AS CHINA cements its position as the world’s largest growth economy, Australia corporates and investors have been warned to consider the political risks of investing there.
Australian corporates, and those located in other Western economies, have been rushing to join the Chinese growth story, but according to David Pulver, political risk manager at Aon Australia, prospective investors should consider issues other than financial and economic risk.
“Many Australian companies are looking to trade, develop resource projects or increase their activities to China,” he said. “However, this level of interest has done little to mitigate the significant political risks endemic to the region.”
Aon’s 2005 political risk map, a barometer of global risk conditions, showed that China is susceptible to non-economic risks such as supply chain vulnerability, political interference, legal and regulatory risks, strikes, riots and civil commotion.
By contrast, Australia, along with the US, UK and most of Western Europe, is considered low in terms of political risk.
Indeed, well-placed business sources have indicated that although economic and corporate reform is gathering pace, there remains State involvement in financial matters. “You find that even in some of the larger banks that have attracted Western investment, lending decisions, for example, are made by local party officials, not bank management,” said one US businessman with interests in China.
According to Pulver, political risks can develop very quickly. “Political, economic, religious and other tensions can shift at a moment’s notice and disrupt business operations for exporters, mining companies, traders, investors, banks and other organizations involved in international commerce,” he said. “Companies can be subjected to the discriminatory actions - or inaction - of foreign governments and third parties without adequate compensation. Commercial decisions to enter international markets should not be solely driven by economics.”
Stuart Fagg is the Editor of Risk Management,
Lawyers Weekly’s sister publication.