June 17, 2018 / 11:00 PM / 3 months ago

EXPLAINER-Fraying Australia and China relations face testing times in Canberra

SYDNEY, June 18 (Reuters) - Australia's relationship with top trading partner China faces a testing two weeks as Canberra prepares to pass laws designed to limit Beijing's influence in domestic affairs amid pressure on some of its fastest growing exports.

The fallout from proposed foreign interference laws will likely be exacerbated by an expected ban on China's Huawei Technologies from supplying equipment for the soon-to-be built 5G mobile broadband network on national security grounds.

Australian winemakers who say their goods are being held up at Chinese ports have urged the government of Prime Minister Malcolm Turnbull to resolve diplomatic tensions blamed for the trade obstacles that some fear could spread to other major exports.

HOW DID AUSTRALIA'S RELATIONSHIP WITH CHINA SOUR?

Barely two years into a landmark Free Trade Agreement with China that fuelled an export boom, Turnbull cited Chinese "meddling" as justification for new laws aimed at limiting foreign influence.

Turnbull told parliament late last year he was concerned by reports of Chinese Communist Party interference in Australia's media, universities and politics. These included close ties and donations by Chinese interests made to an opposition lawmaker, who later resigned over the issue.

The centre-right government has been preparing laws to ban foreign political donations and better disclose links between lobbyists and the foreign interests they work for. A changed definition of espionage has also been proposed which would capture more activities.

"China objected to being singled out by Turnbull," said James Laurenceson, an expert on the two nations’ economic ties, at the University of Technology in Sydney.

China denies accusations of meddling in Australia's affairs, and has accused Canberra of bias that has poisoned relations.

WHAT PROMPTED AUSTRALIA'S ASSERTIVENESS?

Australia had until recently sought to navigate a path between its long-time security ally, the United States, and China, which took nearly 30 percent of all exports from Australia last year.

The balance has become more difficult as Australian security agencies warned of increased cybersecurity and a heightened risk of political interference. Beijing's defiance of international demands to cease militarising the South China Sea has also fuelled tensions.

Peter Jennings, who served as an adviser to former Prime Minister John Howard, said the strategic landscape had quickly changed Turnbull's pro-China outlook that he had articulated when he came to power in 2015.

Questions about China's involvement in Australia became more vocal that year with the lease of a commercial and military port in the northern city of Darwin to a Chinese firm said to have close ties to China's military. Washington was said to have raised concerns about the deal, near a base where it stations more than 1,500 marines.

HOW HAS CHINA RESPONDED?

China, a major importer of Australia agricultural and commodity products, initially limited its response to diplomatic protests. That changed last month as Chinese customs began to delay shipments of six Australian wines, including those produced by Treasury Wine Estates and Pernod Ricard .

Australia’s wine exports to China were worth A$848 million last year and are forecast to top A$1 billion in 2018, government figures show. Some analysts now say those figures now look optimistic. China says imports of Australian wine are being handled "according to normal procedures".

WHY ARE THE NEXT FEW WEEKS CRITICAL?

Despite mounting economic pressure, Australia could pass the foreign interference legislation as early as this week.

The first part of the new laws, which will require the registration of individuals with links to foreign governments, is the centrepiece legislation of Canberra's China hawks, who argue it is addressing warnings highlighted by security officials.

"The foreign interference legislation is long overdue and addresses prior weaknesses or loopholes in Australian law, which had to be strengthened to suit modern circumstances," said John Lee, former principal advisor to Australia's Foreign Minister Julie Bishop.

The foreign interference legislation may coincide with an expected ban on China's Huawei Technologies from supplying equipment for the soon-to-be built mobile broadband networks.

Huawei was banned in 2012 from supplying Australia's massive National Broadband Network, and in May, Australia committed millions of dollars to ensure Huawei did not build an internet cable between Australia and the Solomon Islands.

Australia has not publicly explained its objection, but a source familiar with the Solomon Islands deal said Canberra was concerned that China could jeopardise its national security, by having access to Australian telecommunications infrastructure.

Australia, like the United States, worries Huawei is de facto controlled by China, raising fears that sensitive infrastructure will fall into the hands of Beijing.

Huawei has repeatedly denied the allegations, insisting it is an independent company.

WHO CAN EASE THE TENSIONS?

Australia has made some modest attempts to ease tensions, although the government's tough stance has played well locally with many voters.

Australia's Minister for Trade Steven Ciobo has sought to woo China and Bishop has sought a meeting with officials in China, a request that sources say Beijing is yet to respond.

Several analysts say Beijing wants a higher-ranking official, namely Turnbull, to lead efforts to mend ties.

Turnbull will on Tuesday deliver a keynote speech to Chinese business leaders, an address that Australia's trade industry hopes will balance the country's security and commercial interests.

"Australia can express any security concerns but we must be conscious of the potential impact it has on trade," said Tony Battaglene, chief executive of industry body the Wine Federation of Australia. (Reporting by Colin Packham in SYDNEY; additional reporting by Jonathan Barrett; Editing by Lincoln Feast.)

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