Clinton Dines … new hurdles will ensure proper due diligence.
CHINESE authorities are cracking down on foreign investment after a string of troubled projects that have run up tens of billions of dollars in losses, including two big resources deals in Australia.
In a decision that will have implications for Australia’s booming resources sector, China’s State Assets Supervision and Administration Commission has published new rules that will hold state-owned enterprises and their executives accountable for bad overseas investment decisions.
The commission’s move follows two disastrous investments in Australia’s resources sector.
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The largest Chinese investment project in Australia, the $7 billion CITIC Pacific Sino Iron project, conceived by the magnate Clive Palmer, has been dogged by huge cost blowouts and delay. The budget for the project has almost tripled from the initial $2.5 billion estimate.
A second big investment project, the $2 billion Sinosteel Midwest project, was shelved last year after a string of difficulties. The head of Sinosteel, Huang Tianwen, reportedly lost his job because of investments that had gone awry in Western Australia.
The commission has demanded more due diligence and risk management on all overseas investment deals by state-owned companies. No penalties have been announced but executives will be held ”accountable” for foreign investments that result in significant losses for the state.
Since the start of China’s ”going out” initiative in 2003, which encouraged Chinese companies to invest overseas, Australia has been a favourite hunting ground for them.
The Labor government is believed to have approved more than $70 billion worth of investments from Chinese companies since it was elected in 2007.
That growing investment in Australia will be affected by the commission’s new regulations.
”Failed Chinese investors are likely to point their fingers at Australia and there is the potential for the ill-judged investments to become part of the tone of the bilateral relationship,” the former president of BHP Billiton China, Clinton Dines, said.
But he said there should be a long-term benefit. ”That the Chinese government is putting some filters and hurdles in place to ensure that more proper due diligence is done is a good thing.
”A lot of prospective Chinese investors don’t know much about owning, operating and investing in the resources industry. If there were to be too many bad Chinese investments in Australia, these difficulties would inevitably bleed across into the government sphere and that cannot be good for the bilateral relationship.”
Mr Dines, who is now the executive chairman (Asia) of the private equity firm Caledonia, said the introduction of the new rules was ”consistent with the evolution of policy thinking in Beijing” as the government reassessed resources security.
”The Chinese government has learnt two important lessons since the advent of the ‘going out’ initiative,” he said. ”Firstly, that Chinese companies are not always equipped to be successful buyers, owners and operators of overseas projects.
”Secondly, Chinese government thinking is gradually evolving towards the conclusion that security of supply does not necessarily require ownership of these assets.”
While a number of projects in Australia have cost the Chinese government billions, one is held up as a model of how to invest abroad successfully.
That company is Minerals and Metals Group, a wholly owned subsidiary of China Minmetals that emerged from the purchase of key assets from OZ Minerals in 2009.
MMG’s chief executive, Andrew Michelmore, said all his dealings with the state-owned parent company had been positive.
”All my experience with Minmetals has been about the return on investments, profitability and shareholder values,” he said.