hmmmmmm....from the australian i wonder if some insiders got...

hmmmmmm....from the australian

i wonder if some insiders got this news earlier thn the rest of us.

China Inc investment faces curbs

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Matthew Stevens | June 26, 2008

THE Rudd Government is understood to be preparing a new foreign investment regime that would limit state-owned corporations from taking technical control of Australian companies.

Speculation that a 49.9 per cent ownership ceiling for sovereign corporations is being contemplated emerged as the Foreign Investment Review Board moved to delay a ruling on Sinosteel Corp's application to acquire West Australian iron miner Murchison Metals.

The delay, which in fact locks the FIRB into a timetable for a firm and final decision on Sinosteel's application, is arguably the most definitive indication yet of the Rudd Government's unease about Chinese investment in the Australian resources sector.

The FIRB's extension has been interpreted by some parties close to the tripartite stand-off between Sinosteel, Murchison's neighbour Midwest Corp and Murchison as preparation for rejection of the Sinosteel's application.

As one insider said yesterday, the Government is telling China Inc that "it can play in our sand pit but it cannot own it".

Any intervention by the FIRB or change of foreign investment rules could set in train a cascade of complications for Sinosteel's $1.3 billion bid for Midwest and subsequent plans for a $2.8 billion merger between Midwest and Murchison.

Sinosteel controls 43.6 per cent of Midwest and 2.4 per cent of Murchison. It has been given FIRB approval to purchase all of Midwest while Midwest has applied to the FIRB for clearance to buy Murchison.

A rejection of Sinosteel would have implications well beyond the Midwest-Murchison deal.

Intervention here by either the FIRB or Government would resound in Beijing, where there is growing and open confusion about the Government's attitude on Chinese investment.

But indications that the Government is preparing new rules to limit rather than prevent Chinese investment would suggest fears of a blanket FIRB rejection of Sinosteel may well be misplaced.

The challenge for the Government is to find a way of setting a ceiling for investment by foreign state-owned corporations without putting Australia in breach of international treaty obligations.

Specifically, the Government cannot create legislation that directly targets China's government-owned corporations with investment ceilings.

The idea being floated would seem to clear the hurdles because it links limits to the sovereign status of the investor rather than to any specific nationality.

So, while an artificial ownership ceiling would apply to Sinosteel and its brethren in China Inc, because they are 100 per cent government-owned, the legislation that sets the boundaries would not particularly identify China as its target. Mind you, if preventing sovereign entities from controlling Australian assets is what is in the Government's mind, then then a 49.9 per ceiling might be just a wee bit high.

In the real world of business there is very little difference between 49.9 per cent and 89.9 per cent. Even without crossing the technical control point of 50.1 per cent, an investor would expect to be appointing a chairman and exerting control of the board and of management's strategy.

If this is a question of transparency, then a 89.9 per cent limit would be just as effective as anything else because the Chinese-owned entity would have to remain listed and the interests of minority shareholders would be protected by law.

All technicalities aside though, it remains clear that the mood of the Rudd Government towards China's sovereign corporations has changed profoundly since March when FIRB delivered a green light to Sinosteel's $1.3 billion takeover of Murchison's then rival and now its merger aspirant, Midwest Corporation.

Since then, FIRB has become a convenient bureaucratic bottleneck for the Government with up to 13 separate applications by Chinese entities wending their way in and out of the process.

Sinosteel's arduous progress through the FIRB process has been typical of most Chinese applications.

Sinosteel, 100 per cent owned by the Chinese government, first applied to FIRB back in January.

It routinely takes FIRB 30 days to make a ruling but a final decision can be extended by a maximum of 90 days. Often though, if FIRB believes it will not be able to make a decision within its timetable it will go to applicants and ask them to withdraw and re-submit applications, thus putting the process into agreed suspended animation.

Given China's investment intentions are so laden with political and geopolitical implications, stasis has been the Government's preferred position pretty much since the Midwest approval.

Sinosteel, for example, is understood to have withdrawn and re-applied for FIRB clearance at least twice since January.

The problem with Sinosteel's ambition for Murchison is that its ownership would deliver the Chinese state with absolute control of WA's most important mid-west iron ore projects. Which means, China Inc would control the two key iron ore mines and the trains and ports which would funnel them to Sinosteel's customers in China.

The risk here is Sinosteel has no obvious obligation to serve any interests other than its owner, which is currently the Chinese Government. Its interests are served by delivering iron ore at substantially anything less than market prices. In effect then, allowing Sinosteel to take full control of the Midwest and Murchison projects delivers it the potential to limit price tension in the broader iron ore market.

It is quite proper for the Government to question whether it serves our national interests to allow control of key Australian resource assets to shift into the hands of sovereign-owned investors.

And its worry here, let's face it, is China Inc, not the Abu Dhabi Investment Authority or our own Future Fund.

But is is just too easy a solution to attempt to ease our national concerns with some artificial ceiling on any particular investment.

Australia has the mechanics necessary to protect its national interest. It is called FIRB and, up until now, it has worked very well for us. It has walked the fine line between protecting the national interest and encouraging investment and it is one of the reasons Australia has developed such a sound reputation as a investment destination.