2

Who is Clive Palmer and why is he

saying these things?

The Australian government has racially discriminated against
(China) and stopped them from investing in AustraliaThey've
brought in things like the Foreign Investment Review Board in
Australia, which is an outstandingly racist legislation designed
to slow down Chinese growth, and it's a national disgrace

Clive Palmer
The Australian
29 September 2009
3
The facts do not support a racist policy
which discriminates against Chinese investors

In the past 4 years the FIRB has approved around 230 Chinese
investments worth some $60 billion, one outright rejection and
six with conditions
Over the last decade there were three high-profile rejections of
which one was Anglo-Dutch, one Singaporean and one Chinese

4
Chinese investors believe that Australia
discriminates against them
Survey by Australias Lowy Institute found Chinese believe
investment discrimination by Australia is driven by:
Media driven nationalism
Perception that state related investors are not focused on
commercial objectives
Concerns about China as both owner and customer
Concern with Chinas growing geo-political clout
Such perceptions stem largely from the failure of a series of
high profile resource deals
5
A serious policy debate, but we can
still laugh
The topics and structure of this
presentation
1
Analyze the magnitude and structure of Chinas overseas
direct investment in general and to Australia in particular
2
Explain the workings of the FIRB and detail its track record
in approving and rejecting investment proposals
3
Consider characteristics that make Chinese investment
different to other foreign investment to Australia
4
Discuss the Chinalco Rio Tinto transaction as a case study to
better understand Australias FDI policy
7
Key facts relating to Chinas overseas
direct investment
1
Chinas ODI has increased in recent years, but is still
much smaller than FDI (bigger recipient than investor)
2
Australia is the largest beneficiary of Chinas overseas
direct investment
3
Mineral resources are the largest part of Chinas
Australian ODI, but this is not the case overall
4
China has encountered problems in countries other than
Australia and usually with natural resource investments
Over time, China has attracted far
more FDI than ODI
$0
$20
$40
$60
$80
$100
$120
2003 2004 2005 2006 2007 2008 2009 2010
V
a
l
u
e

(
U
S
$

b
i
l
l
i
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n
)

FDI ODI
9
Official data would suggest Australia
is a very minor beneficiary of Chinas ODI
0%
1%
2%
3%
4%
5%
2003 2004 2005 2006 2007 2008 2009 2010
S
h
a
r
e

o
f

C
h
i
n
a

s

O
D
I

10
Australia is ahead of all other countries
in attracting Chinese overseas direct investment
$0
$100
$200
$300
$400
Australia USA Nigeria Iran Brazil Canada Other
F
D
I

(
U
S
$

b
i
l
l
i
o
n
)

Heritage Foundation 2005-10
11
Mineral resources are a significant,
but not the largest part of Chinas ODI
0%
20%
40%
60%
2003 2004 2005 2006 2007 2008 2009 2010
S
h
a
r
e

o
f

C
h
i
n
a

s

O
D
I

12
Iron ore and copper make up 60% of
Chinas mineral resource sector ODI
0%
20%
40%
60%
80%
100%
Iron ore Cu Al Pt C Au Other
13
The Heritage Foundation has identified
a further US$122 billon of troubled investment
$0
$20
$40
$60
$80
$100
$120
$140
Agriculture Energy Finanace &
property
Metals Technology Transport
2006 to 2010
14
Australia not the only difficult destination,
but natural resources are mostly a problem
Total value
(US$ billion)
Most troubled
sector
Most troubled
destination
2006 34.5 Energy Iran
2007 13.7 Agriculture Philippines
2008 33.2 Finance Germany
2009 33.1 Metals Australia
2010 7.6 Metals USA
15
Summary of key issues relating to
Chinas Australian bound ODI
1
While its level of investment is growing, China is still a
minor player in Australias FDI
2
Almost all the proposals submitted to the FIRB are
approved, though some have conditional obligations
3
Minerals resources account for 56% of Australias FDI,
but almost all of Chinese investment
4
Mineral resources differ significantly from other forms of
investment
16
FIRB statistics not a reliable indicator
of Australias foreign investment inflows
Data do not cover investments below legislated thresholds
Includes proposals that are approved in a given year, but may
not be actually implemented or could be implemented in a later
year or over a number of years
Can include approvals for multiple acquirers of the same target
asset
Because of time, I have not been able to access additional data
published by Australian Bureau of Statistics

17
Its Australian investment is growing,
but China is still a relatively small investor
2007 2008 2009 2010
USA 29% 26% 22% 28%
UK 9% 17% 11% 21%
China 2% 4% 15% 12%
Japan 3% 3% 12% 4%
Singapore 12% 6% 1% 3%
Europe 27% 34% 24% 31%
Asia (other) 7% 7% 18% 10%
No of transactions not value
18
Even on a value basis, China is a
significant but not the largest investor
$0
$40
$80
$120
$160
USA UK China Japan Switzerland Other
S
h
a
r
e

o
f

F
D
I

(
A
$

b
i
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l
i
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n
)

A sample of Chinas biggest Australian deals
Date Target Acquirer Value (US$ m)
March 10 Arrow Energy Petro China A$3,500
April 09 Felix Resources Yanzhou Coal $2,755
April 09 Mining assets Minmetals $1,386
Feb 09 Fortescue Hunan Valin $765
March 08 Oil & gas assets China Petrochemical $560
March 09 Mining assets China Metallurgical $515
Feb 08 Soco Yemen Sinochem $465
Feb 08 Mining assets China Metallurgical $370
Aug 08 Mining assets Shenhua $261
Aug 09 Aquila Resources Baosteel $237
20
FIRB approvals involving mineral
resources represent 56% of all approvals
$0
$3
$6
$9
$12
$15
$18
Mineral
resources
Real estate Resource
processing
Services Manuf.
F
I
R
B

a
p
p
r
o
v
a
l
s

(
$

b
i
l
l
i
o
n
)

21
About half of Chinas FIRB approvals
involve mineral resources
$0
$3
$6
$9
$12
$15
Mineral
resources
Real estate Resource
processing
Services Manuf. Agriculture Finance Tourism
F
I
R
B

a
p
p
r
o
v
a
l
s

(
$

b
i
l
l
i
o
n
)

22
Mineral resources differ significantly
from other forms of investment
Usually associated with economic rents
Involve a wasting resource
Capital intensive and asset specific investment
In many countries, including Australia, minerals are owned by
the people
Transfer pricing is an issue:
Opaque global prices
Intermediate products and integrated companies
23
Analysis of FIRB annual reports reveals
the vast majority of proposals are approved
2007 2008 2009 2010
Rejected totally 0.03% 0.10% 0.03% 0.04%
Approved 99.97% 99.9% 99.97% 99.96%
Unconditionally 90.00% 85.0% 75.0% 90.0%
With conditions 10.oo% 15.00% 25.00% 10.00%
24
Australia does not rank too badly on the
OECD FDI restrictiveness index, but China
0.000
0.125
0.250
0.375
0.500
China Non
OECD
Australia Brazil World USA OECD
1
=
C
l
o
s
e
d
,
0
=
O
p
e
n

25
Summary of key issues relating to the
administration of Australias FDI
1
Australia has a long tradition of accepting foreign
investment, especially in the resources sector
2
A clearly defined approval process, with the final
decision made by a politician, however rejection is rare
3
Entities with >15% foreign government ownership are
subject to lower thresholds and additional criteria
4
Investments are approved if they are found to be in
Australias national interest
26
Because of the benefits, Australia has
always welcomed foreign investment
From settlement in 1788, the development of Australias mineral
resources have depended on foreign capital and technology
Almost all of the great Australian mines have been developed
because of the availability of foreign capital and technology
Foreigners own 50 to 70% of Australias mining industry
While Australia now has the technology, it still is very
dependent on foreign capital AND markets
Foreign investment must ultimately benefit Australias long term
interests i.e. National Interest Test (Net benefit in Canada)
Beijings own restrictive FDI policy confirms that, like Australia it
has a national interest test. (Coca-Cola and Carlyle).

27
Understandably, the national interest
is an opaque standard that changes over time
Introduced in 1986
Burden of proof rests with the Government NOT the investor
According to Treasurer Swann, reasons include:
Preserving national security
Preserving government revenue
Investor will not respect Australian law and business practice
Reduce competition or result in excessive competition
Consistent with government policies
Character of investor
Rarely used but basis for rejecting Shell, Lynas, WISCO and SGX
28
Current regulations regarding foreign
investment are detailed in the FAT Act (1975)
Foreign Acquisitions and Takeovers Act (1975) requires investors
obtain approval to acquire > 15% of a company worth > $219 m
FTA with US means higher thresholds for US companies
Irrespective of size, entities owned >15% by a foreign
government require approval
Sensitive areas include media, banking, telecommunications,
civil aviation and real-estate for which there are special rules
Decision made by Treasurer (political decision) on FIRB advice
30 days to make a ruling but can be extended to 90 days
Process seems to be flexible with each case examined on its
own merits while consultation is welcomed
29
Applications are becoming more complex
and require more than the maximum 90 days
If likely to exceed 90 days applicants are asked to withdraw and
resubmit applications
No comprehensive data on withdrawn applications nor
withdrawn and resubmitted, but FOI fillings show no obvious
bias against Chinese investment
Between November 2007 and January 2011, 349 proposals
withdrawn of which 66 were from China (15 government) and
35 from USA
During 2010, 10o withdrawn of which 6 from China (5
government) and 11 USA
High proportion of withdrawals in early years could reflect
lack of familiarity with the process
30
Not in the national interest, but very
reasonable grounds for outright rejections
2001: Shell additional stake in the Woodside LNG JV rejected by
Treasurer (sic.) because of the belief that further development
could be sacrificed for other Shell projects
2009: China Nonferrous Metal Mining Group proposed 51.66%
stake in rare earth hopeful Lynas rejected unless reduced to
<50% and minority board representation. China controls >95% of
market and acquisition would reduce competition Withdrawn
2009: WISCOs planned purchased of Western Plain Resources
iron ore project rejected because of close proximity to Wommera
2011: SGX takeover of much larger ASX rejected because of
perceived loss of economic and regulatory sovereignty. 23% non-
voting Singapore Government ownership in SGX

31
Applications from foreign government
entities are judged on additional criteria
Entities include companies as well as sovereign wealth funds
The extent an investors operations are independent from the
foreign government
Whether the investor is subject to adequate regulation in other
jurisdictions
That the investment not hinder competition or lead to undue
concentration or control in the relevant industry sector
Investment taxed same way as other commercial entities
Investment will not impact Australias national security
Whether the investment impact Australian exports, research etc
32
Summary of key arguments for
treating Chinese entities differently
1
Most Chinese investment involves SOEs where no clear
distinction between commercial and political objectives
2
Chinese entities increase the possibility of transfer
pricing between related entities
3
Reciprocity: foreign companies, including Australian
cannot invest in Chinas resource industry
4
SOEs etc have little experience in operating with open
society multi-stakeholder and strong institutions
33
Chinese companies are different from
most other enterprises investing in Australia
Vast majority (95%) of Chinese investment involves SOEs where
there is no clear line between commercial and political
objectives
Many Chinese investors have little experience with the
administrative processes associated with rule of law
jurisdictions so have difficulty working with the FIRB process
Transfer pricing is a problem in the mining industry and more
so with integrated companies and state owned enterprises


34
Reason to believe that SOEs sacrifice
commercial efficiency for political imperatives
NDRC selection of Chinalco to thwart BHP move on Rio confirms
political interference and suggests that Beijing does not want
companies to compete with each other outside of China
Party secretary is the most important position in an SOE and it
is usually a joint appointment with the enterprise chairman.
Party personnel department controls political and commercial
appointments




35
There are many cases where the Party
rotates people between industry & government
Wei Liucheng from CNOOC to Hainan Governor
Zhang Qingwei from Aerospace to Minister of Technology
Guo Shengkun from Chinalco to vice-governor Guangxi (now
Party General Secretary)
Xiao Yaqing from Chinalco to State Council where he is
secretary to Vice Premier, Zhang Kejiang
Li Xiaopeng from Huaneng to vice-governor Shanxi
Fu Chengyu from CNOCC to Sinopec




36
Even the largest Chinese companies
are not experienced at operating outside China
When operating in China, SOEs really have only one, but very
powerful stakeholder
The large number of Chinese projects withdrawn from the FIRB
system in 2007 and 2008 suggests a learning process
Chinese companies seem to have shifted from criticizing the FIRB
to complaining about compliance over environment, heritage and
labor regulations
Overseas problems (Ramu, Chambishi etc) can be traced to
attempts at replicating the China model i.e. confining negations
to political elite while ignoring local stakeholders



37
Even outside China, national strategic
objectives seem to trump commercial objectives
Hanlong chairman (Liu Han) reported as saying Beijing backs his
takeover of Sundance Resources (ASX) as it would give China
an opportunity to influence the price of iron ore
Similar statements by Shen Heting regarding MCCs involvement
in the Sino Iron project in WA
Representatives of government organizations ranging from CISA
to the NDRC supported Chinalcos move on Rio because it
would lower the price of iron ore
The mining industry affords ample opportunity for transfer
pricing and it is hard to police infringements
A Chinese SOE increases the risk of transfer pricing
38
Sino Iron project demonstrates Chinese
can bring their own perils with them
CITIC Pacific purchased Cape Preston project from Palmer in
2006 for $200 million
Planned cost of $1.4 billion and 2009 delivery blown out of the
water because CITICs partner, MCC has no Australian (developed
country?) experience
Problems being solved by employing more labor and MCC critical
of Australian Government for not approving import of laborers
from China
MCC has suggested that problems with their project stem from
Australians managing Australians



39
Lack of reciprocity is a reasonable
argument against Chinese resource FDI
Much of Chinas mining industry is out of bounds to foreign
investors, including Australians
Outside the resource sector, China is also very tough on
foreigners wanting to invest in its local companies. Coca-Cola
and Huiyuan Juice, Carlyle and Xugong
Chinas discrimination is a powerful rallying point for nationalists
Because China discriminates against foreigners, does this make
China racist?
Rosen and Hanemann argue that China has grown stronger by
opening its doors wider FDI and US should do the same. But is
Australia different? Are resource investments different?
40
Chinese perceptions are driven by
several high profile failures
41
Summary of the key issues surrounding
the Chinalco transaction with Rio Tinto
1
Rio Tinto under significant financial pressure following
disastrous purchase of Alcan
2
Chinaclos (an SOE) initial proposal to increase its Rio
stake was approved, subject to some conditions
3
Proposal withdrawn when bailout plan collapsed under
shareholder opposition and improved financial markets
4
Treasurer never had to decide on various strategic
alliances
42
The Rio Tinto-Chinalco transaction is
widely known but not well understood
During GFC Rio came under significant financial pressure
because it overextended to purchase Alcan
Rios circumstances compounded by a hostile bid from BHP
In a daring and well executed share market raid, Chinalco
snapped up 9% of Rio to become its largest shareholder.
Chinalco (an SOE) and NOT Chalco the listed subsidiary
Chinalco threw Rio a lifeline in exchange for additional shares,
board representation and strategic stakes in a number of key
operations
Chinalco permitted to grow to 14.99%, subject to not raising it
again without fresh approval and not seeking a board position
43
Chinalcos planned alliance with Rio
Tinto failed because the deal was unsound
Fierce opposition from Rio shareholders who were annoyed with
their management and were positioning to vote it down
Improved financial climate confirmed that Rio could improve its
balance sheet with shareholder equity
Proposal withdrawn so FIRB did not have to make a decision,
but approval given to Chinalco increasing its stake in Rio up to
14.99% and not seeking to appoint a director
44
Urandaline Investments
PO Box 100, Biggera Waters
Queensland 4216
Australia
Phone+61-7-5528-5595 Cell +61-409-198-173
ChinaMetal@Urandaline.com.au
www.Urandaline.com.au
45
Minemtals legally enforceable
conditional approval protects national interest
Operate as a separate business with commercial objectives, HQ
in Australia and managed locally
Sales team based in Australia with arms length pricing
Maintain or increase production at nominated mines subject to
economic conditions
Comply with Australian IR laws and honour employee
entitlements
Maintain and increase levels of indigenous employment
46
Hunan Valin share holing in FMG
also has enforceable undertakings
Hunans Board nominees will comply with FMGs directors code
of conduct as well as submitting a standing notice on potential
conflict of interest relating to marketing, sales, pricing, costs etc
Hunan and any person nominated to FMG Board will comply
with information segregation arrangements
47
Yanzhou Coals purchase of Felix
Resources is another conditional transaction
Acquisition through Yancoal, an Australian subsidiary
Two Australian directors
Yancoal to list in 2012 at which time Yanzhou to reduce stake to
70%
Arms length dealing on coal sales to China
48
Process
Confidentiality can be justified on basis that some applications
seek advance approval for possible investments that have yet to
be revealed to the stock market
49
Chinese companies have come a long
way since the failed Noranda deal
2004 Minmetals US$4 billion bid for Noranda which foundered
on Canadian opposition and decision paralysis by NDRC
Acquisition completed in September 2005 by Xstrata for
US$19.2
In past 4 years FIRB has approved 230 Chinese investments
worth $60 billion, no outright rejections, but 6 with conditions
Foreign exchange reserves are no longer an issue and decisions
made by NDRC and not State Council


50
Australian companies have not been
active investors in China
Australian investment in China is a paltry $11 million
Services make up 70% of the Australian economy and China has
yet to open this area to foreign investors
51