Fortnight of 13 to 26 February 2023

Pricing Chinese investment rejections into bilateral ties

From the 15 February Foreign Acquisitions and Takeovers (Prohibition of Proposed Action) Order:

“Yuxiao Fund Pte. Ltd. is directed not to increase the proportion of interests in issued securities in Northern Minerals Limited beyond the 9.98 per cent interest it held as of 17 August 2022.”

Quick take:

Beijing presumably won’t welcome this decision. Especially considering that China has continued in recent months to object to what it sees as a discriminatory environment in Australia for its businesses. These complaints are longstanding. But they are especially conspicuous in the context of China’s much warmer rhetoric about Australia. So much so that the environment for Chinese businesses in Australia has been the only point of clear public discontent in the Chinese government’s readouts of major bilateral meetings in the last few months. These complaints have also featured prominently in recent Ministry of Foreign Affairs messaging and were reiterated in the readout of the Australia-China foreign minister meeting on 2 March (in English and Chinese).

But despite Beijing’s frustrations with Canberra’s approach to Chinese businesses, there are strong reasons to expect that relatively small-scale foreign investment rejections like Yuxiao won’t sour the diplomatic mood or derail the current push towards relationship repair. For one thing, Beijing presumably decided to pursue relationship repair knowing full well that the Australian government would end up rejecting at least some Chinese investments. Given that Australia has for years taken a more risk-averse approach to foreign investments on a range of national interest grounds, Beijing surely would have expected outcomes akin to the Yuxiao rejection. China’s awareness of the near inevitability of some rejections would also have presumably been especially acute in the critical minerals and rare earths sectors of the mining industry.

The likelihood/near certainty of these kinds of Chinese foreign investment rejections means it’s plausible that developments like the Yuxiao decision were already priced into the relationship. In other words, Beijing’s decision to embrace a warmer approach to Canberra already factored in a certain number of such foreign investment rejections. After all, it would have been pretty strategically inept for China to orchestrate a significant tactical diplomatic shift on Australia only to be forced to reverse course over some foreign investment rejections that were all but inevitable. How many more such rejections might Beijing be willing to accept before it decides to stall or even reverse bilateral relationship repair? Of that, I’m not sure. (It’s neither clear that the Chinese government necessarily has such an upper limit, nor what kind of rejections would most quickly lead to that threshold being reached if it existed.) But at the very least, it seems reasonable to conclude that China was always willing to continue relationship repair on the assumption that this and other similar rejections might be in the pipeline.

Other factors also probably minimised the fallout from the Yuxiao decision. First, the size and structure of the proposed investment likely took some of the heat out of the rejection. Yuxiao already had a 9.98% interest in Northern Minerals and the deal would have increased their interest by 9.92% to 19.9%. All things being equal, I’d imagine that Beijing would be more inclined to take umbrage when a Chinese company is blocked from taking any stake in an Australian company at all rather than when a Chinese company is blocked from increasing an established stake. (Admittedly, that’s just my instinct. If readers have any hard hard data on this issue, I’d love to see it.)

Furthermore, the company in question is relatively small compared to many of the gargantuan miners in the Western Australian resources industry. The last time I checked, Northern Mineral’s stock was trading at around $0.04 a share and its market cap was only about $240 million. Of course, these are just two metrics, and I’m by no means a business analyst. But these numbers at least suggest to me that the Yuxiao rejection wasn’t on the scale of the kinds of large and high-profile rejections that previously caused turbulence in the Australia-China relationship. None of this is to say that a roughly doubling of Yuxiao’s share to circa 20% of Northern Minerals wouldn’t have entailed national interest implications for Australia. But Yuxiao’s pre-existing stake, the (relatively) modest increase, and the size of the company overall make the rejection less likely to touch on Beijing’s sensitivities.

Prime Minister Anthony Albanese in Port Headland on 21 February 2023 []

Timing and (oblique) messaging probably matter too

Zhou Fangyin, from the Guangdong Institute for International Strategies, commenting on the Australian approval of the Rio Tinto-Baowu joint venture (as paraphrased by the Global Times):

“Australia has previously been sensitive to Chinese investment in its key iron ore sector, but the approval indicates that there is no security concern about cooperating with Chinese companies and China is an indispensable economic and trading partner for Australia.”

Quick take:

Then there’s the timing of the decision. I’m certainly not privy to any information suggesting that the Albanese government deliberately sought to have the Yuxiao rejection coincide with news that the Rio Tinto-Baowu joint venture had been approved. These decisions are presumably taken according to schedules determined by a range of commercial and statutory considerations. But regardless of whether the timing was planned, it could hardly have been better for Canberra’s management of ties with Beijing. The approval of Baowu’s $1 billion circa 46% stake in the Western Range iron ore project was being publicly reported just a couple of days after the Yuxiao rejection was quietly put up on a relatively obscure Australian government website. This meant that the positive news for Beijing of the Baowu approval had been floating around for nearly two weeks by the time the Yuxiao rejection was picked up by the press. That’s precisely the kind of order of events that one would expect to reduce blowback from Beijing.

If the above is right, it seems entirely plausible that the Albanese government was both seeking to reduce the chances of anger from Beijing with the timing, while also sending an oblique message. Given the chronology of the Baowu approval and the Yuxiao rejection, Canberra might have been able to indirectly say to Beijing: “Yes, we’re going to reject some Chinese investments. But there’ll be approvals too, which will give you some good news to trumpet.” Of course, it’s also possible that I’ve become way too conspiratorial. Maybe the timing is just happenstance and there’s been no tactical effort to massage ties with China? Not inconceivable. But I doubt that such a face-value interpretation gives the Albanese government enough credit for their so-far seemingly shrewd China strategy.

I’ll write more about the broad topic of the possible contours of an overarching Albanese government China strategy in future issues. But for now, it’s worth briefly going back to a speech that Minister for Foreign Affairs Penny Wong delivered in 2017 at the Australian Institute of International Affairs’ National Conference. In it, she said about engaging with China:

“The fifth principle underpinning Labor’s policy approach is to take a much more integrated and connected approach to the various strands that make up the bilateral relationship. This requires better synthesis of our security imperatives and economic opportunities. The counterpart to that analytical integration is a better institutional integration, particularly across government. We need to ensure that our economic, education, trade and diplomatic engagement with China is consistent, disciplined and co-ordinated. That demands both clear objectives and fit-for-purpose institutional arrangements. … Our national interests are realised, not through trade-offs, but through policy integration.”

To be clear, there’s obviously not a straight line between that general approach and what might have been a savvy play by the Albanese government on the Baowu approval and the Yuxiao rejection. A lot of water has gone under the bridge since 2017, not least of which is a change in Labor leader. But if one was taking the kind of “integrated” approach to managing the Australia-China relationship described by Minister Wong in 2017, one would be tempted to orchestrate something akin to what the Albanese government might have done on the Baowu and Yuxiao decisions. Namely, reduce the downside risks of broader relationship fallout from the Yuxiao rejection by concurrently approving a large Chinese investment in a less strategically contested sector. And there might be an especially strong reason to do that if one’s “Government ha[d] worked hard to stabilise Australia’s relationship with China,” as Prime Minister Albanese recently put it. Alright, I’ll stop there before I get caught in ever-tightening circles of speculation.

Darwin Port permutations

ABC News reporting on 21 February on the Albanese government’s additional review of the 99-year lease of Darwin Port to the Chinese company Landbridge Group:

“The federal government has refused to release advice given to the prime minister’s office about possible ‘paths forward’ for the Darwin Port on the grounds it could ‘cause damage to the defence of the Commonwealth’.”

Quick take:

It’s tempting to think about the Albanese government’s Darwin Port decision in binary terms. Either the government ends Landbridge Group’s 99-year lease or leaves the current arrangement in place. Tearing up the lease would be more consistent with Prime Minister Albanese’s past comments but would risk a backlash from Beijing, while not touching the lease would somewhat mollify China’s concerns but leave the Albanese government vulnerable to accusations of inconsistency and softness on national security. Given the costs of each of these options, the reference in the above recent reporting to “paths forward” (plural) makes it seem more likely that the Albanese government will try and avoid both horns of this dilemma by opting for a third path.

As I’ve written previously, forms of corporate restructuring and additional security oversight might be available to both mitigate the perceived and/or real national security risks of Landbridge Group’s lease while also avoiding the negative impact on bilateral ties of cancelling the lease. Such a third-way approach might involve one or more measures like scrutinising Landbridge Group’s operations with ongoing or regular security reviews, appointing an Australian government or corporate sector administrator to oversee certain more sensitive parts of Darwin Port, and/or reducing the length/modifying elements of the Landbridge Group’s lease. Such measures might even be so cumbersome that Landbridge Group decides to extricate itself from Darwin Port entirely without the Albanese government having to terminate the lease.

The above configurations might not be the most efficient commercial outcomes or the even the preferred security options. But these kinds of measures might offer the Albanese government the optimal balance between its goal of minimising the security risks (perceived and/or real) of Landbridge Group’s lease, while also reducing the chances that Canberra’s decision on Darwin Port will endanger the ongoing stabilisation/repair of the Australia-China relationship. Regardless of the precise form of such a third-way option, the Albanese government would likely be criticised in some quarters for not taking a strong enough stance on national security. But such domestic heat is likely to be manageable, especially considering the bipartisan support for ongoing relationship repair on both the diplomatic and trade fronts. A third-way option is also only likely to mean modest political vulnerability for the Albanese government. Darwin Port was initially leased by the Northern Territory government in 2015 when the Coalition was in power and the lease was left in place in the wake of a subsequent review during the Morrison government’s tenure.

Notwithstanding all the above, it’s entirely possible that the Albanese government will either decide to end the lease or leave it in place. But beyond the reference to “paths forward,” the Albanese government’s handling of Confucius Institutes also makes me think Canberra might chart a third way on Darwin Port. Under the Foreign Relations Act legislated in 2020 by the Morrison government, Minister for Foreign Affairs Wong could have vetoed Confucius Institutes. However, such a move entailed significant risk of hampering and perhaps even derailing the improvement in bilateral ties with Beijing. Rather than either leaving Confucius Institutes in place unchecked or jeopardising relationship repair with a veto, the Albanese government sought to achieve its security objectives by scrutinising Confucius Institutes on an ongoing basis, while also not aggravating China with use of a ministerial veto.

The Confucius Institutes and Darwin Port decisions are obviously vastly different in a range of ways. But they both on paper present the Albanese government with an invidious choice between responding to (perceived and/or real) security threats with veto power and earning China’s ire or keeping Beijing on side but inviting (perceived and/or real) security threats and risking domestic political blowback. The Confucius Institutes decision seems to have threaded the needle of pursuing Canberra’s broad security objectives, while also keeping relations with Beijing on an even keel. To my mind, it makes sense that the Albanese government would be looking to pull off something similar on Darwin Port. As always, I could be (very) wrong. But looking at it from a broad national interest perspective, the prospect of both subjecting Landbridge Group to more scrutiny and not aggrieving Beijing might look particularly appealing. TBD.

As always, thank you for reading, and please excuse any errors (typographical or otherwise). Any and all objections, criticisms, and corrections are very much appreciated.