Pearls and Irritations

Chinese investors are fast abandoning Australia as a frosty bilateral relationship dampens trade, with a report showing Chinese investment in Australia nosedived by almost 70 per cent last year to the lowest level since 2007.

A report by KPMG and The University of Sydney found Chinese firms laid out $778 million in Australia in 2021, compared to $2.5 billion in 2020.

At its peak in 2008, when Beijing desperately needed natural resources to boost the economy, investors from China splurged about $US16.2 billion  ($19.1bn based on 2008 exchange rate) in Australia, which was 24 times more than last year.

The number of deals last year almost halved to 11, from 20 in 2020. Four transactions — related to acquiring iron ore and lithium mines — accounted for most of the total Chinese investment inflows last year.

Since 2017, Chinese investment in Australia has been plummeting, but last year’s results have shocked experts who have been monitoring the trend.

“The decline really has now gone to a level where there is literally none or very little investment coming from China,” Hans Hendrischke, report co-author and professor in Chinese business and management from the University of Sydney, told ABC News. “We are surprised in a sense that it’s dropping so fast.”

While there has been a diplomatic breakthrough and a significant shift in tone towards China from the new government, experts say it might take some time for Chinese investors to return.

Why the big fall?

In recent years, Chinese investors have been facing the double whammy of a domestic clampdown on capital export and stricter screening from Australian regulators.

In 2016, Beijing started to impose restrictions on capital outflows due to concerns over excessive debt, inappropriate investment and capital flight.

At the same time, Australia’s Foreign Investment Review Board’s (FIRB) tougher application process subdued interest from potential Chinese buyers.

Professor Hendrischke said the current geopolitical climate was another obstacle.

“US, very strongly, and Europe, [including] the UK, Germany and France, are screening Chinese investment now for any potential conflicts that they could have with Chinese controls over certain assets [and] Australia is part of that,” he said. “The relationship between Australia and China is not a very good one at the moment and diplomatic contacts are interrupted. That does not allow us to go ahead or even approve more investment.”

How much does China own?

Traditionally, Chinese firms view Australia as a “test market”. They get a “Western experience” by investing in Australia and then expand to other similar economies.

Analysts argue the huge loss of foreign funding from China means Australian companies may miss out on future opportunities, including access to the Chinese domestic market.

Between 2007 and 2021, China’s state-owned enterprises and private companies poured a total of $158 billion into Australia, including by investing or acquiring mining and energy companies, infrastructure, wind turbine farms and a dairy processor.

Last year, Suzhou CATH Energy-Technologies invested $318 million in lithium explorer AVZ Minerals and Clive Palmer’s Balmoral Iron was bought by CITIC for $187 million, according to the report.

In 2017, Chinese mining group Yancoal acquired Rio Tinto coal assets Coal & Allied, including the Hunter Valley’s Mount Thorley and Warkworth sites.

Two of Australia’s biggest energy companies were acquired by Chinese firms in the past decade.

Energy Australia was sold to China Light and Power Company by the NSW government in 2011, while the sale of Alinta Energy to Chinese company Chow Tai Fook was approved by then-treasurer Scott Morrison in 2017.

In terms of infrastructure, Chinese company Landbridge Group secured a 99-year lease of Darwin Port for over $500 million in 2015, and a Chinese-backed consortium successfully bid $1.75 billion for a 98-year lease of the world’s biggest coal port, the Port of Newcastle, in 2014.

However, both deals drew criticism from politicians and national security experts.

According to 2021 government reports on foreign ownership of agricultural land and water, Chinese companies were also big stakeholders in those areas.

Currently, 14.1 per cent of Australia’s agricultural land is foreign owned, and China is the largest foreign owner (2.3 per cent).

China is also the third-largest stakeholder of Australian water behind Canada and the US, owning 604 gigalitres or 1.5 per cent of the total Australian water entitlement.

About 11 per cent of the Australian water is foreign owned.

Strategic shift amid geopolitical tensions

Under the “going out” strategy, initiated by the Chinese government at the turn of this century, Chinese firms were encouraged to invest aboard.

The aim was to secure natural resources and intellectual property to support the growth of the economy. “Over the last decade or so, China has really become one of the world’s largest foreign investors,” according to Gerard Burg, senior economist at National Australia Bank.

“This was a conscious decision. Initially, it was very heavily resource intensive. A lot of investment in countries like Australia was seeking access to things like iron ore and coal.

“But more recently, it has moved away from those sort of investment targets, more towards things like technology.”

Professor Hendrischke agreed, saying that after the mining boom, when state-led Chinese firms acquired enough assets, they shifted towards health care, agribusiness and renewable energy.

But more recently, as the geopolitical competition between China and the US flared, investment interest in Australia shifted from bigger acquisitions to safe assets.

About one-third of total investment over the past two years was held in commercial real estate. “There is a degree of insecurity and uncertainty,” Professor Hendrischke said. “How the relationship between the US and China plays out over the long term will have an impact on Australia.”

The report also found Chinese companies were flocking to Europe and countries associated with the Belt and Road Initiative. Last year, Chinese investment in Europe grew by one-quarter.

“Just as we’ve been debating how to diversify away from China here in Australia, China has already started diversifying away from Australia in this regard,” Pichamon Yeophantong, a senior lecturer at UNSW Canberra, said.

Concerns over data accuracy

Despite the pandemic, China has continued to invest abroad at a steady pace.

According to China’s Ministry of Commerce, outbound direct investment from China rose by 9.2 per cent to $208 billion.

In 2020, while investment globally was falling, China’s government claimed to be the world’s largest investor, with total spending of $220.5 billion.

Economists have noticed big discrepancies between official and unofficial measures, such as the American Enterprise Institute’s China Global Investment Tracker.  “The key destinations for China’s private investment, according to that official data, have been Hong Kong, as well as two notable tax havens, the British Virgin Islands and Cayman Islands.

“One possibility is that the investors are trying to mask the origin of investment funds. By going through the tax havens, they can wash away the concerns in other countries about Chinese investment.

“Or it’s the possibility that Chinese firms and high-net-worth individuals maybe try to get their capital out of China. That would be a major negative for China’s long-term growth prospects, particularly concerns around its financial sector.”

President Xi Jinping’s “common prosperity” policies have sparked fears of wealth redistribution in recent years, especially in the tech and financial sectors.

Mr Burg noted that Australian data showed the British Virgin Islands and Cayman Islands were the sources of the ninth-largest and 20th-largest stock of foreign direct investment in 2020, while Hong Kong ranked 11th overall.

Why is China accused of ‘debt trapping’ poor nations?

China’s official data also shows Chinese investment in countries affiliated with the Belt and Road Initiative increased by 14 per cent to $28.6 billion last year.

The initiative aims to connect more than 65 countries across various continents for trade, with a particular focus on infrastructure-starved developing nations.

It has also been widely viewed as a tool for Beijing to exercise soft power.

But the lack of transparency in Chinese loans terms and the alarming debt levels among poor nations have sparked speculation about “debt-trap diplomacy”.

The theory is when a country defaults or keeps borrowing more to repay its loans, Beijing will have some leverage in demanding concessions or other advantages in exchange for debt relief.

“China’s share of outstanding external debt to emerging market countries has increased sharply over the past decade,” Carmen Altenkirch, from asset management company Aviva Investors, said.

“This reflected a desire on the part of some emerging market governments to access capital for infrastructure investment, and a willingness on the part of Chinese entities to lend. “China is one of the largest creditors to emerging market countries at a time when debt is, or is quickly becoming, unsustainable for many.”