State Capital: Global and Australian Perspectives

• Publication year: 2013

SEATTLE UNIVERSITY LAW REVIEWVolume 37, No. 2, Winter 2014

State Capital: Global and Australian Perspectives

George Gilligan & Megan Bowman(fn*)

INTRODUCTION

The activities of state-related pools of capital need to be understood within the context of an era of globalization, in which economic and political ties between many jurisdictions are deepening. This increasing economic interdependence between countries also results in jurisdictions increasingly mediating rather than controlling the interests of business that may be conducted within their spheres of influence.(fn1) One significant effect of globalization has been to further elevate deficits and surpluses run by countries and the subsequent macroeconomic trade imbalances that they bring. As ever with international trade, the political context remains crucial, and almost inevitably, it is intertwined with expectations regarding vested interests. These developments are affecting the sovereignty of jurisdictions as local political priorities become more intertwined with international politics and the requirements of international business. The regulatory world reflects the realities of those domains it purports to influence, and so a major consequence of these developments is that regulatory structures and processes have become more internationalized. A variety of modes of governance are emerging that have a capacity for impacts of broad international scope. This political reality interacts with how state-related pools of capital have been increasing in recent years, not only in their number, but also in the scale of their effect. The rising influence of more proactive state-led capitalism is one of the shaping variables in how the global economy has been changing swiftly in recent decades, and the effects of the Global Financial Crisis (GFC) have arguably accelerated these structural shifts.(fn2)

Part I identifies three discrete phenomena in the state capital arena. First, the recent surge in state-led capitalism reflects centuries old traditions in trading and investment in both the Western and Eastern Hemispheres. Secondly, recent rises in state capital investment reflect broader macroeconomic trends, in particular the rising economic influence of Asian economies and the decoupling effect of these structural trends on capital flows in global markets. Thirdly, a key subcategory of state capital actors, Sovereign Wealth Funds (SWFs), is gaining influence in global capital markets. Part II builds on this analysis by considering the regulatory implications of the increasing influence of SWFs, especially in multilateral contexts. These broader international developments have specific national consequences, and Part II focuses in on the foreign investment regulatory regime in Australia. Part III provides a detailed case study of Chinese investment in Australia. The changing patterns of Chinese investment in Australia reflect many of the key structural macroe-conomic changes and regulatory governance issues discussed in the earlier parts of this paper. Moreover, the Sino-Australian case study of Part III highlights not only the methodological difficulties associated with researching state capital investment, but also the importance of acknowledging and responding to these methodological challenges in public discourse and policy development on foreign direct investment.

I. STATE CAPITAL IN A GLOBAL CONTEXT

Recent developments regarding rising investment activity by state actors have a sense of Back to the Future about them. For example, charter companies such as the East India Company (EIC) bear similarities to many contemporary state capital actors with their close linkages to state power and, in many cases, an emphasis on trading in commodities.(fn3)

The first manifestation of the EIC was established in 1600 during the reign of Queen Elizabeth I as the Governor and Merchants of London Trading with the East Indies.(fn4) The EI0C, which evolved through several forms, received monopoly trading advantages and other support from the Crown, including five Acts in 1670 during the reign of Charles II that accorded regal legitimacy to the EIC to command troops, make war and peace, mint money, annex territory, and administer criminal and civil justice over the territory it controlled.(fn5)

Contemporary state capital actors obviously do not play the same militaristic and governmental roles as the EIC, but they do have close linkages to their national governments and play important roles in facilitating their sovereign's economic and political influence in foreign territories. As discussed below, concern has been voiced in recent years in many quarters about these growing levels of influence, and there has been multilateral regulatory innovation regarding SWFs in particular.(fn6) SWFs and other state-related pools of capital, such as State Owned Enterprises (SOEs),(fn7) State Pension Funds (SPFs), and Commodity Stabilization Funds (CSFs), are acknowledged as increasingly valuable sources of liquidity in capital markets that have been drained of liquidity in recent years. Many of the intrinsic challenges associated with regulating the international finance sector in a post-GFC era have come into play in recent years in multilateral efforts to mediate the increasing levels of activity and influence exercised by the diverse constituency of financial sector actors that have been bundled together under the state capital label.(fn8) These mutual challenges include the following: balancing the interests of state and private actors; the transnational nature of much financial sector activity; creating market regulatory conditions that can deliver appropriate balances between liquidity supply and opportunity for profit; the need to protect the national interest of jurisdictions but not encourage protectionism; and the increasing hybridization of financial sector actors, products, and services.

These challenges have been heightened by GFC ramifications, which continue to impact upon political, economic, and legal agendas. For example, in order to save failing banks, some governments have part-nationalized (e.g., Royal Bank of Scotland and Lloyds in the United Kingdom) or nationalized them (e.g., Fannie Mae and Freddie Mac in the United States, and Northern Rock in the United Kingdom).(fn9) An effect of the GFC-induced emergency measures is that the entwined regulatory- investment role of the state becomes cloudier as jurisdictions that might previously have slotted comfortably into the category of recipients of state capital have become more active state capital investment actors themselves. This raises questions about how the state can manage simultaneously the potential conflicts of being an active investment actor, a detached and independent regulator, a recipient of inward investment from both state and non-state sources, and the promoter of the national interest. The increasing investment role of SWFs, SOEs, and other state-related pools of capital reflect changing relationships in the global economy, especially the economic rise of the BRIC countries (Brazil, Russia, India, and China).

As the strategic economic and political importance of these countries increases, so does the need to understand how international regulatory infrastructures must evolve to accommodate these changes. For example, SOE capitalization constitutes a significant element in three of the BRIC countries. According to the Economist, in 2012, SOEs comprised 80% of the value of the stock market in China, 62% in Russia, and 38% in Brazil, as depicted in Figure 1 below; SOEs accounted for one-third of the emerging world's foreign direct investment from 2003-2010.(fn10) And according to Chinese government records, Chinese foreign direction investment (FDI) was set to increase by 15% in 2013.(fn11)

Figure 1: Share of SOE Capitalization on the MSCI National Stock Market Index: Percentage of total, June 2011(fn12)

Click Here To View Image

This rapidly rising pool of SOE investment capital is part of the story of the decoupling effects of contemporary fundamental changes in East-West capital flows with attendant global imbalances regarding the management of exchange rates and reserves. The most obvious example of this is the rapidly increasing global economic influence of China. For example, China increased its foreign reserves from $21 billion in 1992 (5% of its annual GDP)(fn13) to $31,202 billion in 2012 (45% of its annual GDP).(fn14) These decoupling effects are fuelled by the fact that emerging markets have grown at an average of 5.5% (in contrast to 1.6% for developed nations) in recent years, and the activity of these emerging markets is projected to make up half of the world's GDP by 2020 (see Table 1 below).

Table 1: GDP Growth: Advanced vs. Emerging Economies(fn15)

	Actual Average Annual Percentage Change							Projected
	2006	2007	2008	2009	2010	2011	2012	2013	2018
Total Advanced Economies	3.0	2.8	0.1	-3.5	3.0	1.6	1.2	1.2	2.5
E.g., United States	2.7	1.9	-0.3	-3.1	2.4	1.8	2.2	1.9	2.9
Euro Area

...