Chinese port company warns Australian review raises sovereign risk

A Chinese company that owns a 99-year lease on Darwin port has warned that its treatment at the hands of the Australian government risks scaring away 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$506m (US$380m). The development followed a sharp deterioration in relations between Canberra and Beijing and a collapse in investment by Chinese companies in Australia since 2016, when inflows peaked at A$16.5bn.

“My problem as a foreign investor is that the government approved us, we went through a very painful [review] process and for five years no one’s ever come up with anything concrete as to what is the problem,” Mike Hughes, Landbridge Australia managing director, told the Financial Times.

“We are not the Chinese government, we are a private company. If the review forced us to sell the port lease it would certainly raise sovereign risk for any foreign investors looking at Australia, not just Chinese investors.” 

The controversy is stoking a fierce debate between Australian security hawks and pro-business forces. The latter are worried that a decision to force Landbridge to sell the lease threatens foreign investment.

The hawks counter that allowing a Chinese company to control a vital piece of infrastructure in the Asia-Pacific is risky.

A group of 15 rightwing MPs are also targeting China Merchants Group, a state-owned company that has a 50 per cent stake in Port of Newcastle, the world’s largest coal port. Last week the group asked the government to look closer at the port, arguing the stake gave the “Communist Party of China a geopolitical advantage over the export of Australian coal’’.

As the furore over Chinese investment intensifies, the opposition Labor party has criticised the conservative government’s handling of Sino-Australian relations, arguing it is inflaming “nationalist sentiment” for electoral gain.

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

In May, Canberra announced it was reviewing whether to scrap the contentious lease of Darwin port, which is close to a US marines base in Australia’s sparsely populated far north. It follows a decision in April to cancel two Belt & Road Initiative agreements between Victoria and Beijing, a centrepiece of President Xi Jinping’s foreign policy.

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

The decision to lease Darwin port to Landbridge prompted concern in Washington while the Australian Strategic Policy Institute, a think-tank, alleges Landbridge has connections to the People’s Liberation Army and the Communist party. Landbridge says it is a commercial entity and this criticism is unfair.

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

“Canberra could, for example, subject the lease to six-monthly security reviews,” said Richard McGregor, an analyst at the Lowy Institute. “Or they could take the nuclear option, which would also be the expensive and riskier one, of tearing up the lease altogether.”

McGregor said Beijing would almost certainly retaliate, although there were limited Australian investments of a similar nature within China to target. Sanctions have already been imposed on a range of Australian exports.

“Retaliation matters less than the way the decision will introduce a new level of sovereign risk for foreign investors into Australia,” said McGregor.

Chinese companies have grown cautious about dealmaking in Australia owing to greater scrutiny of deals and the deterioration in bilateral ties. Chinese investment fell 61 per cent to A$1bn in 2020, down from A$2.6bn a year earlier, according to Australian National University.

Landbridge’s Hughes said forced divestment risked denting Asian investment in Australia.

“Clearly if you’re a US company, you’re not going to be that bothered. But, you know, foreign investors from some other countries, who knows how things can change over a decade or more,” said Hughes.

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

“In the case of Darwin Port, there are clearly special and extraneous factors at play,” said Jeffrey Wilson, research director at Perth USAsia Centre.

Nevertheless, business leaders are urging caution and pressing Canberra to reset relations with China, the nation’s largest trading partner with A$251bn in two-way trade in 2019-20. Some worry tearing up the port lease could fatally damage bilateral ties and unnerve overseas investors.

“There will be consequences beyond China,” said Andrew Robb, a former Australian trade minister who oversaw negotiations on the China-Australia free trade deal agreed in 2015.

Robb, who acted as a paid adviser to Landbridge and other Chinese companies when he left political office, said Canberra had every right to reassess the port lease in light of changing strategic circumstances.

But he warned that Australia-China political relations had “turned to custard” and business ties could follow.

“In some cases the tone hasn’t taken account of the sensitivities on the Chinese side,” said Robb. “There are certain things that have been thousands of years in the making with regard to China, such as saving face.”