Mon 21 August 2017
By Dr Weihuan Zhou
Official statements and public opinions in Australia and China have been overwhelmingly positive on the impact of the China – Australia Free Trade Agreement (“ChAFTA”) on Chinese investment in Australia. This is an overstatement of the impact. Australia’s ChAFTA commitments on investment liberalisation and investor protection are limited and may not create sufficient incentives for or boost the confidence of Chinese investors.
The only substantive rules under the Investment Chapter of the ChAFTA are national treatment and most-favoured-nation treatment. Apart from the non-discrimination obligations, matters such as minimum standard of treatment, expropriation, transfer, performance requirements are deferred to further negotiations. These matters, however, have been included in Australia’s other recent free trade agreements (“FTAs”). The ChAFTA, therefore, falls short of Australia’s standard practice so that Chinese investment and investors in Australia may not enjoy the same level of protection as Australia’s other major FTA partners.
Australia’s Foreign Investment Review Board (“FIRB”) notification process was regarded as a major barrier to Chinese investment in Australia in the ChAFTA negotiations. The negotiations led to an increase in the notification thresholds for Chinese privately-owned enterprises (“POEs”) in some areas of investment so that less FIRB screening should be anticipated. However, in many other areas, the FIRB process is likely to remain a formidable barrier. For example, despite the increased thresholds, Chinese investors are treated less favourably than investors from Chile, New Zealand and the United States in investment in agribusinesses and agricultural land, and are treated the same as investors from Australia’s non-FTA partners. Furthermore, China failed to convince Australia to increase the ‘zero’ notification threshold for state-owned enterprises (“SOEs”) so that all Chinese SOE investments are subject to FIRB approval regardless of value. As SOEs continue to play a leading role in Chinese investment in Australia and given the widespread concerns in Australia on state ownership and non-commercial objectives of such investment, the impact of the FIRB process will remain significant. In this connection, the uncertainty of the FIRB process – associated with the opaque review criteria and arbitrary and non-transparent decision-making – will continue to impose high financial and administrative burdens on Chinese investors. Finally, as FIRB review is a carve-out in the Investment Chapter, Australia is free to introduce new rules to strengthen the process. Australia has done so several times since the ChAFTA took effect in December 2015, by imposing stricter screening requirements for acquisition of agricultural and critical infrastructure assets, introducing application fees, amongst others. Such a practice not only makes the FIRB review more restrictive but also increases the uncertainties of Australia’s foreign investment review mechanism.
The Investor-State Dispute Settlement (“ISDS”) mechanism under the ChAFTA is overly restricted in substance despite the detailed provisions on procedural matters. The arbitrable matter is limited to violations of the national treatment rule only. As Australia’s domestic laws and regulations generally do not differentiate between domestic and foreign investment/investors (other than the FIRB process), the practical effect of subjecting breaches of national treatment to ISDS would be rather limited. Furthermore, ISDS cannot be invoked to challenge measures “for the legitimate public welfare objectives of public health, safety, the environment, public morals or public order”. Instead, such matters are to be resolved by the two governments by consultation. Accordingly, the ISDS clause is likely of limited practicability unless it is expanded to cover more substantive obligations and achieve a better balance between investment/investor protection and preservation of policy space.
The Investment Facilitation Arrangement (“IFA”) does not attract Chinese investment directly but is merely intended to create a fast-track visa approval process for Chinese workers, previously under the 457 visa scheme, in large infrastructure development projects. However, the arrangement does not create an automatic visa-granting channel for Chinese workers; nor does it grant an exemption from the visa conditions. Instead, it provides Australia’s Department of Immigration and Border Protection with the discretion to decide what conditions (including labour market testing) should be imposed on a case-by-case basis. As the 457 visa scheme was replaced by a Temporary Skill Shortage (“TSS”) visa program on 18 April 2017, Chinese investors are now in the dark as to how IFAs should be implemented. More significantly, the TSS visa scheme shortens the eligible occupation lists and strengthens the requirements for using the scheme as a pathway to obtain Australian permanent residency. These changes create a huge disincentive for Chinese workers to come to work in Australia and consequently for Chinese investors to utilise IFAs.
The rapid growth of Chinese investment in Australia in the decade before the conclusion of the ChAFTA had been boosted by China’s “Go Global” policy and the investment complementarity between the two economies. This suggests that such investment will continue to be influenced by the investment policies and needs of China as a capital-exporter and Australia as a capital-importer. In 2016, the first year of ChAFTA implementation, both the number and the value of Chinese private investment soared, reaching 76% and 49% respectively of all Chinese projects in Australia, according to KPMG-USYD Report 2017. This may have to do with the increased FIRB screening thresholds for Chinese private investors. However, it is more likely a result of China’s domestic policies and global initiatives, and the intangible benefits that the ChAFTA as a whole conveys by way of increased confidence of investors on the prospects of the Australia-China economic relations. Indeed, China is currently tightening regulations over outbound investment by private companies to address capital flight and irrational investments. However, this should be seen as a short-term disruption of the “Go Global” policy for China to better manage the quality of outbound investment and improve the implementation of the policy in the long run.
As China accelerates domestic reforms in furtherance of its new development model, its investment activities are expected to increase globally. This is confirmed in China’s President Xi Jinping’s keynote speech at the World Economic Forum in Davos on 17 January 2017 canvassing his expectations for Chinese outbound investment to reach $750 billion within the next five years. In Australia, Chinese investment will be increasingly diversified into infrastructure, agriculture, health-care, commercial properties, and technology-related assets. Importantly, the China-led One-Belt-One-Road (“OBOR”) Initiative and Australia’s involvement as a major shareholder in the Asia Infrastructure Investment Bank will create massive opportunities for the two countries to collaborate on potential infrastructure projects including in Australia. The recent OBOR Forum held in Beijing in May 2017 showed a strong and shared vision among the Belt and Road countries (including Australia) to further strengthen and expand trade, investment and economic cooperation. In addition, China’s continuous reforms of its domestic foreign investment regime and SOEs, and its participation in the negotiations of regional and bilateral FTAs and investment treaties, will all contribute to further negotiations of the ChAFTA.
China’s Premier Li Keqiang’s visit in Australia earlier this year signalled the political will in both governments to bolster the two-way trade and investment and culminated in the conclusion of a list of collaborative arrangements including one to bring the review of the ChAFTA investment rules forward by one year commencing sometime in 2017. As shown above, there is considerable room to improve the ChAFTA to achieve greater investment liberalisation and investor protection. As the bilateral relationship continues to deepen and broaden, the ChAFTA investment rules will be gradually improved to serve the shared interests of both countries.