Mongolia's parliament is considering a new law that could dramatically curtail foreign investment across the country, restricting foreign ownership to 49 per cent or less in wide swathes of the economy.
Mongolia is rich in resources and its $8.5-billion U.S. economy has been buoyed by foreign investment in the mining sector. However, a backlash against a big Chinese investment deal last month has made foreign investment a central issue in the forthcoming parliamentary elections in June.
The draft legislation, a copy of which was seen by the Financial Times on Wednesday, is the clearest sign yet that Mongolia is uncomfortable with the large foreign investments that have so far been a mainstay of economic growth.
If passed in its current form, the law would mandate majority Mongolian ownership in businesses worth more than 100 billion tugriks ($76-million) and in "strategic" sectors including natural resources, transport, food, real estate, communications and agriculture.
Although the foreign investment law was first drafted last year it was not presented to parliament until April 24, following an attempt by Chalco of China to invest about $1-billion in a coking coal mine in the Gobi desert.
Chinese state-owned groups have been investing heavily in resources-rich neighbours such as Myanmar and Kazakhstan. However, resource nationalism is on the rise along China's borders, as highlighted by Myanmar's recent decision to suspend construction on a giant Chinese-funded hydropower project. Chinese investments in Mongolia have often been stymied by historic mistrust between the two countries.
Mongolia's draft foreign investment law could be revised significantly before it is passed. The role of foreign investment, which comprised 62 per cent of Mongolia's gross domestic product last year, is a central part of political debate in advance of the June election.
Business leaders in Ulan Bator, the Mongolian capital, expressed concern over the impact the law could have on businesses, and the Business Council of Mongolia is expected to issue a statement on the law later this week.
"If this law gets passed in its current form, then nothing will move in Mongolia and nobody will come to invest," said Bayanjargal Byambasaikhan, chief executive of Newcom, a Mongolian business conglomerate. "However, I'm pretty sure that cooler heads will prevail."
A person close to the process said the law's main aim was to limit participation by foreign state-owned enterprises. However, as currently written, the law would limit all foreign investment in Mongolia and institute a formal review process for inbound investment in strategic sectors.
Chalco's proposed deal, which is now on thin ice, would have seen the Chinese company pay $926-million (Canadian) to buy a majority stake in SouthGobi Resources , a mining company listed in Toronto and Hong Kong. Ivanhoe Mines Ltd. is SouthGobi Resources' largest shareholder, currently owning 57.6 per cent of the issued and outstanding shares.
The deal would have been the largest Chinese mining investment ever in Mongolia, but it was met with anger in Ulan Bator and the government threatened to suspend some of SouthGobi's mining licences as a result.
"Large Chinese state-owned enterprises have so much purchasing power that basically they could buy every business in the country," said a mining executive in Ulan Bator. "Mongolia is very afraid that if that were to happen it would become an economic suburb of Beijing."