Australia remains a magnet for Chinese investment – but the 2017 annual figures have fallen materially and we need to be careful that current tensions do not lead to ongoing decline.
KPMG’s annual report Demystifying Chinese Investment in Australia, prepared jointly with the University of Sydney, finds that Chinese investment in Australia dropped by 11% (in USD terms) in 2017 to USD 10.3 billion (AUD 13.3 billion). This was despite renewed investment in mining, continued investment in commercial real estate and a surge in healthcare investment.
This pause in historic growth was also far from unique to Australia. Globally, Chinese overseas direct investment fell by 29 percent during the year.
Australia can be pleased that the fall here from 2016 levels hasn’t been anywhere near as severe as experienced in the US (where the rate of growth of new Chinese ODI is down 35 percent) and EU (down 17 percent). Changing regulatory, political and economic landscapes have significantly impacted new investment flows from China to the world.
Chinese government regulations which were implemented to address concerns about speculative, irrational global investments and massive capital outflows have impacted the Australia result – as have recent changes to Australia’s foreign investment regulations for critical infrastructure assets.
Australia remains the second largest recipient of accumulated Chinese investment globally with just under USD 100 billion since 2008. Chinese investors continue to be drawn to projects in Australia that relate to growing Chinese consumer demand, technology and Chinese government priority initiatives.
Health and wellbeing, tourism and lifestyle, real estate, technology, services and a continuing demand for mining commodity resources, are all areas where Australia has complementary advantages, is internationally competitive and has potential to grow.
The volume of Australian deals (102) was actually on a par with the previous year, but average deal sizes fell, with 76% below AUD 100 million. Notably investment by private Chinese companies grew, but the total volume of State Owned Enterprise (SOE) investment dropped for the first time since 2014. NSW continued to attract the most investment (42%), followed by Victoria (36%) and WA (14 %).
So should Australia have any specific concerns, given the decline in China’s outwards investment was a global phenomenon?
The answer is yes. Our report revealed sentiment has also shifted, with a higher level of apprehension by Chinese investors towards investing in Australia. The public and political debate here about the role of Chinese investment in our country is having an impact on perceptions, if not the deal numbers which don’t lie.
A worrying 70 percent of survey respondents stated that the political debate had made Chinese companies more cautious about investing in Australia. And 67 percent see the Federal Government as less supportive than previously. The Australian media was cited as the group least supportive of their investment; with Australian business leaders the most supportive.
The resultant mood shift is clear – confidence in the Australian market as a safe investment destination has declined between 2014 and 2018. While most Chinese investors retained a level of optimism about their Australian investments some investors, especially SOEs, are apprehensive due to diplomatic tensions and the sense of feeling unwelcome. Only 35 percent of surveyed companies felt welcome to invest in Australia – a notable decline from 52 percent in 2014.
It is disappointing to see this sentiment affecting business investment – particularly given that the last three years have been a good period financially for Chinese investors in Australia. Our report shows that 65 percent of respondents experienced revenue growth, and 45 percent profitability growth.
So should we be optimistic looking forward? Once again the answer is yes.
Australia’s relationship with China, while experiencing a period of heightened tension, is mature and deeply established in trade and investment and increasingly in society and culture through education, tourism and migration. We have mutual economic interests that will sustain through the current diplomatic challenges which are not underestimated.
Chinese investors are increasingly conscious of the need to acquire assets, knowledge and technology and then leverage their links to the Chinese market for profitable growth, rather than base their investment on the expected growth of the domestic Australian economy alone. They are investing with a long-term focus – and this is positive for Australia.
Let’s be very clear eyed. Australia’s long-term economic interests remain linked to China, a market that cannot be underestimated in terms of national importance and diplomatic complexity by many Australian business leader or in terms of opportunity or opportunity cost if we get this wrong. In addition to the top end of town, medium sized Australian companies with high quality food and health products, leading technology, services and advanced manufacturing capabilities have an incredible opportunity to grow through trade and investment. Australian SMEs have expressed and demonstrated the appetite and ambition to make this work, but need support from government.
It is important that Team Australia – the Australian Government and business community, jointly communicate and engage more carefully with Chinese counterparties to encourage further investment in the right areas.
Australia stands to make sustained economic, social and diplomatic gains by nurturing long-term partnerships between Australian companies and Chinese investors.