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HG Alert: Proposed changes to FIRB approval process under free trade agreement with China - 2 May 2014

On his recent visit to China, Tony Abbott delivered a speech in Shanghai addressing the Australia Week Lunch where he indicated the Australian Government’s intention to consider changes to current requirements for Chinese investments, in particular by Chinese state-owned enterprises (SOEs). 

It has been suggested that as part of the proposed China-Australia free trade agreement, the need for inbound Chinese investment to obtain approval from the Foreign Investment Review Board (FIRB) will be relaxed.  Just how relaxed is yet to be confirmed.

In this Alert, Senior Associate Lea Fua explores the proposed changes to the FIRB approval process and the possible subsequent implications for all Chinese investments in Australia.

Key take away points from the proposed free trade agreement

  1. Chinese SOEs investing in Australia will be freed from the requirement to seek FIRB approval for each investment in Australia.
  2. Chinese investments of $1.08 billion or more will be subject to FIRB approval, which would align with the investment thresholds under the free trade agreements with USA and NZ and also those recently struck with Japan and South Korea. The current investment threshold is $248 million.
  3. These changes would remove the impact of the FIRB approval process on a transaction timetable.
  4. Any Chinese investments in Australian farmland will likely be excluded from the changes which are being discussed for the China-Australia free trade agreement.
  5. There is presently no information on how the current list of sensitive sectors (such as media and telecommunications) will be treated.

The proposed changes are part of the discussions for the 20th round of negotiations between Australia and China for a proposed free trade agreement between the two countries.  The Chinese Central Government has indicated its desire to finalise the free trade agreement by the end of this year.

Currently, all investments (regardless of value) by foreign SOEs in Australia require notification to and formal approval from FIRB.  While the requirement applies to all foreign SOEs, the Chinese SOEs have long held the view that this is primarily directed at them.

Implications

While the details of the proposed changes have not been released, these changes will have implications for all Chinese investments in Australia regardless of whether the investor is private or state-owned.

These changes would remove the impact of the FIRB approval process on a transaction timetable, although it is still to be seen whether the relaxation of the FIRB requirements will be complimented by a corresponding relaxation by the Chinese central government of Chinese regulatory approvals for investments in Australia.

Chinese SOEs investing in Australia will be freed from the requirement to seek FIRB approval for each investment in Australia. The key question at this stage is the extent that this requirement will be relaxed with details yet to be released.
The current FIRB approval requirements for investments by foreign SOEs apply not only to entities which are wholly controlled by a foreign government, but also to entities in which foreign governments may have a direct or indirect aggregate interest of 15 percent or more. 

As a result, companies who operate independently of foreign governments, but have as a shareholder a foreign government or its related entities holding a direct or indirect interest of 15 percent or more are deemed to be subject to the same FIRB approval requirements and require approval for all its investments in Australia.

In line with the free trade agreements with the USA and NZ, we expect that that the higher investment threshold in a China-Australia free trade agreement will only apply to investments by a Chinese national, a Chinese enterprise or a branch of an entity located in China and carrying on business activities there.  That is, Australian subsidiaries of Chinese investors may potentially be excluded from the higher investment threshold.  If this is the case, then it is likely that Australian subsidiaries of Chinese investors and independent companies with no formal ties to foreign governments but which are deemed to be SOEs as a result of any direct or indirect foreign government ownership will still be subject to the current approval requirements for all investments by foreign SOEs.

Likely exclusion

In its Discussion Paper on Foreign Investment in Australian Agricultural Land and Agribusiness issued in August 2012, the Coalition proposed that all investments in Australian farmland be subject to an investment threshold of $15 million requiring FIRB approval.  This has also been recommended by the Senate Rural and Regional Affairs and Transport References Committee in June 2013.  Trade Minister Andrew Robb has indicated that this policy will remain.  As a result any Chinese investments in Australian farmland will likely be excluded from the changes which are being discussed for the China-Australia free trade agreement.

No information has been released in relation to how the current list of sensitive sectors (such as media and telecommunications) will be treated under the proposed China-Australia free trade agreement but we expect that it will be similar to existing free trade agreements with USA and NZ and those recently agreed with Japan and South Korea.

At this stage, there have been no further details released in respect of any other exclusion however we will continue to monitor any developments in this respect.

HopgoodGanim will continue to monitor these proposed changes and will provide further update as further details become available.

For more information and discussion, please contact HopgoodGanim’s Asia Business or Corporate Advisory and Governance teams.

Now in its 40th year and with offices in Brisbane, Perth and a presence on-the-ground in Shanghai, HopgoodGanim offers commercially focused legal advice, coupled with reliable and responsive service, to clients throughout Australia and across international borders.