China's Investments Stalled by Security Risks

An analysis by Michael Lelyveld
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Pedestrians walk past a branch of China's state-owned State Grid Corp. in Yichang, central China's Hubei province, July 7, 2016.
Pedestrians walk past a branch of China's state-owned State Grid Corp. in Yichang, central China's Hubei province, July 7, 2016.

China's push into foreign markets has hit a barrier with Australia's decision to block its bid for a major electricity network following its assertive moves in the South China Sea.

On Aug. 11, Australian Treasurer Scott Morrison announced a preliminary rejection of China's attempt to win a 99-year lease of the New South Wales system known as Ausgrid.

Morrison cited "national security issues ... in critical power and communications services that Ausgrid provides to businesses and governments," but he declined to disclose specifics of the risks, Australian media said.

The decision was "consistent" with the recommendation of Australia's Foreign Investment Review Board, Morrison said.

The joint bid for a 50.4-percent stake was submitted by China's State Grid Corp. and Hong Kong-based Cheung Kong Infrastructure Holdings Ltd. (CKI) in a deal valued at 10 billion Australian dollars (U.S. $7.6 billion, 50.4 billion yuan).

Reports pointed to concerns over the role of China's state-owned utility State Grid. In a statement, CKI denied that it was the cause.

"We believe that the Australian government must have reasons beyond the obvious which led them to make today's announcement," said the company controlled by billionaire investor Li Ka-shing.

"The issue is unrelated to CKI," it said.

Morrison's ban has sparked intense debate within Australia in light of State Grid's past investments and those of other Chinese state-owned enterprises (SOEs) in the country.

The Australian Financial Review listed five previous State Grid acquisitions of energy assets and infrastructure that had gone through without triggering national security vetoes.

In a signed commentary, the official Xinhua news agency derided the notion that China would consider turning the lights off in Sydney and the surrounding region.

"To suggest that China would try to kidnap the countries' electricity network for ulterior motive is absurd and almost comical, since it is widely recognized in the world that business reputation is critical to any corporate activity," Xinhua said.

Sale becomes final

But Reuters quoted a senior member of Australia's governing coalition as citing new factors in evaluating China's state-controlled investment in the country.

"The South China Sea disputes, the increased recognition that the Chinese regime is more authoritarian than we originally thought, and the fact that we are dealing with a state-owned enterprise—those three things have suspended people's free-market instincts," the unidentified official said.

In spite of the objections from China, Morrison's decision against the sale became final on Aug. 19.

The move may mark a watershed for Australia, which launched a free trade agreement with China last year and has relied heavily on Chinese demand for raw materials and energy supplies.

"It's high time for Australia to put all parties on the same page and implement its strategy in a unified and coordinated fashion, before its deeply confused investors lose interests," Xinhua said in another commentary, sounding a thinly-veiled threat.

Following the final decision, China's Ministry of Commerce (MOC) warned Australia that the rejection would have costly consequences.

The canceled sale will "severely hurt the willingness of Chinese companies to invest in Australia and exert negative influence on Sino-Australian economic and trade relations," MOC spokesman Sun Jiwen said.

"The issue of foreign investment, particularly Chinese ownership of critical infrastructure ... will be among several tensions in the Canberra-Beijing relationship when Prime Minister Malcolm Turnbull attends the G20 meeting in China," The Sydney Morning Herald reported last week.

The two-day summit of the Group of 20 major economies is set to open Saturday in the eastern city of Hangzhou.

Resistance to other acquisitions

Despite its earlier investments in Australian power and gas assets, China has encountered rising resistance to further acquisitions this year.

In April, Morrison barred the sale of agricultural land holder S. Kidman & Co. to Chinese investors, citing national interest.

Security concerns have also been raised about the decision to sell a long-term lease for facilities at the port of Darwin to a Chinese investment group last year.

China's reactions are a sign of worry that the recent pushback against its investments may be part of an international trend.

In July, Britain's new government shocked China by delaying a final decision on building its Hinkley Point C nuclear power plant in a project that includes China General Nuclear Power Corp. as a 33-percent partner.

On Aug. 8, China responded with a commentary from Ambassador Liu Xiaoming in the Financial Times, implying that relations could be at risk.

"Britain takes pride in being a country that is open to foreign investors. Rightly so. It is exactly because of such openness that China has become the UK's second-largest non- European trading partner," Liu said.

"As long as both sides cherish what has been achieved ..., bilateral relations will maintain their strong momentum and work for the well-being of both the Chinese and British people," he said.

Pedestrians walk past the headquarters of China National Offshore Oil Corporation (CNOOC) in Beijing, April 5, 2015.
Pedestrians walk past the headquarters of China National Offshore Oil Corporation (CNOOC)in Beijing, April 5, 2015. Credit: ImagineChina
Rising tide of investment

There have been notable instances in the past of national interest or security opposition to Chinese investment, as with the failed bid by China National Offshore Oil Corp. (CNOOC) to buy U.S.-based Unocal Corp. in 2005.

But recent bans in response to China's rising tide of overseas investment have been relatively few, suggesting that new international concerns over its assertive policies may be at work.

"Chinese aggressiveness in the South China Sea and East China Sea is creating a toxic element to its global economic expansion," said Mikkal Herberg, energy security research director for the Seattle-based National Bureau of Asian Research.

"It's just creating an extra layer of atmosphere where everything in China's decision making is colored by national security interests," he said.

The link between investment and security appears to have tightened since China rejected the finding of an international arbitration tribunal in July that Beijing's sovereignty claims in the South China Sea were unjustified.

Security concerns have grown with the release of aerial photos showing China's construction of aircraft hangars on man-made islands in disputed waters, prompting fears of a military buildup.

Commentators like former British Foreign Secretary Malcolm Rifkind say the chances that China would use its investments to "turn the lights out" or exert influence over policy may be remote but not beyond consideration.

"It may sound like a fantasy. It may be a fantasy. But it is a worst case scenario that some security experts predict could occur if the government proceeds with the Hinkley Point C nuclear reactor with Chinese involvement," Rifkind said, writing in the Daily Telegraph.

"Of course, the issue needn't be about the South China Sea. It could be about Hong Kong, or Tibet, or Taiwan, or any number of places where China's military could crack down on human rights," he said.

‘Really bad idea’

In fact, long before its South China Sea claims became a pressing issue, China has had a pattern of using investments particularly in poorer countries to sway their policies toward Taiwan.

Herberg said China is making "a mistake" when it argues that relations with countries could be at risk in cases like Ausgrid and Hinkley Point, since threats only heighten security concerns about linkage between economic and strategic issues.

"I think that's really a bad idea. You're basically reinforcing the talking points of the nationalists," he said.

International reactions to China's assertiveness in the South China Sea could be a setback for its ambitious "belt and road" initiatives, which seek to expand trade routes with infrastructure investments throughout Asia and build corridors stretching to Europe and Africa.

Beyond trade, the acquisition of infrastructure is likely to raise longer-term security concerns since China's embedded interest and influence could last for years.

"This comes back to bite them, and there's this chronic issue of how to convince people that these are strictly commercial transactions when so much of China's economy is driven by state ownership and state interests," Herberg said.

The strategic stakes are also rising for China as it becomes increasingly reliant on outbound investment and overseas energy supplies for economic growth.

"It's not hard to see why China is sometimes the object of suspicion when it comes to these overseas acquisitions," said a report by Britain's BBC.

"But the countries that China wants to invest in will increasingly have to balance their national security concerns with their economic and commercial ones, too," it said.





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