Myth busting Chinese investment: Australia can say ‘no’

Myth busting Chinese investment: Australia can say ‘no’

By Peter Jennings

Prime Minister Scott Morrison and Treasurer Josh Frydenberg must soon decide to accept or reject a $13 billion acquisition of the Australian energy infrastructure business, APA Group by the Hong Kong company, CKI.

Decisions don’t get much more important. The outcome will show if the government puts national security priorities ahead of a seemingly limitless thirst for Chinese investment into critical infrastructure.

This is the 2018 reality of what Tony Abbott summed up so clearly in 2015: Australia’s China policy is driven by the conflicting emotions of greed and fear. It needn’t be this way. Morrison’s task should be to define and explain Australia’s strategic interests. A key question should be to ask: ‘how much Chinese foreign investment in critical infrastructure is too much for Australia’s interests?’

Here’s the answer: If CKI’s acquisition of the APA Group goes ahead, then between CKI and State Grid, a Chinese state-owned entity which owns and controls smaller subsidiaries in Australia, Chinese companies will control 100% of electricity transmission and distribution assets in Victoria, South Australia and the ACT, as well as ownership of 100% of gas transmission and distribution assets in NSW and the ACT, 99% in Victoria, 86% in South Australia and 78% in Queensland. Ownership will also include 74% of gas transmission pipelines in the Northern Territory and 65% in Western Australia.

It takes a special type of genius to conclude that the domination of Australia’s gas and electricity infrastructure by companies owned or subject to the political control of the Chinese Communist Party is fine from a national security perspective.

Few countries in the world – certainly not the People’s Republic of China – are so accepting of foreign investment that they lose control of vital critical infrastructure. How did Australia’s policy makers allow this to happen? A future Royal Commission should ask that question. The truth will surely be like Kenneth Hayne’s assessment in the banking misconduct inquiry: ‘Too often, the answer seems to be greed.’

The good news is that Scott Morrison and Josh Frydenberg have an opportunity to prevent the take over of APA Group. That moment will come when Treasury’s Foreign Investment Review Board (FIRB) makes its recommendation to Government on what to do.

At that point, if not before, the Prime Minister should decisively block the takeover as not being in the national interest. While this is a big decision it shouldn’t be a difficult one. No government needs to apologise for taking a firm stand on security. A decision to limit further People’s Republic of China investment in critical infrastructure will be welcomed by the community and our friends and allies.

That said, supporters of the deal are busy making the case why the government should agree CKI’s takeover and why disaster will ensue if the deal is nixed. Here are seven specious reasons I’ve seen deployed in favour of the takeover and the counter arguments.

1: The FIRB protects Australia’s national security

The recently appointed and highly capable Treasury Secretary, Philip Gaetjens told a ‘Chinese investment and Australia’ forum, earlier this month:

‘that the vast majority of [foreign investment] applications are approved, or approved with conditions indicates there are very few proposed investments that pose national interest concerns unable to be mitigated.’

I beg to differ.  Here’s the data from the FIRB’s annual reports: Over the ten financial years from 2007-08 to 2016-17 the FIRB made 169,178 foreign investment approvals and only four refusals (that’s right, four refusals) of business investments. (Two rejections on the foreign sale of Ausgrid; one each on Graincorp and the ASX.)

That’s not a record of a system adequately protecting national security. It shows foreign investment is prioritised at all costs. This goes against substantial moves in the United States, UK and elsewhere to strengthen their formal controls over foreign investment in critical infrastructure. A new Critical Infrastructure Centre in the Department of Home Affairs now has the chance to prove that it can shape sensible natural security decisions.

We should be concerned by Gaetjens’ concept of conditions that mitigate ‘national interest concerns.’ The Government correctly identifies espionage, sabotage and coercion as risks to our infrastructure.  FIRB adopts a formulaic approach to mitigating these risks through behavioral undertakings and restrictions on the level of foreign ownership.

These mitigation strategies just allow investments to occur within ‘acceptable levels’ of risk but the only definitive way to deal with these risks is to make the tough calls as to who can and can’t own the assets.  Legal restrictions on how data is used and stored and who has access to operating systems won’t be all that effective in a national security crisis or stop a hostile intelligence service – the damage will have been done by then.

2: Chinese capital is no different from any other.

Here’s FIRB Chair, David Irvine, talking to an ‘Investors’ Forum’ last August:

‘A key strength of Australia’s investment regime is that it is non-discriminatory – applications are treated in the same manner regardless of the nationality of the applicant.’

This might have been true during the years of the PRC’s so-called peaceful rise, but it is simply wrong to maintain in 2018 that China is just like any other country. China is re-emerging as a powerful authoritarian regime and is attacking Australia hourly through industrial-scale cyber spying. The PRC aims to supplant the US as the lead security provider in the Asia-Pacific and is working as hard as it can to weaken America’s friends and allies.

Chinese and Hong Kong businesses have no option other than to cooperate with the Communist Party and its intelligence services, particularly in achieving Xi Jinping’s international ‘belt and road’ objectives to harness global infrastructure to Beijing’s benefit.

China is not like Canada, Columbia or Costa Rica. Our government knows this but struggles to find the language to describe what we can do to mitigate the threat, particularly as we have allowed ourselves to become so economically dependent on a country that has fundamentally different strategic objectives.

3: Hong Kong is separate to China so CKI’s investment is acceptable.

CKI’s management deny the company is influenced by mainland China and point to a record of 20 years of operations in Australia. Twenty years is also the period that Hong Kong has been back under the control of the PRC. True, Hong Kong has a separate legal system, but it’s undeniable that Communist China is squeezing the independent political life out of the former British colony.

No large, internationally focused Hong Kong business is immune from having to acknowledge the primacy of the Party or can close the door to its intelligence services. In fact, Hong Kong business success requires the closest possible alignment to the Party.

The chairman of CKI, Victor Li, son of billionaire founder Li Ka-shing, is a member of the 13th National Committee of the Chinese People's Political Consultative Conference of the PRC. This is an organisation designed precisely to bring senior business leaders and others into the Party’s orbit.

Li the elder was asked in March about the constitutional amendment removing the two-term limit on the Chinese presidency. He is quoted in the Hong Kong Standard saying, ‘If I have a vote to get Chairman Xi re-elected, I will vote for him.’

Whatever the situation two decades ago, Hong Kong’s political separation from the mainland is rapidly fading. How does CKI get out from under the Party’s influence? Go abroad if possible. This helps to explain why CKI’s bid for APA is $11 dollars a share, well above APA stock market price of $9.80 at market close last Thursday.

4: It’s too late to stop Chinese control of critical infrastructure so we should allow the sale.

Its true that some shockingly bad decisions were made in the past to allow PRC investment into critical infrastructure. The (almost inevitable) future Royal Commission will dig into that. Right now, the Government is in a position at least to stop further predations of our critical infrastructure ownership.

There is no time like the present to start making the right decisions for Australia’s national security based on what we know now about the PRC’s strategic directions and how these damage Australia’s interests.

5: There is no intelligence value to China in owning gas or electricity infrastructure.

This was not Scott Morrison’s view in August 2016 when, as Treasurer, he stopped State Grid and CKI bids to take over Ausgrid – the electricity ‘polls and wires’ in NSW. Nor was it Morrison’s view when he announced in February this year that a ‘key national security safeguard is the diversity of ownership’ of critical infrastructure.

Although Morrison limited his comments to electricity, the reality is that gas is already important to the secure supply of electricity through gas-fired generation supporting intermittent renewable electricity generation. This interconnection between power sources will only grow.

Chinese intelligence services are working hard to deploy malware into the critical infrastructure of potential opponents, creating options to harm an enemy during conflict. The same intelligence services gathering big data about the design, operation and users of critical infrastructure. The espionage and sabotage threat to critical infrastructure is growing because of the dominant role played today by cyber technology to run these systems.

True, you don’t have to own and control infrastructure to do cyber damage – but it helps enormously if intelligence agencies can use trusted insiders to facilitate their spying.

Opposing Chinese investment is just xenophobic, threat mongering.

Charges of xenophobia are quickly deployed in this debate primarily to shut national security advocates up. This is a tactic deployed by the PRC’s army of supporters. Its not xenophobic to want Australia to be secure. Opposing the CKI takeover has nothing to do with the Chinese people and everything to do with the nature of the Chinese Communist Party and their repressive intelligence and security apparatus. This is a crucially important distinction.

China will punish Australia if we reject the takeover.

Australian politicians and public servants have done a thorough job talking themselves into immobility from fear of Chinese economic retaliation if we audaciously promote national security over ties with Beijing.

But Australia can learn to say ‘no’ to too much Chinese influence, as many other countries – Malaysia for example – are now doing. China will respect an Australia that protects its national security. Alternatively, Beijing will push for every concession we make, and keep looking for more if we are silly enough to give ground on our critical infrastructure.

No one would be more surprised than the Communist Party’s Politburo if Canberra agrees to the APA sale to CKI. Now we need some spine to protect our people and national interests.