Chinese foreign direct investment: Is Australia's food security under threat?

Alexander attended the 2012 WTO Public Forum in Geneva where he represented Griffith University. He is currently studying a Bachelor of Laws/ International Business and he is also a part of the Griffith Honours College.

Abstract 

This paper examines claims that Chinese foreign direct investment is threatening Australia’s domestic food security. This unsubstantiated hysteria threatens to undermine Australia’s leadership in the pursuit for global food security as well as harm Australia-China trade relations. An examination of foreign ownership within the agricultural sector reveals that Chinese foreign direct investment remains relatively low. Moreover, an analysis of the Foreign Investment Review Board’s safeguards shows that Australia has substantial protection against the purported threat of politically motivated foreign investment. Nonetheless, this paper argues that the Foreign Investment Review Board’s functionality can be enhanced by lowering the monetary thresholds on foreign investment and through the introduction of a foreign land registry. The introduction of these recommendations is considered one way to calm concerns over Chinese foreign investment and preserve Australia’s global food security legitimacy. 

Introduction

In recent decades Australia has emerged as a world leader in the fight for global food security. A strong commitment towards reducing subsidies, tariffs and other trade-distorting policies has elevated Australia’s agriculture sector to the forefront of competitiveness.1 In 2011, the Organization for Economic Cooperation and Development (OECD) estimated that only 2.2 per cent of Australian farm income arose as a result of government support compared to the OECD average of 18.32 per cent.2 Having established itself as a leader in agricultural competitiveness, Australia has advocated strongly for international food security. Addressing the World Trade Organisation (WTO) in late 2011, the Hon Craig Emerson3 described WTO members’ reluctance towards agricultural trade liberalisation as an ‘abrogation of responsibility... to the poorest countries on earth.’4 Essential to the legitimacy of the Minister’s stance is Australia’s agricultural track record, but a domestic firestorm threatens to derail Australia’s impetus on the issue. 

A growing concern over China’s foreign direct investment (FDI) into Australia’s agricultural sector has dominated domestic headlines in recent times. Faced with decreasing arable land and a population of 1.3 billion, China is facing increased national food security pressures.5 This has led to speculation that purported surges in Chinese FDI are part of a broader plan to guarantee China’s agricultural supply.6 Spurred on by outspoken Members of Parliament, there is a widely held belief that Australia’s domestic food security has been compromised and that the Federal government should move to protect Australia’s agricultural sector. As public hysteria builds, the government is facing heightened pressure to impose greater access restrictions on FDI and also to introduce subsidies for national producers.7 While the Federal government has dismissed such demands,8 growing public unrest will undermine Australia’s leadership legitimacy in the pursuit for global food security. In addition to this, unchecked xenophobic sentiments will damage Australia-China trade relations in the long term. 

This paper will seek to investigate fears surrounding China’s FDI into Australia’s agriculture. In response to concerns that China is ‘buying up the farms’, levels of foreign ownership in Australian agriculture will be explored. Additionally, the institutional mechanisms tasked with safeguarding Australia’s national interests will be analysed in order to assess the claim that Australia’s food security is under threat. As such, this paper will look to support Australia’s advocacy for global food security by calming the hysteria that is threatening to burn the foundations of Australia’s efforts. 

Foreign Ownership of Australian Agriculture

Identifying the levels and composition of foreign ownership in Australia’s landholdings is a difficult undertaking. This is almost entirely due to the fact that no institution has been tasked with permanently tracking levels of foreign ownership across Australia. As a result, data is limited to a select number of surveys. Indeed this absence of official record keeping is likely an overriding cause for the perception that Australian farms are being rapidly bought out by Chinese enterprises. On the contrary, recent data surveys indicate that this perception is completely unfounded. 

In 2011 the Australian Bureau of Statistics published the most comprehensive survey of the Australian agricultural sector and its ownership since 1984.9 The survey utilised a sample size of 11,000 farms and collected information concerning the ownership composition of both businesses and land.10 Of the 135,600 agricultural businesses in Australia on 31 December 2010, 99 per cent were entirely Australian owned and only 1,300 were estimated to have some level of foreign ownership.11 Of these 1,300, only 824 comprised greater than 50 per cent foreign ownership.12 This equates to less than 1 per cent of Australia’s agribusinesses. The survey also found that 89 per cent of total agricultural land was entirely Australian owned with the remaining land either wholly or partly owned by foreigners.13 While still significant, these estimates hardly indicate that Australia’s domestic food security has been compromised by Chinese FDI. 

To enhance the Australian Bureau of Statistics’ findings, the 2011 survey is compared with the earlier 1984 version to provide insights into the rate of FDI. In March 1984, 5.9 per cent of Australia’s agricultural land was held by foreigners compared with the 2010 estimates of 11 per cent.14 Similarly, foreign ownership of agricultural businesses increased from 0.3 per cent in 1984 to just 1.0 per cent by 2010. On this data alone it seems that concerns over current levels of Chinese FDI appear to be unfounded. Nonetheless, it should be acknowledged that these figures are merely estimates and that they overlook the value of the foreign owned agricultural businesses or land. As outlined in the Coalition’s discussion paper on FDI, the survey makes no distinction between a foreign owned billion dollar agribusiness and a wholly Australian owned hobby farm.15 To add to this, the Australian Bureau of Statistics survey offers no insight into the nationality of foreign ownership. Thus while the survey largely debunks fears of prolific Chinese FDI, it is not conclusive. 

To better understand foreign investment in Australian agriculture, a number of other sources are examined. Unlike most states, Queensland keeps a record of foreign owned landholdings pursuant to the Foreign Ownership of Land Register Act 1988 (Qld).16 The Department of Environment and Resource Management’s records indicate that foreign interests hold approximately 2.62 per cent of Queensland’s land.17 Interestingly, China’s precise ownership percentage is unreported having failed to make the top six landholding nationalities, albeit isolated to Queensland only.18 The Foreign Investment Review Board (FIRB) also tracks foreign ownership in agricultural land for purchases in excess of its thresholds (approximately $240 million). In 2010, FIRB listed the United States, Malaysia and the United Kingdom as the leading investors in Australian agriculture while China made no agricultural investments within FIRB’s thresholds.19 To add to this, KPMG in conjunction with the University of Sydney recently compiled a detailed assessment of Chinese FDI in Australia and found that China was almost exclusively investing in mining and energy.20 The study found that China’s agricultural FDI totalled $567 million and comprised less than 5 per cent of China’s total FDI into Australia during the 21 month period to June 2012.21

Having considered a range of data, it seems fears that China is ‘buying up the farm’ are completely unfounded. While a definitive conclusion requires more comprehensive records, surveys suggest that foreign ownership of agricultural assets as a whole is surprisingly low even before considering China’s investment in isolation. As mentioned earlier, the lack of any national land registry to monitor ownership levels has likely fuelled misrepresentations about the agricultural status quo. It should be remembered however that this analysis is static and many indicators point towards a rapid increase of Chinese FDI into agriculture in the future. 

Sources of Concern

Having found no evidence of supposed prolific Chinese investment into Australian agriculture, it is interesting to consider why it is such a controversial issue. Curiously, the United Kingdom in tandem with the United States hold the majority of Australia’s foreign owned agricultural assets and yet news headlines are silent on these countries.22 In the past, foreign investment has underpinned increased capacity, lower food prices and higher levels of employment in the agricultural sector.23 Indeed, amidst a skills vacuum and looming productivity crisis, foreign investment is crucial for the continued development of Australia’s agricultural sector.24 For such a capital hungry country, it is perplexing that Chinese FDI is the source of so much anxiety. This is of course a complex question, but it is useful to survey the major narrative in opposition of China’s investment. 

The starting point is undoubtedly China’s demand for food. With a projected population of 1.6 billion by 2030 and declining levels of arable land, China is under pressure to meet the food security of its increasingly urbanised middle class.25 The narrative explains that China will use its extensive current account surplus to secure food production overseas and guarantee its domestic food supply. As argued by outspoken Senator Barnaby Joyce, this means that China would hold Australia’s land in perpetuity and pose risks for Australia’s sovereignty.26 If the narrative were this simple however, British, American, and indeed all foreign investment, would be met with the same opposition that China faces.  

The distinguishing characteristic of China’s FDI is its perceived inextricable link with the Communist Party of China (CPC). Underpinning China’s economic rise has been the establishment and development of State Owned Enterprises (SOE).27 SOEs are defined as enterprises ‘owned by the State, and thus, by the whole people [of China]’.28 Ownership rights are vested in the State Council (the highest executive organ of the Chinese state) although each SOE has autonomy from the State in operational policies.29 Nonetheless, the government retains participation rights in major decisions and each Chinese SOE must obtain state approval before making outbound foreign investment.30 The narrative thus concludes that Chinese foreign investment is politically driven rather than commercially motivated and will be used to export Australian produce directly to China to the detriment of Australia’s own food security.31 While it is true that the majority of Chinese FDI stems from SOEs, studies have revealed that Chinese SOEs ‘operate not as agents of the state but like any other commercial firm.’32 In any case, there is always a degree of inherent risk with any foreign investment. It is for this reason that Australia tightly regulates FDI. 

The Foreign Investment Review Board

Recognising that foreign investment brings both opportunity and risk to Australia’s economy, a federal screening process exists to protect the national interest. Empowered under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA), the Treasurer acts as the chief safeguard against harmful FDI. In practice, the Treasurer is guided by the recommendations of the Foreign Investment Review Board (FIRB) who evaluate foreign investment proposals against a range of criteria. Following FIRB’s recommendations, the Treasurer is empowered to block proposals that are deemed contrary to the national interest.33  

FATA is silent on what is meant by ‘national interest’. In 2003, the Department of Foreign Affairs and Trade broadly defined national interest as ‘the security and prosperity of Australia and Australians’.34 Under the Foreign Investment Policy, FIRB has outlined a number of considerations to determine whether foreign investment proposals accord with the national interest.35 Specifically, FIRB examines: national security (‘the extent to which investments affect Australia’s ability to protect its strategic and security interests’); competition (‘whether a proposed investment may result in an investor gaining control over market pricing and production of a good or service in Australia’); tax revenues; environmental impact; economic and community impact (‘including an analysis of the interests of employees, creditors and other stakeholders’36); and character of the investor (whether the investor ‘operates on a transparent commercial basis’).37 FIRB also examines all investment by foreign governments and their related entities to determine whether ‘the investment is commercial in nature or if the investor may be pursuing broader political or strategic objectives.’38

Despite operating on a case-by-case basis, agricultural foreign investment proposals are subjected to FIRB’s assessment only if they meet FATA’s thresholds. Importantly for the analysis at hand, all direct investment in Australia by foreign governments and their related entities is subject to FIRB’s review regardless of the value of the investment.39 Foreign governments and related entities include a body politic of a foreign country; or companies which comprise of more than 15 per cent government ownership; or companies that are otherwise controlled by foreign governments.40 This means that all investment conducted by Chinese SOEs is subject to the FIRB review process. In relation to agriculture specifically, foreign investment by a private investor in rural land (a business of primary production) is subject to FIRB’s review only where the total assets of the business exceed $244 million.  

FIRB’s Potential Shortcomings 

Under FATA, strict safeguards exist to protect the Australian agricultural sector from foreign investment that is contrary to the national interest.  FIRB’s rigorous assessment in conjunction with the Treasurer’s discretion ranks Australia fourteenth internationally under the OECD FDI Restrictiveness Index and places Australia above the OECD restrictiveness average.41 Despite these safeguards, FIRB’s ability to protect the national interest will vary based on the nature and characteristics of a particular sector. 

While all foreign investment made by foreign governments will be reviewed, FIRB will almost never screen private foreign investment in Australia’s agricultural sector. This is because the vast majority of agricultural property and businesses lack the valuation necessary to trigger the $244 million threshold.42 For example, the recent sale of Cubbie Station (one of Australia’s largest agribusinesses) to Chinese owned Shandong Ruyi barely triggered FIRB’s threshold having being valued at an estimated $300 million. In Queensland, the Department of Environment and Resource Management’s records show that the average value of farms bought by foreigners is well below FIRB’s $244 million threshold at just $6.28 million.43 However as mentioned, the majority of Chinese FDI flows from SOEs and is thus subjected to FIRB review.  Nonetheless, as China continues to undertake economic reform and strive towards a more free market orientation, FIRB’s private investment threshold will become increasingly more important. 

As discussed previously, unlike Queensland, the rest of Australia has no comprehensive means of tracking foreign ownership in agricultural land. The lack of a national land registry has significant implications for FIRB’s efficacy. A crucial consideration of the national interest test is competition.44 Specifically, FIRB considers the diversity of ownership and potential risks for monopolistic control over pricing, production and global supply of a product.45 In an agricultural sector more akin to perfect competition, very few agribusinesses in isolation will affect competition. Absent any records on foreign ownership of the agricultural sector as a whole, it is difficult to see how an individual sale’s effect on competition can be evaluated in any meaningful way. This means that FIRB’s case-by-case approach to agricultural sales struggles to adequately evaluate the cumulative impact of foreign investment on competition. This deficiency is compounded by the reality that most private agricultural investments will elude FIRB’s $244 million threshold. As a result, the agricultural sector is left vulnerable to ‘the creeping cumulative acquisition of agricultural land’.46

Recommendations 

Despite largely discrediting concerns over China’s FDI, the fear itself (among the population) is nonetheless real. If left unchecked, it will harm Australia’s leadership in global food security as well as Australia-China trade relations. While a number of policy responses exist to address this, this paper focuses on FIRB and its functionality. In addition to pacifying fear, changes to FIRB can greatly enhance its efficacy in monitoring the agricultural sector. Of course recommendations should be subject to greater thought and scrutiny than this paper allows, but the following discussion nonetheless acts as a useful starting point. 

  • FIRB’s thresholds for private investment in agribusiness should be lowered from $244 million to a figure that is more appropriate to the agricultural sector. Given the nature of agricultural assets, few agribusinesses meet FIRB’s existing threshold for private investment. While the majority of Chinese FDI is screened under FIRB’s mandatory foreign government thresholds, China’s economic reforms mean that foreign investment will become increasingly independent in the future. Thus FIRB’s thresholds should be lowered to account for this transition. Such a recommendation does not target Chinese FDI in isolation nor does it imply that Chinese FDI requires closer scrutiny. Instead, lowering the private investment threshold will enhance FIRB’s ability to safeguard the agricultural sector. Because the agricultural sector consists of many producers, a larger percentage of the industry must be screened in order to assess the cumulative effect of foreign investment on competition. While this would undoubtedly raise administrative costs, it would give greater purpose to Treasury’s express goal of ensuring ‘the sustainability of Australia’s national agricultural resources’.47 

  • A national land registry should be introduced to track foreign ownership in rural land. In combination with lowering FIRB’s private investment thresholds (and thus yielding a higher volume of screening), a foreign land registry would enable FIRB to comprehensively evaluate agricultural investments in the context of the industry as a whole. This would allow FIRB to better assess national interest considerations like competition, national security and community impact. It would specifically address the agricultural sector’s noted vulnerability to ‘creeping cumulative acquisition of land’.48 Despite obvious costs involved, a similar registry already exists in Queensland from which a national registry could be modelled. To add to this, the Federal government has already committed substantial funds to ‘more regular and expanded surveys’ to improve the transparency of foreign investment in agriculture.49 Instead of this, these funds could be diverted to creating the national registry which would serve the same purpose to a more accurate and comprehensive degree. 

Conclusion 

Having underpinned past development, FDI continues to provide a viable and safe means of boosting Australia’s agricultural productivity regardless of which country it comes from. Contrary to widely held beliefs, minimal evidence exists to suggest that China’s foreign investment is threatening Australia’s food security. However, the hysteria is as much about future risk as it is about Australia’s current food security. This means that static examinations into levels of Chinese FDI will do little to ease domestic tensions. Instead, this paper has focused on FIRB’s ability to protect the national interest as the principal way of debunking fears over China’s investment. However, despite FIRB’s rigorous screening process, the lack of a national land registry in combination with FIRB’s high monetary thresholds does raise some doubt over FIRB’s ability to monitor the agricultural sector. Addressing these issues will both appease domestic concerns and enhance FIRB’s effectiveness. Despite indicating its reluctance to implement such changes, the Federal government should carefully consider the broader implications of Australia’s domestic anxiety. The costs associated with any reforms may pale in significance to the potential damage to Australia-China relations and also to Australia’s ongoing efforts for global food security. 

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