Chinese investments into Australia at lowest point in decade
Chinese investment into Australia declined for the third year in a row last year, marking the lowest level of investment since 2008 according to KPMG. Investments are unlikely to pick up in the short or medium terms.
Back in 2008, Chinese Overseas Direct Investment (ODI) into Australia’s mining and energy sectors boomed, to the extent that the total investments for the year exceeded $16 billion. Investment levels have fluctuated since, but have remained in and around the $10 billion mark since 2010.
A sharp decline began in 2017, while 2018 marked an eight-year low with investments plunging to just over $6 billion. The downward trend has continued into last year with a fall of nearly 60% in investment value to just over $2 billion. According to KPMG’s researchers, the trend of declining investments is here to stay for a number of reasons.
“The reasons for the decline are many and no one country or issue is responsible. Tightening Chinese ODI regulations, SOEs (state owned enterprises) investment moving away from developed markets and towards the BRI projects and Latin America, and negative Chinese perceptions on stricter investment regulations by the Australian government have all contributed to the lower levels of investment,” said Doug Ferguson, Partner in Charge for the Asia & International Markets at KPMG.
As explained in KPMG’s report, the decline is not indicative of deteriorating economic relations. Bilateral trade between the China and Australia remains strong. In fact, trade increased by more than 20% over the last financial year, while many businesses continue to operate across the two markets.
The decline is indicative of broader dips in Overseas Direct Investment from China in several developed markets, brought about by tighter regulations within China among other shifts. Although Australia registered the largest decline in investments, ODI declined across the US and Canada last year as well.
Meanwhile, more than $2 billion of ODI did flow into Australia last year. According to the report, the lion’s share of this investment was driven by one major deal – Mengniu Dairy Company’s acquisition of Bellamy’s Australia. The acquisition amounted to more than $1 billion, accounting for over 43% of Chinese ODI into Australia last year.
The deal positioned the food & agribusiness sector as the top economic segment for investments, at 44% of the total. Commercial real estate, meanwhile, drew the second largest share of investments at 43%. Investments in this space more than halved over the last year, offering a more accurate reflection of the broader investment landscape. Of the $1 billion that did flow into the commercial real estate sector, the majority was taken up by residential development, followed with some distance by industrial real estate.
While food & agribusiness combined with commercial real estate made up nearly 90% of the ODI, the rest was made up by the services and mining sectors, which drew investments of well over $100 million each. China also invested a bit in renewable energy, which drew just over $10 million.
By region
The Bellamy’s Australia deal also had a significant impact on the regional distribution of investments. The food & beverage company is headquartered in Launceston, which positioned Tasmania as the biggest destination for Chinese investments for the first time ever.
New South Wales followed as the second most popular destination, accounting for most of the services and commercial real estate investments. Sydney’s expanding commercial real estate market no doubt drove up investments in the region. Following at some distance was Victoria, while Queensland and Western Australia drew 6% each. South Australia accounted for only 1% of all investments.
The number of deals declined across Australia, falling from 74 in 2018 to just over 40 last year. KPMG notes that the average deal size has also dipped, with nearly 80% falling below the $100 million mark. The Big Four accounting and advisory firm suggests that the decline across the board is likely to be a fairly persistent scenario, further exacerbated by the Covid-19 crisis.
“The domestic health and economic effects of Covid-19 are all consuming for both the Chinese and Australian governments and companies,” said Ferguson. He points to the fact that borders of both countries are closed, while the only flights currently operational are for repatriation purposes. Trade will be significantly impacted by this scenario, which will dampen investments.
Meanwhile, most markets are now tightening their foreign direct investment (FDI) regulations, looking to protect their local businesses from opportunism. There was already a growing suspicion around Chinese SOE investments in the pre Covid-19 landscape, and the new conditions are unlikely to foster vibrant trade relations.
