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BFCSA: Chinese investment in Australia drops to a decade low

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Chinese investment in Australia drops to a decade low

Australian Financial Review Apr 8, 2019 12.05am

Michael Smith

 

Shanghai | Australia experienced its sharpest drop in Chinese investment for more than a decade last year due to Beijing’s clampdown on capital outflows and the demise of big mining and commercial property deals, a report released on Monday shows.

Chinese investment fell 36.3 per cent, or $8.2 billion, in 2018, confirming Australia has caught up with the United States, Canada and the United Kingdom as a less favourable destination for Chinese capital.

China’s state-owned companies are instead diverting capital into Belt and Road infrastructure projects in Asia and central Europe under the government's instructions, while private firms are increasingly focused on smaller deals in healthcare.

Chinese investors also remain pessimistic about the investment environment in Australia, where they said it was becoming harder to raise capital, particularly in the property sector.  Some investors complained the Australian media singled them out for criticism, and while more were optimistic about the bilateral relationship than a year go, 59 per cent still said the domestic political debate about China was a turn-off.

The findings were part of Demystifying Chinese Investment in Australia, an annual report released on Monday by KPMG and The University of Sydney, which analysed direct Chinese investment into Australia in 2018 and studied investor sentiment.

“It doesn’t feel particularly robust at the moment but at the same time China still sees Australia as a safe and attractive place to invest," Doug Ferguson, report co-author and head of Asia & International Markets for KPMG Australia, said.

“Despite Chinese global outbound direct investment actually growing by 4.2 per cent in 2018, Australia has felt the pinch of a significant reduction to our shores, reflecting the impact of policy changes in China."

The rate of decline is now closer to the falls recorded in the US and Canadawhere Chinese investment dropped by 83 per cent and 47 per cent respectively in 2018. The decline was more than double the 11 per cent fall in Chinese investment into Australia between 2016 and 2017.

The report highlights the dramatic shift in the Chinese inbound investment boom, which peaked around 2008 when the world’s second-largest economy invested heavily in Australian mining, energy and property assets. Beijing has since clamped down on investors getting capital out of the country, while the investment criteria for private firms is now focused on sectors such as healthcare and technology designed to meet the needs of China’s rising middle classes.

Healthcare was the most popular sector for Chinese investors, overtaking commercial property for the first time. The survey does not include residential home or apartment purchases or deals worth less than $US5 million ($7 million).

“Large strategic investments in resources, energy and infrastructure have given way to smaller investments, into projects that are tactical and directly linked to Chinese consumer market demand. This is particularly evident in the targeting of the Australian healthcare sector by Chinese investors,” said Hans Hendrischke, professor of Chinese Business & Management at the University of Sydney Business School.

Healthcare made up 41.7 per cent, or $3.4 billion, of total Chinese investment for the year following a string of mega deals, including a bid by China's CDH Investments for Sirtex Medical,  Chinese health supplements giant By-Health's acquisition of probiotic manufacturer Life-Space Group, and Jianyin Investment's acquisition of Nature's Care.

But Chinese investment in commercial real estate fell to $3 billion from $4.4 billion in 2017. Yuhu Group’s $1.1 billion acquisition of Dalian Wanda’s property assets in Australia made up 31 per cent of the total.

ENN’s acquisition of more shares in Santos for $619 million pushed up investment in the energy sector. The mining sector only accounted for 5.6 per cent of the Chinese investment, while food and agribusiness only attracted $100 billion of investment.  NSW attracted more than half the capital at 53 per cent while Victoria fell to 27 per cent. 

Private investors accounted for 92 per cent of the Chinese deal volume and 97 per cent of deal value in 2018, up from 83 per cent in number and 60 per cent in volume in 2017.

Investment by State Owned Enterprises dropped to just over $ 1 billion.

The percentage of Chinese investors who said they felt welcome to invest in Australia remained low at 38 per cent but improved from 35 per cent in 2017. But there was also an increase in the percentage who said they felt unwelcome, from 15 to 19 per cent. Fifty-nine per cent said the political debate around China made them more cautious about investing, but this was better than 70 per cent in the previous year.

Influenced by global events

Mr Ferguson, who is also KPMG's NSW chairman, said Australia’s investment links with China were increasingly being influenced by global events rather than domestic issues.

Prime Minister Scott Morrison last month appointed a new ambassador to Beijing and established a $44 million foundation to focus on Australia’s relationship with China in a bid to improve fractured ties, while the opposition has also signalled it wants to work on the relationship.

The foreign investment environment is overshadowed by security concerns about  inbound investments by Chinese technology and telecommunications companies such as Huawei.

The Foreign Investment Review Board has signalled it could follow the US lead and adopt tougher national security rules to stop sensitive assets ending up in offshore hands. The US surpassed China as the largest source country for approved proposed investment n 2017-18 due to an increase in US approvals and a decline in Chinese approvals, according to FIRB's latest annual report.

 

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