The Australian

By Paul Kelly

Our most important new relationship will require a diplomatic firmness of purpose

The ability of Australia to exploit the revolution in global power and finance remains in question — it means mobilising huge new Chinese foreign investment, reassuring the public against populist eruptions and brokering rules that China accepts and understands.

This challenge nearly brought Kevin Rudd and Wayne Swan to grief in Labor's first term. This week Tony Abbott, as prospective prime minister, appeared in a dramatic new light: as manager of the China relationship, a job that demands subtlety, toughness and consistency. In his trail-blazing foray into China, Abbott won two cheers only.

He delivered the right messages on how a Coalition government would deal with China on strategy and values.

Indeed, Abbott had the sense to walk in John Howard's footsteps. He embraces as his model the Howard-originating Liberal Party method for managing China based on mutual respect and recognising differences. That's smart. China should get this.

But Abbott blundered at the pivotal hurdle of foreign investment policy. How important is this? It is Australia's future financial lifeblood, that's all. No blunder can be tolerated in this minefield. With China, words are bullets and Abbott got his words wrong. This is the generous interpretation. The view Swan unsurprisingly seized on was that Abbott had left open a populist anti-China investment option and had outsourced policy to his mate, the Nationals' Barnaby Joyce.

At week's end, opposition Treasury spokesman Joe Hockey, who will have responsibility for foreign investment policy in an Abbott government, told Inquirer Labor's policy would remain unchanged under the Coalition.

''We need foreign investment,'' Hockey says. ''There is no attempt on our part to add new restrictions to foreign investment into Australia. We will not change the extent of FIRB scrutiny of government-owned entities, which is already substantial.''

These were the words required. Hockey gave China reassurance in the wake of Abbott's ambivalence. Labor's screening process is highly rigorous. There could be few greater follies for an Abbott government than to tighten, again, foreign investment policy into resources and begin its incumbency by having a brawl with the Middle Kingdom. (Changing transparency in relation to agriculture investment is separate.)

The Treasurer, in the previous crisis over the proposed Chinese government-owned Chinalco bid for an 18 per cent holding in Rio Tinto, forced a tougher set of ''national interest'' guidelines. In essence, despite rhetorical hysteria, the guidelines are bipartisan. The evidence this week is that Abbott misjudged — not that he went to China to insult his hosts on investment policy. The reality is that Australia needs to mobilise for its future the role of China as creditor power. It is past time political leaders began educating the public about such fundamentals. If the Nationals don't get it, then they must explain why they champion the consequence: the deprivation and decline of rural and regional Australia.

In Canada this week Resources Minister Martin Ferguson offered a convincing exposition of Labor's foreign investment policy — he said the ''national interest'' test worked for the advantage of both Australia and investing corporates, including state-owned enterprises. The culture it fostered was that joint ventures were best and that companies should consult government beforehand.

Beyond this, Labor wants China's investment not just in resources but to facilitate the necessary restructuring of Australia's economy away from heavy inefficient manufacturing into value-added food and agricultural exports for the growing Asian middle class. In this sense, China's capital is pivotal to a more productive, export-oriented Australia.

Australia-China Council chairman Warwick Smith tells Inquirer: ''There has been a fundamental shift in global capital flows in favour of China. That won't abate any time soon. The biggest single export from China to the world is its capital. This needs to be understood in Australia. Of the five largest banks in the world by market capitalisation, the top four are Chinese. History shows us that when you have a strong trade relationship, what follows is a strong investment relationship. This is our experience with Europe, America and Japan.

''I worry about reactionary and unrealistic attempts by politicians to curtail this trend with China. That would really hurt us. Any view that Australia can stop or doesn't want this Chinese capital would damage our growth and prosperity. I think FIRB gets these issues but I worry about the politicians.''

As energy powerhouses, Australia and Canada occupy the cutting edge of this debate. With Ferguson and Rudd in Canada this week the backdrop was the $US15 billion ($14.4bn) bid by China National Offshore Oil Corporation for Canadian energy giant Nexen. It will be the largest overseas acquisition by a Chinese corporation if it passes Canada's ''net benefit'' regulatory test. This time the Chinese have done their homework. Canada, desperate to deepen its economic ties with China, is under intense pressure to give approval. Rudd was quoted in the Toronto Globe and Mail saying: ''CNOOC is a company I know very well. They're a good company.''

On his North American visit Rudd has visited Washington, New York, Chicago, Toronto and Ottawa, and the dominant theme has been his opinion on how to manage China. Rudd has offered sought-out public and private advice on China, with his theme being the need to deepen commercial ties yet to avoid letting China dictate the terms of engagement.

Malcolm Turnbull, also in Toronto at the Australia-Canada Economic Forum, said in the context of the China debate that Australia's foreign investment policy was essentially bipartisan. Yet the full implications of the evolving US-China-Australia economic triangle are rarely explored.

The outgoing head of the US Studies Centre at the University of Sydney and new dean of the business school, Geoffrey Garrett, attending the forum, told Inquirer: ''This notion of Australia being in a Sophie's choice between an American past and a Chinese future is just the wrong way to think. The new world will be a G-2 world, the US and China. And Australia is at the sweet spot in this triangle.

''For me, the best example of this is the $20bn project near Gladstone for a coal-seam gas facility. It is a partnership between Origin Energy and ConocoPhillips using American capital to build the LNG plant. Because the gas is going to China, the third player is China's Petrochemical Corporation, Sinopec, who got a chunk of the equity with their 20-year supply contract.

''The point is that in terms of US investment, Australia is a proxy play for China.''

Garrett sees a smart Australian policy leveraging the US-China financial relationship. US investment into Australia runs 25 times as high as China's. Yes, that will change across time. His argument, however, is that ''US investment is important in helping Australia to maximise its resources boom by selling into China''.

This constitutes for Australia one of the most daunting policy challenges in its history -- making the triangle work in economic and security terms.

As the main architect of foreign investment policy, Swan argues it is accepted by China. While Australia promotes Chinese investment, a screening process for policy and political safeguards is essential, a view shared by Swan, Abbott, Rudd and Hockey.

Far greater scrutiny applies to investment from state-owned enterprises. Swan's guidelines require judgments on whether an SOE is independent from control by its foreign government, whether it hurts the market by creating undue concentration or control, in effect, monopolising a supply chain, as well as including national security factors.

Labor is suspicious of a controlling interest by an SOE but has no rule, as such, against this.

While Abbott supported Chinese investment, his statement that ''it would rarely be in Australia's national interest to allow a foreign government or its agencies to control an Australian business'' was distinctly more prescriptive. It implied a policy change. This is vital not just in its own right but as a test of whether Abbott crumbles to anti-market populism within the rural heartland.

Managing the China relationship and expanding Chinese investment will be decisive in Abbott's leadership. If he cannot get China right, he will be crippled in economic and foreign policy. It is why this week's China visit was vital. Abbott sent the right signals. He hailed China as a ''good friend'' who could become a ''better friend''. He enshrined this goal as a personal pledge. Like Howard, he declared the rise of China was a plus for Australia. Like Howard, he wanted closer ties with China. Like Howard, he saw no impediment arising from the US alliance because gaining a new friend did not mean losing an old friend. Like Howard, he repudiated any Australian support for containment of China (knowing that containment is not US policy).

Abbott signalled that Australia would not compromise its values dealing with China. The test is whether Abbott, like Howard, focuses on shared interests with China and plays down the obvious differences. Howard will tell him that consistency counts with China. This is where Rudd ran into so much trouble.

Abbott wanted to underline Australia's values on his first trip -- hence his lament that the Chinese people cannot choose their government. Such declarations of the obvious allow Abbott to retain his integrity and satisfy Australian public opinion. But it is critical he abandon any megaphone and keep human rights concerns in their specified dialogue, a path he indicated he will follow.

Abbott has exceeded Howard in his pledge to Asian literacy and a new ''two-way street'' Asia student exchange policy. For Australia's sake, it is vital that China policy stay bipartisan.