerability of several advanced economies post-GFC

• Several high-profile acquisitions & investments - Qantas/Emirates 2013 - CNOOC/Nexen 2012 - Abu Dhabi/Chrysler Building 2008

Questioning of liberal capitalism; and Concerns re diminution in home-state ownership of national resources & entities.

Context, cont.Concerns focus specifically on foreign SOE

acquisition.• Exemplified in media headlines:

China's state-owned enterprises obtain FIRB approval by stealth The Australian March 13, 2013 12:00AM

Don't mix politics and deals: FIRB in warning to state-owned investors The Australian August 7, 2012 7:00AM

Context, cont....policy guidelines:Eg. Revised Canadian investment policy guidelines:• Investors “expected to address…the inherent

characteristics of SOEs, specifically that they are susceptible to state influence”

projects are commercial & free from political influence.

...and political decisions:• Aust govt: exclusion of Huawei from National

Broadband Network bidding (2012)• US govt: prohibition of Ralls Corporation from

owning wind farms in Oregon (2013)

Context, cont.• Intrinsic nature of an SOE:

eg. Clarke and Howson (2012) on Chinese SOEsFeeds media sensationalism and influences

political discourse

But is there documented cause for concern?• Assumption = inward investment by SOEs

(particularly China) is statistically dominating the Australian landscape

• Reality = lack of readily accessible empirical data on exactly where SOEs vs. non-SOEs are investing:Which jurisdictions? Which sectors? Which entities?

3.2 Our Research Goals

(1) Source empirical data on Chinese SOE vs. Non-SOE investment readily accessible one-stop database

(2) Research individual Chinese SOE companies where else investing?

(3) Make well-founded mid-term predictions about likely materiality of Chinese SOE investment into Australia cross-compare and evaluate the current Australian regulatory regime provide evidence-based recommendations for optimal regulatory design.

3.3 Initial stage – data gathering & challenges• Aim:

produce a longitudinal table - incidence of Aust approvals of Chinese investment by sector differentiating between SOE and non-SOE investors

• Process has revealed surprising gaps, inconsistencies and methodological challenges for researchers of state capital.

3.4 Initial stage & challenges, cont.

• Multiple sources: Chinese, Australian, international • Starting point = FIRB but no breakdown of SOE: non-

SOE• Extracting that level of detail from other sources, incl:

- ABS, NBS- DFAT- OECD, IMF- Heritage Tracker, - Media- KPMG, Deutsche Bank - MOFCOM, SASAC.

(1) Datasets are not easily compared

Examples of differences between sourcesSource Currency Label Deal

valueDeal Type

Locale

FIRB AUD “Approved proposed investment”

<AUD1mn;>AUD2bn

-All deals that require federal approval-Changing Thresholds

Excludes SARs & Taiwan

ABS AUD Actual investment

All actual flows

All deals above 10% equity threshold

Excludes SARs & Taiwan

KPMG USD ? Actual investment

>USD5mn -M&A-Jt ventures-Greenfield-Equity acquisitions that result in foreign ownership

Subsids & SPVs based in HK, Singapore, “other locations”

NBS RMB ? Actual investment

>RMB1mn - Excludes SARs & Taiwan

MOFCOM USD “Actualized investment”

? Equity & “other investments”

Excludes SARs & Taiwan

Global Tracker

USD Actual investment

>USD100mn All deals, excl bonds.

-

(2) SOE investment data for Australia: state/territory, sector, industry, entity?• Traditional areas of SOE investment: natural resources,

utilities, telcos, defence.• KPMG 2013: Chinese SOE diversification towards other

sectors & away from natural resources & mining• Lee 2012: Chinese SOEs now operate in all major

sectors• Marchick & Bowles 2011: growth of small private coys.• Heritage Foundation’s China Global Investment Tracker - Limitations triggers methodological caveats

outlined above. - BUT can further investigate data to reveal insights

about SOE investment in Aust.

Company Enterprise type

Sector (sub sector) Accumulated value 2005-2012 US$ millions

Chinalco SOE Metals (aluminum) 14,300

Yanzhou Coal SOE Energy (coal) 6,590

Sinopec SOE Energy (gas & oil) 3,070

CITIC SOE Metals (steel), Energy (coal)

3,020

Minmetals SOE Metals 2,960

Guangdong/CDB

SOE Metals 2,280

CNOOC SOE Energy (gas) 2,200

Datang/Boading SOE Energy (alternatives) 2,030

Sinosteel SOE Metals (steel) 1,460

China Metallurgical

SOE Metals (steel) 1,090

Total 39,000

4. Conclusion• Post-GFC world: rising economic power of Asian

countries changing perceptions of appropriate levels of state-directed investment activity changing trends in composition of the global economy.

• Highlighted significant trends & strategic importance of state capital national/ international policy development must be underpinned by accurate data.

• Methodological challenges associated with evaluating the extent and impact of investment by state capital actors important process to chart these developments.