29 August 2014

Keynote address to the Foreign Investment Roundtable, Sydney


Check against delivery

This speech was presented by the Hon Joe Hockey to the Foreign Investment Roundtable.

Introductory remarks

Thank you, Jennifer, for inviting me to speak today.

And thanks to you all for making this roundtable a priority. I know you are busy people.

Today I’ll be talking a little bit about China’s economy and how it relates to Australia’s need for foreign investment.

Then I’ll talk about the reform of China’s State Owned Enterprises (or SOEs) and China’s moves into the world economy and global markets.

Finally, I’ll talk about Australia’s foreign investment policy and our being ‘open for business’ internationally.

Opportunities for Australia

There is a lot of talk about the Chinese economy and rightly so because of its importance not just to Australia but to the whole world.

China is our already our biggest trading partner, with two way trade valued at more than AUD 150 billion, and growing.

On top of that, between (July) 2005 and (June) 2014, Australia attracted USD 61 billion of Chinese outbound investment, which was 7 per cent of China’s total foreign investment. Only the United States got more - attracting just under USD 72 billion.

We have done an enormous amount of work on a free trade deal with China and are hopeful of bringing that to fruition by the end of this year.

And in April I announced that the central banks of Australia and China are working together on potential future RMB clearing and settlement arrangements in Sydney.

I was recently in Beijing and Shanghai for a series of meetings that included Vice Premier Zhang Gaoli; Zhou Xiaochuan, Governor of People’s Bank of China; Mr Xu Shaoshi, Chairman of the National Development and Reform Commission; Mr Lou Jiwei, China’s Minister of Finance; and Mr Han Zheng, Party Secretary of Shanghai Municipality.

Let me tell you, these are some of the most senior, influential people in China. It was very productive in terms of further strengthening the relationship between our two countries, and I learned a great deal.

Together with Trade Minister Andrew Robb, we held the first Australia-China Strategic Economic Dialogue, where we discussed further opportunities for two-way investment.

It’s important to recognise the two-way nature of the relationship, both in terms of investment and access to markets.

There are some great stories to tell about Australians making inroads into China – and in some unexpected areas.

We don’t just export resources to China.

I visited a company in Western Sydney recently called RODE Microphones.

Who would have thought an Australian company would design, manufacture  and export hi-tech microphones to China?

What began as an electronics shop in Summer Hill selling low-cost Chinese audio-visual equipment is now a globally recognised brand that employs 140 people worldwide.

It’s a hi-tech, highly innovative company with offices in Seattle, Los Angeles, New York and Hong Kong and Shenzhen – that will   manufacture more than 500,000 units at its plant in Silverwater and export 97 per cent of them to over one hundred countries throughout the world.

Great opportunities like this also exist in the areas of services, infrastructure and agriculture.

I am most impressed by China’s absolute commitment to economic reform – and their ability to deliver that reform.

You see it in every aspect of their economy and fortunately Australia has a great record of grasping the benefits of China’s economic transformation.

Today, I’d specifically like to talk about reforms to state owned enterprises and opportunities for attracting investment.

I have no doubt that as we go forward, some of the opportunities that emerge will be because of the relationships we’ve already built between Australian businesses and Chinese SOEs.

Chinese SOEs are increasingly looking towards Australia for new opportunities in part thanks to our economic stability and our economic structures being so complementary.

As China loosens its restrictions on outbound investment, there will be further opportunities for Australia.

So we are working to make sure that Australia is ready.

China’s state sector

Whenever foreign investment in Australia is discussed, you can be sure that China’s state sector will be part of the conversation.

In part, this just reflects China’s increasing weight in the international economy, which now stands at around 12 per cent.

But it also reflects China’s roots as a centrally planned economy.

Unlike most advanced economies, China’s state sector continues to produce and supply many key goods and services like petroleum, gas, electricity, telecommunications, banking and steel.

And the State’s continuing role in these ‘strategic sectors’ is a defining feature of the Chinese economy.

But it’s important not to overstate the role of state-owned enterprises in China’s economic success.

Rather, China’s success over the past few decades was built on the back of greater private sector involvement in the economy.

Chinese SOEs have lagged behind the non-state sector, in terms of their productivity and contribution to economic growth.

The non-state sector is now much larger than the state-owned sector on most measures. In 1999, SOEs represented around 31 per cent of the total gross industrial output of China. In 2011, this share had decreased to around 8 per cent.

And this shift is likely to continue in coming years as China’s leadership gradually implements its market-oriented reform package, announced in November last year.

These structural changes in the Chinese economy are also likely to see China’s private enterprises become a more important source of foreign investment in coming decades.

However, while the output, assets and profits of SOEs are decreasing as a share of China’s economy, the state sector continues to increase in absolute size.

For example, the state sector’s industrial output almost doubled in real terms between 1999 and 2011.

Likewise, SOEs’ profits in 2013 were nine times higher than they were in 1999 in real terms.

Moreover, many of China’s largest enterprises are state-owned.  Some of these now rank among the world’s largest companies, and have the potential to be large sources of foreign investment globally.

For example, China Mobile is the world’s second largest telecommunications company by market capitalisation. Oil and gas giant Sinopec’s revenues are the third largest in the world.

And China’s state-owned banks are also among the largest in the world. This includes ICBC, which is the world’s biggest bank by total assets.

China’s state-owned banks are also active in the Australian market. Each of China’s top five banks has established operations here, facilitating more efficient trade and investment.

SOE reform

SOEs are being increasingly exposed to a more competitive operating environment and the Chinese Government has identified SOE reform as a key priority.

SOE reform over the past two decades saw the shedding of loss-making enterprises and significant restructuring of those remaining.

SOEs are now subject to greater market discipline, and are more accountable for their performance.

At last November’s Third Plenum, the Chinese Government made a commitment to encourage private investment and to reduce government supervision over SOEs and their assets.

The Chinese Government also announced that by 2020, SOEs would be required to remit 30 per cent of their dividends to the state, up from the current 5 to15 per cent.

And last month, the Chinese authorities announced that six SOEs under its management would be part of a pilot programme designed to attract private investment and improve corporate governance.

China’s SOEs will also be affected by the broader reform agenda announced at the Third Plenum. For example, financial liberalisation will, in the long run, require credit to be allocated on a competitive basis.

So while the state sector will continue to play an active role within the Chinese economy, that role will be increasingly guided by market realities. Even now, many SOEs are domestically and globally competitive.

I am pleased that China remains committed to reform.

Importance of foreign investment for economic development

We all know that as a small population, but with enormous resources, we have a relatively high demand for capital.

In the past, Australia has relied on foreign funds to finance shortfalls between our national investment and national savings.

Without foreign investment, our production, our employment rate and our income would all be lower. In short, our standard of living would not be as high.

That’s why we have an open, welcoming foreign investment regime in Australia.

But, we are continually looking to improve our economic policies.

The Government appreciates the BCA’s work in producing its ‘Action Plan for Enduring Prosperity’.

A number of these recommendations may be considered through the Government's Industry Investment and Competitiveness Agenda, which is designed to improve Australia’s productivity performance.

We’re undertaking a ‘root and branch’ competition review that will look at ways to improve our competition framework to maintain pressure on firms to innovate.

In turn, this will reduce costs for consumers and increase productivity.

Improved productivity is essential to ensure foreign investors continue to be attracted to Australia.

Australia ‘open for business’: maintaining competitiveness

On my recent trip to China I made it clear that Australia was ‘open for business’ and that we welcomed Chinese investment. I also made it clear during discussions with some of China’s largest SOEs.

Australia remains a priority destination for foreign direct investment. The stock of inward foreign direct investment topped AUD 630 billion in 2013 – which is up 40 per cent from 2008 figures.

This highlights Australia’s appeal to foreign investors and in particular, to new investors.

In the past, the source of Australia’s inward foreign direct investment was other developed countries. The two countries with the largest stock of foreign direct investment for 2013 were the United States (at AUD 149.5 billion) and the United Kingdom (at AUD 86.7 billion).

Now, it’s increasingly coming from Asia.

Japan (with AUD 63.3 billion) and Singapore (with AUD 25.2 billion) are fast-growing sources of foreign direct investment in Australia.

And of course, Australia is a leading destination for Chinese investment. China now represents our sixth-largest source of inward foreign direct investment, with around 3.3 per cent of the total stock. This Chinese investment in Australia was AUD 20.8 billion in 2013, up from AUD 16.7 billion in 2012.

I know I am not entirely objective in this, but by any measure Australia continues to be an ideal investment destination in Asia.

We are economically resilient and strategically located, with strong global trade and investment ties. We also have a proven track record of innovation and an open and outward-looking business environment.

But there is tremendous global competition.

The world’s economy is becoming more integrated and cross-border trade and investment between countries is increasing.

Global supply chains are much more commonplace and capital markets are becoming more connected.

If Australia is to take advantage of the opportunities presented, we will require additional capital.

We need to make sure foreign investors continue to invest.

I want to reiterate that the Government is very welcoming of Chinese investment, including investment by SOEs.

Since I have come into government, I have approved a number of significant cases involving SOEs, which included proposals by StateGrid, Baosteel, Yanzhou and China Merchants, to name a few.

So while we continue to screen all direct investments by foreign government investors, our record in approving major Chinese investment proposals speaks for itself.

Concluding remarks

This is an exciting time for both China and Australia.

The Chinese economy is performing well. The reform of Chinese state-owned enterprises means the economy is also going through a major transition and is opening up to global markets.

Australia’s economy is also going through significant change and we need to engage with global investors if we are to continue to grow.

This means continuing to make Australia appealing for foreign investment and being ‘open for business’ in the global market.

Thank you for your time today.