Australia's Trade Minister Craig Emerson greets Chinese President Xi JinPing on a visit to China in April 2013. Emerson says plans to increase scrutiny on farmland investments would ruin any chance at all of a free-trade deal being struck with China, Australia's biggest trading partner and largest buyer of its agricultural exports.
By CAROLINE HENSHAW
MELBOURNE—Australia's trade talks with China have stalled after Canberra rejected Beijing's request to allow state-backed foreign investment of as much as one billion Australian dollars (US$1.03 billion) without regulatory scrutiny, Trade Minister Craig Emerson said.
China wants Australia to investigate only investments above that amount, Mr. Emerson said Thursday, adding that such a condition was unacceptable to the government.
The minister just returned from an official visit to China this month with Prime Minister Julia Gillard, where a landmark direct currency-conversion deal was struck with Beijing.
Beijing sees easing the regulations as essential to encouraging its companies to invest more in Australia, which Chinese investors complain has become increasingly hostile to their presence. But Australia's lawmakers fear dropping such scrutiny could hand over control of vital assets to Chinese companies that remain beyond their political control—a stance that comes ahead of a federal election in September.
Though China is Australia's biggest trading partner, free-trade negotiations that have dragged on for about eight years have failed to gain traction. China has already reached deals with a number of other countries including New Zealand, which competes with Australia to supply food to Asia's rising middle class.
At present, Canberra probes all investments in the country by government-owned foreign entities, including sovereign-wealth funds—applying what is locally known as a national-interest test.
A major source of contention with China has been Australia's approach to foreign involvement in its agricultural sector, and in particular land investments where there is fierce political opposition, particularly to the ambitions of Chinese companies.
While all proposals by overseas government-backed companies are reviewed, Australia allows land investments by nonstate companies worth less than A$244 million to go ahead without oversight.
China considers reducing scrutiny of investments by its state-owned enterprises—which account for most of its largest companies—as nonnegotiable in the quest to reach a free-trade deal, Mr. Emerson told an agricultural conference co-sponsored by The Wall Street Journal.
"That's not pragmatic, we can't do that," he told reporters on the sidelines of the event. "China is saying, at this stage, nonnegotiable, you've got to raise the threshold from zero to A$1 billion. That's where we're stuck."
Supporters of more overseas investment in Australia's farm sector, including industry groups, say foreign involvement is critical to supplying the more than A$1 trillion in investment the sector needs by 2050. Critics, including many conservative lawmakers, say overseas investors tend to have little regard for Australia's natural resources and ecology.
The opposition Liberal-National coalition, widely tipped to win the next federal election in September, has said it plans to lower the review threshold for private company investments in farmland specifically to A$15 million.
Much of the concern in Australia is around the security of food resources and the preservation of its natural resources, including land and water, which are already suffering from the effects of overuse, pollution and climate change.
Luke Mathews, an analyst at Commonwealth Bank of Australia, has estimated that the nation has already lost access to 13% of its farmland—an area bigger than Germany and the U.K. combined—over the past two decades because of such impacts.
Mr. Emerson said the opposition's plan to increase scrutiny on farmland investments would ruin any chance at all of a free-trade deal being struck with China, Australia's biggest trading partner and largest buyer of its agricultural exports.
Overseas investment continues to be a sensitive issue in the country. Last year, Chinese telecommunications firm Huawei was barred amid security concerns from bidding to take part in the rollout of Australia's national broadband network. And in early 2011, the government knocked back a planned A$8 billion takeover of its main bourse operator, ASX Ltd., by Singapore Exchange Ltd., again on national-interest grounds.
During this month's visit to China, Ms. Gillard bemoaned the failure to reach a free-trade deal with Beijing, saying the government was seeking to resolve the issue as soon as possible. Mr. Emerson told reporters Thursday that since his Labor Party won power in 2007, Australia's Foreign Investment Review Board, or FIRB, had scrutinized 380 foreign investments, and that all had been approved.
Beijing's A$1 billion threshold, if accepted, would mean that the overwhelming majority of overseas investments in Australia would pass without government scrutiny, leaving the door open to much larger investments by Chinese companies in the corporate sector.
"It's a fantastical number," Nigel Scott, who heads up Australia & New Zealand Banking Group Ltd.'s agriculture lending business, said on a panel at Thursday's conference, adding that only a fraction of investments in the sector, made up of mainly small family-run farms, would come in at above the A$1 billion mark.
The opposition, meanwhile, has been critical of the government also for its failure to reach a deal with Beijing.
"It's absolutely vital that the federal government prioritizes and finalizes a free-trade agreement between China and Australia," Denis Napthine, the Liberal Party premier of Victoria state, said at the same conference. "New Zealand has stolen a march on us."
Mr. Emerson told the conference that the government was now looking at reaching a limited free-trade agreement relating to agriculture specifically, without giving further details.
—James Glynn contributed to this article.
Write to Caroline Henshaw at [email protected]