China port operator warns Australian review increases sovereign risk

A Chinese company that owns a 99-year lease in the port of Darwin has warned that its treatment at the hands of the Australian government risks alienating investors from other countries.

Landbridge, a Shandong-based company founded by billionaire Ye Cheng, was informed last month of a security review of its Northern Territory operations, which it bought in 2015 for A$506 million (US$380 million). The development came on the heels of a sharp deterioration in relations between Canberra, Beijing and Collapse In Chinese companies’ investment in Australia since 2016, when inflows peaked at A$16.5 billion.

My problem as a foreign investor is that the government approved us, we went through a very painful problem [review] process and for five years, no one came out with anything concrete about what the problem was,” Mike Hughes, Landbridge Australia general manager, he told the Financial Times.

We are not the Chinese government, we are a private company. If the review forces us to sell the port lease, it would certainly increase the sovereign risk of any foreign investor looking to Australia, not just Chinese investors.”

This controversy is fueling fierceness discussion Between Australian security hawks and pro-business forces. The latter are concerned that the decision to force Landbridge to sell the lease threatens foreign investment.

The hawks argue that allowing a Chinese company to control a vital part of infrastructure in the Asia-Pacific region is too risky.

A group of 15 right-wing MPs is targeting the China Merchants Group, a state-owned company that owns a 50 per cent stake in Port of Newcastle, the world’s largest coal port. The group last week asked the government to look closely at the port, arguing that the quota gave “the Chinese Communist Party a geopolitical advantage over Australian coal export”.

As the uproar over Chinese investment intensifies, the opposition Labor Party has criticized the conservative government’s handling of Sino-Australian relations, arguing that it is fueling “nationalist sentiment” for electoral gain.

“Federal talk of conflict and trade retaliation can and must stop,” Mark McGowan, chief minister of the Labor-led state government in Western Australia, told business leaders last week.

In May, Canberra announced that Review Whether to cancel the controversial lease of the port of Darwin, which is near the US Marine base in Australia’s far north and sparsely populated. It follows a decision in April to scrap the two Belt and Road Initiative agreements between Victoria and Beijing, a cornerstone of President Xi Jinping’s foreign policy.

“My thinking is that when the decision was made in 2015 [on the port lease] “The circumstances were very different than they were in 2021,” Peter Dutton, Australia’s defense minister, said when announcing the review.

The decision to lease Darwin Harbor to Landbridge has sparked concern in Washington, while the Australian Strategic Policy Institute, a think-tank, claims Landbridge has links to the People’s Liberation Army and the Communist Party. Landbridge says it is a business entity and that criticism is unfair.

Many analysts believe the government will demand changes to the lease.

“Canberra, for example, could subject a lease to security reviews every six months,” said Richard MacGregor, an analyst at the Lowy Institute. “Or they could take the nuclear option, which would also be the costly and more dangerous option, of tearing up the lease completely.”

McGregor said Beijing would almost certainly respond, although there was limited Australian investment of a similar nature inside China to target. Sanctions have already been imposed on a range of Australian exports.

“Retaliation matters less than how the decision will introduce a new level of sovereign risk to foreign investors in Australia,” MacGregor said.

Chinese companies have become wary about doing deals in Australia due to increased scrutiny of deals and a deterioration in bilateral relations. Chinese investment fell 61 percent to A$1 billion in 2020, down from A$2.6 billion the previous year, according to the Australian National University.

A vertical chart of FDI (A$1 billion) showing that China's investment in Australia has faded

Landbridge’s Hughes said forced divestment threatens to dampen Asian investment in Australia.

“Obviously if you were an American company, you wouldn’t be bothered by that. But, you know, foreign investors from some other countries, who know how things can change over a decade or more,” Hughes said.

Analysts are divided over whether tearing up the Darwin port lease would significantly change the sovereign risk environment for non-Chinese companies.

“In the case of the port of Darwin, it is clear that there are both proprietary and extraneous factors at play,” said Jeffrey Wilson, director of research at the Perth USAsia Center.

However, business leaders are urging caution and pressing Canberra to restore ties with China, the country’s largest trading partner worth A$251 billion in two-way trade in 2019-20. Some worry that tearing up the port’s lease could damage bilateral relations and alarm foreign investors.

“There will be consequences outside of China,” said Andrew Robb, the former Australian trade minister who oversaw negotiations on the China-Australia Free Trade Agreement agreed in 2015.

Rob, who served as a paid consultant to Landbridge and other Chinese companies when he left his political post, said Canberra has every right to re-evaluate the port’s lease in light of changing strategic circumstances.

But he warned that political relations between Australia and China had “turned into hate” and trade ties could follow.

“In some cases, the tone didn’t take into account the sensitivities on the Chinese side,” Rob said. “There are certain things that took thousands of years to make in connection with China, like saving face.”

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