A brief history of Chinese agricultural investment in Australia

Since 1972, Australian governments of both political stripes have pursued closer relations with the People’s Republic of China.  During that time, China’s position in the world economy has shifted.  From an autarkic communist regime, it became the workshop of the world, and is now a nascent foreign investor boasting competitive global brands.

Conclusion of an Australia-China FTA has, since 2005, been elusively close.  Key sticking points remain around the vexed issue of Chinese investment.

Our national debate casts these issues in stark terms – Chinese state enterprises buying up Australian farms to supply their domestic market.  Instead, Chinese investment should be seen as an opportunity, and a natural outgrowth of Chinese economic growth.

Agriculture in the People’s Republic

The small farm occupies a unique place in Chinese history. 

The 1940s land reforms – a form of land to the tiller – cemented peasant support for Mao Zedong and created a system dominated by hundreds of millions of small farms.

In the late 1970s, small farms formed the basis of Deng Xiaoping’s ‘Household Responsibility System’ – an early experiment with market pricing in the reform period.

Today, China’s agricultural sector remains dominated by two hundred million small farms, with an average size of only 0.6ha.  Amazingly, the average size has actually shrunk over the last 30 years.

Economic transformation has stretched the limits of productivity growth in this system.  Modern farm management techniques are difficult to apply when your farm is the local playground, the gap from the letterbox to the road, a shared backyard or the easement by the local creek.

Nor is there capacity to retreat to Maoist economic strategies of continually ‘scaling up’ production.  There is insufficient uncultivated arable land, with the growth of mega-cities placing yet more pressure on farmland.  While Chinese food production is increasing, China’s domestic produce is not sufficient to meet the consumer demands of its growing middle class – for safer and more nutritious food – particularly given the expected doubling of the domestic demand for food to 2050.

This demand growth has lead to an explosion in agribusiness trade – beef exports from Australia up nearly 400% from 2012 to 2013 alone, and the size of the New Zealand dairy industry tripled after the NZ-China FTA conclusion.

As the Chinese economy has grown, so have the policies and goals underpinning its foreign investment agenda.

Thirty years ago, China was an impoverished, quasi-isolationist state seeking to assure foreign investors that it was serious about its retreat from Marxism.  It wanted to attract capital, tech and know-how.  In 2014, it is a sophisticated global investor with nascent global brands.  Huawei, Lenovo and Haier have significant overseas sales.  Alibaba is preparing for US listing, and four of the world’s tens largest banks are PRC-based.  Chinese investment in African and South American natural resources has likewise ballooned.

China has sought to support its investment agenda in a number of ways.

Firstly, by sophisticated and evolving use of bilateral investment treaties.  A bilateral investment treaty – or BIT – is an agreement between two states in which they give assurances about the treatment of the other’s foreign investors.  These treaties are typically between developed and developing states – developed states seek protection for their investors, and developing states want to assure foreign investors that they are a ‘safe’ destination.

Beginning with Sweden in 1983, China began to conclude BITS in its reform and opening period.  China’s early treaties were designed to reassure against a slide back into Maoist state socialism.  Absent was the idea that Chinese enterprises and individuals would be significant outward investors.  China was a capital importer, and wanted to attract foreign capital, technology and know-how.

By the 2000s, China had begun negotiating greater protection for its own investors in its BITs.  It was increasingly becoming a capital exporter – and wished to protect both its private and state-owned enterprises as they went abroad.

This investment agenda has, from 1999, been underpinned by the ‘Go Out’ policy, which encourages Chinese firms to seek a global presence, and underpinned by specific assistance programs.

However, this entwining of Chinese trade and investment goals has stymied efforts to conclude an Australia-China FTA – which has been a goal of successive Australian governments.

Two key Chinese demands, remain sticking points: higher foreign investment thresholds, and treatment of SOEs (which hold around 40% of PRC GDP and dominate Chinese investment in Australia) in line with non-government entities.

This pushes hot buttons in Australia in ways that trade, tourism and cultural engagement do not.

To date, Chinese direct investment in Australia has focused almost entirely on mining and energy.  A 2012 joint KPMG/University of Sydney report, Demystifying Chinese Investment noted that, of $45 billion worth of Chinese investment in Australia between 2006 and 2012, 95.5% was in mining, oil and gas and renewables.

In agriculture – despite the high-profile purchase of Tully sugar mill and Chinese participation in a consortium to buy Cubbie station – PRC investment is still comparatively small.  A 2010 Australian Bureau of Statistics report found that the level of foreign ownership of Australian agricultural land had been virtually unchanged since 1983.  A joint 2012 RIRDC/ABARES report, Foreign Investment and Australian Agriculture, replicated the finding and also noted that Chinese agricultural investment was often for minerals exploration.

Despite its small size, Chinese agricultural investment has managed to attract substantial political and media controversy.  Images of SOEs buying up Australian farmland to secure integrated supply chains for their own domestic markets loom large.

However, the trajectory of Chinese engagement with the world is clear.  To cement trade ties, Australian politicians and business will need to get better at explaining the benefits of Chinese investment.

Australian Policy Settings

The former government produced three key policy documents, outlining a vision for agribusiness engagement in the region.

The Asian Century White Paper outlined the regional challenges and opportunities for Australia in the 21^st century, with specific reference to agriculture.  It outlined Australia’s comparative advantage in agriculture – a reputation for safety and quality, strong R&D, and political and economic stability.

Feeding the Future ook this further, looking at potential for joint co-operation with China in investments and R&D.  It discussed encouraging investment by streamlining our regulatory environment, and facilitating high-level contacts for business and politics.

Finally, the National Food Plan looked at the Australian food chain ‘from paddock to plate’, in light of the growing demand for quality food in emerging markets.  It discussed the comparative advantage of Australia and other competitors and proposed a range of programs underpinning market development and competitiveness in the region. 

The incoming government has shelved the Asian Century White Paper and National Food Plan (to be replaced by a paper focusing solely on the agricultural sector), instead emphasising speedy conclusion of FTA negotiations.

However, Chinese demands for greater investment have not changed, nor has Australian antipathy towards that idea.  If significant concessions are required for the FTA’s conclusion, it will require delicate finessing.

The current government has sought to manage this in various ways:

Firstly, by softening their position (previously strongly against SOE investment).  Significantly, the government no longer holds that such investment in Australia would ‘rarely be in Australia’s national interest’.

Secondly, building on the Gillard government’s ‘Feeding the Future’ report, it announced an ‘Investment Co-operation Agreement’, to identify projects for joint investment, emphasising agricultural projects in northern Australia.

Politically, it appears designed to demonstrate the potential of Chinese-invested projects to a sceptical public, warming them to the idea of significant concessions on investment in an eventual FTA.  It may help re-position the debate, with reminder that foreign investment in Australia is to our own benefit.

Above all, we need to realise that FTA conclusion is not simply a matter of Australia ‘negotiating harder’ to force investment off the table.  China is driven by its own internal economic situation, and no amount of Australian haggling will persuade it to substantially alter its investment policy.

Consumer demand for food is expected to double in our region, and China’s growing middle class will increasingly demand quality products, which Australia is uniquely positioned to provide.

But to grasp this opportunity, Australia needs an open debate that recognises the history and trajectory of China’s opening, its current policies, and its impact on the development of its agricultural sector.