Spotlight Asia - Assessing the Risks and Rewards of Chinese Investment in Australia

Date: Sep 2015

Contents include:

  1. An overview of Chinese FDI and M&A into Australia
  2. A look at the China-Australia Free Trade Agreement and what it means for Chinese investment in Australia
  3. Analyses of activity and trends in the mining, real estate, agriculture and infrastructure sectors
  4. An interview with Violet Ho, Senior Managing Director, and Richard Dailly, Managing Director at Kroll, on conducting due diligence on foreign investors or buyers before entering into crossborder transactions

1. Chinese investment in Australia

In 2014, China’s outbound direct investment soared to a record high of more than US$100bn, a large portion of which has been focused on its southern regional neighbour Australia. For the first time, China became Australia’s largest source of approved proposed investment with an aggregate of US$19.7bn in 2013-14, a 75% increase from US$11.3bn in 2012-13, according to the Australian government. China outperformed long-time top investor, the United States, which yielded US$12.5bn worth of approved investment proposals, down from US$14.7bn in the previous year.

For M&A, 2014 closed with 20 announced deals worth US$3.7bn from Chinese bidders, down from US$4.8bn in 2013, albeit at almost twice the deal volume, due in part to a shift towards mid-market deals. Activity in H1 2015 kept pace with 2014, closing with 10 announced deals grossing US$1.8bn. The outlook for the rest of the year, however, is clouded amid economic uncertainty arising from China’s deceleration in growth, and compounded by its stock market volatility.

China’s outbound investment has traditionally been driven by state owned enterprises (SOEs) in search of natural resources, raw materials and technological know-how to fuel the country’s industrialisation and modernisation efforts. Much of this offshore interest has been channelled to Australia, by means of its economic maturity and low political risk, regulatory efficiency and transparency, rule of law, strong equity markets, wealth of quality resource assets and geographical proximity to China. Australia’s low cash interest rates, combined with a bearish Australian dollar, have intensified its appeal.

While China’s interest in Australia has been consistent, it is nonetheless a transformation in the investment landscape that gave rise to 2014’s record values. China’s investments in Australia are changing: China’s emphasis has swung from resource-intensive investments to include more acquisitions of real estate, agribusiness, tourism, life sciences, renewable energy and infrastructure assets.

2. The China-Australia Free Trade Agreement

The China-Australia Free Trade Agreement (ChAFTA) was signed on 17 June 2015, paving the way for greater ease of trade between the two nations. A possible forerunner to growth in the M&A market, the ChAFTA signals the Australian government’s recognition of the importance of Chinese capital as fuel for the domestic economy.

3. Analyses of activity and trends in the mining, real estate, agriculture and infrastructure sectors

Mining

Traditionally favoured by Chinese SOEs, mining was the top sector for M&A in 2014. However, activity was not as intense as in years past, due in part to a paucity of the sort of mega deals that characterised Australia’s decade-long mining boom, such as the US$7.25bn merger between Australia’s Gloucester Coal
and Chinese-owned Yancoal Australia in 2012.

Real Estate
In real estate, FIRB approvals in 2013-14 totalled US$8.8bn for Chinese investment. According to Credit Suisse, Chinese buyers acquired US$6.2bn worth of Australian residential property in 2013-14, and another US$42.3bn is expected to be invested in the next six years, far more than the US$20bn over the past six years. The Australian government requires non-resident foreign investors to buy new-build properties instead of established housing, and investment interest has been focused on apartments close to city centres, universities and public transportation networks, as opposed to detached houses.

Agriculture and agribusiness
Chinese investment in agribusiness is driven by a need to ensure food security and to maintain safe sources of food products amid a growing number of scandals and food scares at home. To tighten its scrutiny of foreign purchases of farmland, the FIRB lowered its screening threshold from AU$252m (US $179.6m) to AU$15m (US$10.7m) from 1 March 2015. Australia’s agricultural exports are placed at a premium for the country’s pristine reputation in upholding uncompromised food safety standards and quality.

Infrastructure
Given their close proximity to major Asian trading hubs, the privatisations of Australian state-owned ports have been particularly attractive to Chinese SOEs, as control of such premium ports would streamline trade logistics and transportation for China’s enterprise interests in other sectors.

4. Due diligence on investors makes for deal success

  • As an Australian company, what risks should a potential recipient of investment consider before working with a Chinese investor?
  • How can anyone in Australia truly know who they are dealing with in China, given China’s opacity?
  • Should Australian businesses be concerned that some investments might simply be a way of off-shoring or laundering money?

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