In talking with China about investment, Australia wants to reverse the punch line of the giant gorilla joke:

Q: Where does a 500lb gorilla sit?

A: Anywhere it damn well wants!

With its administration of foreign investment guidelines, Australia is trying to tell China it must ask politely, then wait a long time before it might be given permission to sit.

This is shaping as a fascinating test of the Rudd Government’s ability to manage Asia’s new giant. So far, Canberra is not handling the test too well, according to two of Australia’s best in the Asia economic relationship business, Professor Peter Drysdale and Professor Christopher Findlay. In their view, policy on Chinese foreign direct investment in Australian mining has fallen into confusion over the last year. Or as they pose the problem: 'It may seem a puzzle as to how we got ourselves into this pickle over Chinese FDI.' The Drysdale-Findlay solution is for Australia to step back from its effort to place additional hurdles in the way of Chinese state-owned firms.

The rising flood of money, though, is clearly making Canberra nervous. In the financial years 2005-06 and 2006-07, Australia approved a total of about $10 billion in investment from China. But in the single financial year just finished (2007-08) the value of approved investments was heading towards $30 billion. The Treasurer, Wayne Swan, gave those figures in June in a Beijing speech to the Central Party School of the Chinese Communist Party.

Mr Swan said Australia was screening China’s investments through the Foreign Investment Review Board to ensure it is in Australia’s national interest. 'And we also want to ensure that investment is consistent with our aim of maintaining a system in which investment and sales decisions are driven by market forces rather than external strategic or political considerations', he said.
 
Ah, there are some words to conjure with: 'external strategic and political considerations.' Are we talking investment here or international intrigue? The Swan speech was a quick summary of the revised foreign investment test the Treasurer released in February, setting out extra hurdles to be applied to 'foreign governments and their agencies over and above those that apply to normal private sector proposals'. As Drysdale and Findlay comment, Australia is prejudging Chinese investment and risks, transforming the issue from one of trade to politics. And China is in no mood to be discriminated against.

How Australia handles this will be crucial, obviously, in dealing with its new number one economic relationship. But it is also being monitored by lots of others pondering the gravitational pull of China’s mountainous foreign reserves. The Economist commented in July on the 'peculiar nature' of Australia’s foreign investment review process and what is being seen as growing friction with China.

Rulings of the review board are public, but applications are not, and those unlikely to be approved can be withdrawn and resubmitted without anyone outside of a small circle ever being alerted. Estimates of applications by Chinese-related entities that are bouncing back and forth range from a dozen to 200.

The gorilla isn’t going away and it now has a big wallet. In explosive potential, the investment issue could well overshadow the torturous three-year-old negotiations for a free trade agreement between Australia and China.