Running scared: Chinese foreign investment

China is investing. They will continue to do so. And the thing is, we need them.

Foreign investment comes with additional capital and access to growing markets. But still, there is hesitation, and steamy opposition.

Hesitation and negative sentiment is not a case of xenophobia as WA Premier Warren Barnett has misguidedly stated— the Australian people are better than that Warren. It’s resource nationalism, and it’s a warranted concern that direct foreign investment is by enterprises that are state owned or controlled. Stop hounding us over xenophobic attitudes; it’s just not accurate. Actually, it’s a little insulting.

Here are my concerns: Transfer pricing, where in short; profits of a resource project are understated in an attempt to avoid Australian taxation. Secondly, undervaluing the export price. This is grave, as if an enterprise is government owned profits would be transferred to China. This would again bypass appropriate Australian tax, and seemingly take currency out of the Australian economy.

Drysdale and Findlay, impressive academics on this topic conclude that a third party needs to be involved in foreign investment. They call this vertical integration, and argue that transfer pricing will not be an issue with such implementation.

Cubbie Station is a great example of this policy. As much as I hesitate with this admission, Wayne Swan handled the deal well.

‘Shandon RuYi’, the company that purchased the agricultural land, is required to use a subsidiary company ‘Lempriere’ to run the station’s operations. The local workforce must remain, and after three years Shandon RuYi must reduce its equity in the company to less than 51 percent.

Transfer pricing is difficult when a third party manages the project. It’s also increasingly difficult to undervalue the resource price if Shandon RuYi wants to sell its equity for a decent price.

But I’m left with another concern. The Foreign Investment Review Board does nothing for public confidence. I had to plough through a variety of sources to reach my above conclusion.

The FIRB needs to make its decisions and cases submitted for review a more public process. Transparency is key if the Australian public is to be won over.

The potential of our resource sector can only be unlocked through foreign investment. But the FIRB and DFAT alike need to make support a little easier to swallow.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s