CHINESE INVESTMENT PLUNGES TO 14 YEAR LOW

Chinese investment into Australia is plummeting, having sunk to its lowest level since 2007, with the total funds now falling steadily each year since 2016 and 75% of Chinese investors reporting they are reluctant to invest because of the political climate. The numbers reveal a sea-change in China’s investment outlook towards Australia. Total investment in 2020 was $2.5bn, a decline of 27% on the 2019 figure of $3.4bn. The number of deals fell away dramatically from 42 in 2019 to 20 in 2020, a decline of about 50% year on year. “This appears to be a trend with no obvious end in sight,” Doug Ferguson, the report’s co-author and head of Asia and International Markets for KPMG Australia, said. “Investment has now fallen 83% since 2016.”

These figures come from the latest KPMG/University of Sydney joint report for 2020 titled “Demystifying Chinese Investment in Australia” and cover investments, mergers, acquisitions, joint ventures and greenfield projects but do not include stocks, bonds and private residential purchases. Asked how the dominant Chinese state-owned enterprises now saw Australia as an investment destination, Mr Ferguson said: “They are wary and focused on other markets.” He said the future of China’s investment into this country lay with smaller, private companies seeking lower risk opportunities.  “The outlook for Chinese investment is mixed and uncertain and we anticipate any future growth to remain muted compared to previous years,” he said.

The extent of the trend, its sharpness and the structural forces in China and Australia driving this downturn, point to a pivotal change in the Australia-China financial relationship. Three core factors are behind the collapse in investment over the past five years: Chinese government restrictions and their shift in priorities away from OECD nations; and far tighter regulatory scrutiny in Australia by the Foreign Investment Review Board with its strong emphasis on national security and declining confidence in the political relationship. The impact of COVID-19 is relevant in 2020 but the downward trend long predated the pandemic. Optimism about Chinese investment is eroding rapidly. Mr Ferguson said the “new realities” had now “disrupted the heady expectations of the past for investment by Chinese companies”.

The extent of the slide shows Chinese investment into Australia fell from $US11.5bn in 2016 to $US1.9bn in 2020. “We are now at the lowest point in terms of investment value and the number of deals since 2007 and it is getting worse each year,” Mr Ferguson said. He said the troubled political relationship was a “material factor”. In addition, surveys conducted with executives from 75 Chinese companies showed that while Australia remained a preferred destination compared with other countries and investors were highly confident about Australia’s handling of the pandemic, alarm signals were being rung. The report said: “75% of the surveyed executives stated the political environment in 2020 has made Chinese companies more cautious to invest in Australia compared with 59% in 2018 and 70% in 2017.

Chinese private investors believe the tense diplomatic situation increased business risks and compliance costs in China and Australia. Chinese state-owned investors registered increased communication problems between headquarters and subsidiaries, reputation decline for Australian subsidiaries in the headquarters’ corporate hierarchy, delays in headquarters’ approval and concern about the security of assets and supply chains. Business commentator Terry McCrann says China will not keep “handing” its money over to buy Australian iron ore amid its search for resources in other countries. “From the business perspective of Chinese investors in Australia the political mistrust between the Australian and Chinese governments has become mutual.

66% of the surveyed executives stated the Chinese government was less supportive of investment in Australia than previously, while 75% of respondents felt the Australian federal government was less supportive of Chinese investment in Australia than previously.” Beijing’s policies on capital are a critical feature of the story. A total of 54% of Chinese investors reported concern and said it was “difficult to get capital out of China in 2020”. Evidence pointed to less funds being available for overseas investment as well as a reordering of priorities to developing nations. In terms of investment into Australia, mining was the largest recipient sector in 2020 with 37.6% of total Chinese investment followed by commercial real estate at 36.1% and the services sector running at 21%. There was no Chinese investment in renewable energy, oil and gas or infrastructure.

Returns are being squeezed. Only one-third of executives believe their turnover will grow in 2021 and 39% say it will decline. The survey shows a tougher, more pragmatic outlook by Chinese investors, there is more emphasis on synergies, profitability and targeted opportunities. On the other hand, much of China’s total foreign investment is linked to Belt and Road agendas. The global context is fundamental to the story. Global direct foreign investment fell by one-third in 2020 and the total fall in direct investment into developed economies was 58% reaching an 80% fall in Europe. Total foreign investment into Australia halved from $US39bn in 2019 to $US20bn in 2020. “China still remains a significant player in our overall foreign investment,” Mr Ferguson said.

He said China’s 2020 investment into the UK and Europe fell by an even larger margin than its investments into Australia. Yet in 2020 about 1.5% of China’s total foreign investments came to Australia, a far lower figure than in the past. Asked what Chinese investors said was their greatest problem dealing with Australia, Mr Ferguson said: “Getting Australian regulatory approval.”

Source: Compiled by APN from media reports

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