Chinese Investment fallout in Australia; Are there any Bright Spots?

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 Chinese Investment fallout in Australia; Are there any Bright Spots?
                                 

Summary

  • Chinese investment in Australia dropped 58% to A$3.5 billion in 2019, with deals dropping from 74 in 2018 to 42 in 2019 due to tighter FDI measures.
  • Food and agribusiness sector and Tasmania region received the largest share of Chinese investment in 2019, accounting for 44% share of investment.
  • FDI regimes are likely to be stricter in future as governments look to protect their national economic security.
  • AU-China trade tensions intensified after Australia called for an investigation into the origin of coronavirus and raised voice against Beijing’s Hong Kong law.
  • China recently imposed tariffs on Australian barley and banned beef imports from the country, with sanctions against travel and education in Australia.
  • Australia may look for export markets diversification to weather the trade threat from China.

Brimming stiffness over COVID-19 outbreak has undeniably caused a stress in Australia and China relationship. Australia has been one of China’s top FDI destinations, and there have been signs of increasing conflict between the two nations.

As per a report by KPMG and the University of Sydney demystifying Chinese Investment in Australia, Chinese investment in Australia fell 58% from A$8.2 billion in 2018 to A$3.5 billion in 2019. The report revealed that the number of Chinese investment deals fell 43%, from 74 in 2018 to 42 in 2019, with an average deal size down to A$81.75 million.

Since 2008, Chinese firms have supplied more than US$ 107 billion to Australia. The decline in new Chinese investment was in contrast to significant growth in the bilateral trade which rose by 21% n 2018-19 by achieving the highest volume ever, i.e. A$235 billion.

However, the downturn in 2019 brought Chinese outbound direct investment (ODI) to one of the lowest since investment from China was at the top in mining and energy in 2008.

Trade relations between China and Australia seem to have deteriorated in recent weeks after Australia called for an international investigation into the origin of COVID-19. While, China imposed tariffs on Australian barley and banned imports of beef from 4 Australian shambles, 3 weeks ago, which added to the suspicion that tariffs were in a sense punishment for Australia’s support for an inquiry into coronavirus origin.

Beef, barley and coal trade row

China announced a 73.6% anti-dumping tariff and 6.9% subsidy charge to all Australian barley imports. Tariffs are set to be in place for 5 years and will impact demand, resulting in enormous losses for Australian farmers, as Australia exports above 50% of barley to China.

The import tariffs are estimated to leave a void of A$500 million on Australia and may see the country relying on other trading partners like Japan, Saudi Arabia and Thailand.

China also banned 4 Australian meat processing plants from exporting to China for breaches of Chinese import regulations.

On June 9, the Ministry of Education of China stated that students must reassess their decision to study in Australia, intimidating international education (Australia’s 4th largest export industry) worth A$38 billion annually. There was also a warning on Chinese tourists to visit Australia from Beijing.

ALSO READ: China Suspends US Pork and Soybean Imports; Tale of Australian Pork Farming Space

There have also been reports that China is suppressing import quotas of Australian coking coal and is planning on the suspension of imports of Australian thermal coal from July 1. Subsequently, Australian coal mining firms have been looking to diversify cargoes to southeast Asia, particularly, Vietnam and build market share in mature markets like north Asia.

Chinese investment by industry, geography and ownership

Australia’s food and agribusiness sector received the largest share of Chinese investment in 2019. While, 3 deals were completed in 2019 for the sector amounting to A$1528.74 million, making it the biggest sector receiving 44.5% of the total investment in 2019.

However, the investment was primarily driven by the acquisition of Bellamy’s Australia Limited by China Mengniu Dairy Company Limited for A$1.5 billion. Commercial real estate accounted for the second largest share, grabbinh 43% of Chinese investment with residential investment being the most popular segment.

By geography, the Tasmania region got the largest percentage of investment in 2019 by China due to the acquisition of Bellamy’s Australia. New South Wales was second with A$1 billion or 31% of the total investment, followed by Victoria.

While investment in New South Wales was focussed in commercial real estate and service, mining was the focus in Western Australia.

Source: Demystifying Chinese investment in Australia Report, June 2020

Source: Demystifying Chinese investment in Australia Report, June 2020

By ownership, private investment went on to lead, with 84% of the total value and 76% of the deals in 2019. The report states that there is an expectation that the share of privately-owned Chinese companies will rise, while state-owned investment will fall.

It also being predicted that in upcoming period, mixed ownership of conglomerates are the entities that receive investments via state-owned capital, and non-state-owned capital in future.

Outlook on future investments

Chinese investment in Australia has been falling significantly for the past two years. There has been a steep fall in the value and number of transactions reflecting an end of the investment boom in Australia.

Tightening of Chinese ODI regulations, moving away of state-owned enterprises investment from developed markets and negative Chinese perceptions, with tightening of regulations by Australia seem to have contributed to falling investment trend.

Recent changes in the Foreign Investment Review Board (FIRB) regulations in late March 2020 due to COVID-19 has allowed for a longer 6-month review process with no definite timeframe that has impacted all foreign investors.

FDI regimes are likely to intensify further, as governments are now keen on safeguarding critical infrastructure, tech and any asset that is crucial for the nation’s economic wellbeing. This seems to be have been taken negatively by Chinese investors.

Trade borders between both the countries are closed in the medium-term with flights restricted to transport respective citizens back to their home and limited air freight for perishable product supplies. This can impact trade exports in the short to medium term, which is disabling new investment deal. Nevertheless, there are many Chinese firms now that are launched and have operations in Australia that are expected to invest, and push deal activity locally as well as the bilateral trade.

Besides, Australia may look for export diversification options into different markets in a bid to safeguard its trading position, amidst continuous threat from China utilising its trade tools to supress Australia’s voice against origin of virus and passing of nation security law in Hong Kong.

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