China Power Giant’s Grid Bid Tests Australia Investment Nerve

  • State Grid offer for Ausgrid may be blocked on security fears
  • Foreign investment faces protectionist backlash in Australia

China's State Grid's Australia Bid Faces Hurdles

State Grid Corp. of China’s hopes of buying one of Australia’s biggest electricity distributors may be slipping away amid national security concerns and a protectionist backlash against foreign ownership of critical infrastructure.

Government-owned State Grid, the world’s largest utility, and Hong Kong’s Cheung Kong Infrastructure Holdings Ltd. are vying to buy Ausgrid, which supplies 1.6 million homes in and around Sydney and may fetch more than A$10 billion ($7.7 billion), people familiar with the matter have said. Both bids are being evaluated by the New South Wales state government and require the approval of Federal Treasurer Scott Morrison, who’s said that national security is the primary consideration in deciding whether to allow foreign buyers.

“It certainly looks like there is very little chance that Australia clears State Grid to buy this asset,” said Peter Jennings, executive director of the Australian Strategic Policy Institute. “Internationally, we are seeing a changing attitude toward Chinese investment, on the back of years of Chinese hacking and espionage around the theft of data and intellectual property.”

To watch a video on the issue, click here.

The sale comes as Australia balances the need for foreign investment to drive economic growth against mounting public opposition to sales of farmland, real estate and strategic infrastructure, particularly to Chinese investors. Rejecting State Grid’s bid risks straining ties with Australia’s most important trading partner -- something Chinese state-run media was swift to point out this week.

‘Bone in an Egg’

Australia would be “looking for a bone in an egg” to oppose the deal on national security grounds, China’s Global Times cited academic Zhou Shijian as saying Tuesday.

Despite overseas capital being vital to Australia’s future expansion, the government is arguably making it harder for foreigners to invest. Last year, it tightened scrutiny of sales of farmland to Chinese, Japanese and Korean buyers. The government board that vets investments now includes a former spy chief.

When the Obama administration last year raised concerns that a Chinese company had bought a port in the northern city of Darwin, where U.S. Marines are based, Morrison beefed up oversight of the sale of state assets. He’s also blocked the sale of the iconic S. Kidman & Co. cattle station to a Chinese-led group saying it could be against the national interest.

Global Assets

State Grid, which distributes electricity to 1.1 billion people, is bidding for energy assets globally as President Xi Jinping seeks to overhaul the country’s bloated state-owned businesses. Earlier this year, it bought a stake in Brazilian power distributor CPFL Energia SA for $1.8 billion, and it already owns parts of electricity networks in South Australia and Victoria states. The company missed out last year when New South Wales electricity transmission network TransGrid was sold to a group of investors from Canada, the Middle East and Australia’s Hastings Funds Management Ltd. for about A$10.3 billion.

CKI, the listed group controlled by Hong Kong billionaire Li Ka-Shing, owns stakes in electricity grids that service cities including Melbourne, Wellington and London.

Jennings of the Australian Strategic Policy Institute said it was possible that Morrison may also block CKI’s bid “given the growing direct influence that the Chinese government has in Hong Kong.”

A spokesman for Morrison said the Treasurer doesn’t comment on individual cases being assessed by the government and the Foreign Investment Review Board. Neither State Grid nor CKI responded to requests for comment.

‘Shut Down’

Australia isn’t alone in pondering national security when it comes to foreign investment in critical infrastructure. U.K. Prime Minister Theresa May has postponed approval for a new nuclear reactor in which China General Nuclear Power Corp. would have a minority stake. May’s long-time adviser warned in a blog last year that China’s involvement in nuclear projects could allow them to “shut down Britain’s energy production at will.

Security researcher Craig Valli said that while State Grid would have absolute power to shut down the electricity grid if its bid was successful in New South Wales, it was the “stuff of hysteria” to imagine it would and dismissed wider concerns of espionage.

“At this point I see little risk,” said Valli, the director of the Security Research Institute at Edith Cowan University in Perth who focuses on network and infrastructure security. “Do you think someone’s energy-use pattern is going to be of use? Are you going to blackmail someone about their energy use? No.”

State Grid isn’t alone in having its bid examined by Morrison and FIRB. They are also combing over proposals by Chinese companies to purchase assets including oncology services provider Genesis Care Ltd. and vitamins and supplements maker Vitaco Holdings Ltd.

Chinese Suitors

The prospects for Chinese suitors haven’t improved since the July 2 election saw a swag of protectionist independent or minor party lawmakers elected to the upper house Senate. The National Party, the junior partner in Prime Minister Malcolm Turnbull’s coalition which has been a vocal critic of investment by Chinese state-owned companies, also now has a bigger voice in the government.

Those domestic political considerations may make it harder for Turnbull to avoid a geopolitical headache, according to Jennings.

“If the bids are denied, and in particular if State Grid is blocked, that will not be warmly welcomed in China,” he said.

Before it's here, it's on the Bloomberg Terminal.