The challenges wrought by burgeoning Asian demand for Australia’s natural resources – the so called “two-speed economy” – have already begun to receive policy attention from the federal government. The Minerals Resources Rent Tax, set to be introduced from July 1 this year, is just one example.
But the challenges arising from trade flows are only part of the story that will confront economic policy-makers during the Asian Century. Countries are also linked by investment flows, and policy development with respect to this channel is lagging badly.
A national liability
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The investment channel takes on added significance in the case of Australia, given our long-standing reliance on foreign savings to fund domestic investment and consumption. Australian Bureau of Statistics (ABS) data show that, bar a few quarters, Australia has not recorded a surplus on the current account over the past 50 years.
By year-end 2011, our international investment liabilities exceeded our international investment assets by $853 billion.
Data from the Reserve Bank of Australia (RBA) shows that 18.1% of the liabilities of Australian banks are owed to non-residents.
What is striking about Australia’s international investment linkages is not only their scale, but also how their composition differs so dramatically from our trade linkages.
In 2011, merchandise exports to Asia (ASEAN, China, Hong Kong SAR, India, Korea, Japan, Taiwan) accounted for 76.2% of Australia’s total. Yet in 2010, the latest year for which data are available, these countries were only responsible for 21.0% of total foreign investment flowing into Australia. If Japan is removed from the calculation, the share drops to a paltry 6.3%.
The Asian share of the stock of foreign investment in Australia is no more impressive at 12.87%, or 6.87% minus Japan. In contrast, the shares of the US and UK stood at 27.94% and 24.02%, respectively.
For all the talk of behemoth Chinese state-owned entities buying up Australian mining and farming assets, the Chinese share of the stock was less than 1%. In 2010, Chinese investment in Australia actually fell to $1.65 billion, down from $7.82 billion a year earlier.
The limited scale of Asian investment in Australia is particularly noteworthy given that the region includes some of the world’s most prodigious net capital exporters, namely China and Japan.
Beyond a hole in the ground
Aside from being limited in scale, Asian investment also appears narrowly concentrated in just one industry sector: mining.
Comprehensive data showing foreign investment by country as well as industry sector are scarce. One source that provides some indication is the annual report of the Foreign Investment Review Board (FIRB).
This shows that for all countries over the period 2007-2010, the value of approved investment in the mineral exploration and development sector accounted for 47.34% of the total. However, with the exception of Singapore, this share was considerably higher for Asian countries. For example, in the case of China, it was 86.88%.
Thus, aside from managing the two-speed economy, another major challenge that policy-makers face is plotting a path to effectively tapping Asian capital markets in order to promote broader-based, higher value-added, and ultimately more sustainable, productive activities.
To some extent, this job will be made easier as countries such as China continue to open up their economies and allow domestic capital to flow abroad more freely. However, it would be naive to assume that Asian interest in our unique endowments of natural resources will automatically translate to a broader investment interest.
To be sure, Australia already has a number of basic policy settings right, such as political stability and a strong system of intellectual property right enforcement.
Yet there is evidence that more can be done. According to the latest World Investment Report, published by the United National Conference on Trade and Development (UNCTAD), Australia ranked 15th out of nearly 200 countries for its foreign direct investment (FDI) “potential”.
A country’s potential is calculated based on 12 variables expected to influence a country’s attractiveness to foreign investors. However, our actual performance in attracting FDI ranked only 72nd. Understanding why there is such a gap – and seeking to bridge it – is vital.
Getting it right with China
Looking forward, the big player in terms of investment flows is clearly going to be China. It hosts 1.4 billion people, has an exceptionally high savings rate and is expected to continue experiencing rapid income growth. Its capital account continues to open gradually and, as long as its own financial sector remains repressed (for example, real interest rates on savings deposits in China’s banks are currently negative), there will be additional incentives for domestic savers to seek out higher returns overseas.
And yet it is with respect to China that our investment policy performance has been most lacking. After the recent ban by the federal government on Huawei supplying equipment to the National Broadband Network, and the near-hysteria surrounding Chinalco’s earlier proposed investment in Rio Tinto, it would be difficult for Chinese companies to view Australia’s attitude to foreign investment as anything other than arbitrary and opaque.
Until such basic policy positions can be clearly articulated and justified, it will be nigh on impossible to pursue other worthy endeavours, such as positioning Australia to become an offshore trading centre for the Chinese currency, the renminbi.
The recent Memorandum of Understanding (MOU) signed between Australia and China relating to infrastructure projects is a welcome development.
One hopes that the Working Group charged with developing this MOU is able to achieve more than has been the case with stalled negotiations for an Australia-China free trade agreement.
This is part two of Australia in the Asian Century. The previous instalment is: Want to get ahead this century? Learn an Asian language.