Big deals and state-owned enterprises the defining features of Chinese investment

CHINA’S preference for deals at the bigger end of the investment spectrum may account for the high level of attention they receive at a political level.

A new report into investment in Australia found that, although Chinese investment in Australia had been falling in favour of the African and US resources sectors, investments in Australia tended to be via large transactions.  

More than 80 per cent of Chinese investment between September 2006 and July 2012 involved deals of more than $US500 million, according to ‘Demystifying Chinese Investment’, a report published last week by KPMG and the University of Sydney.

The report said Chinese investment was “essential for infrastructure and transport projects, which are critical to the long-term development of the Australian economy”. 

However, large deals tend to attract a lot of media attention, which can create negative public sentiment.

“The recent Lowy Institute survey said 56 per cent of Australians thought there was too much Chinese investment in Australia, when the reality is less than 1 per cent of accumulated foreign investment in Australia has come from China,” KPMG chairman of Australia China Practice WA, Duncan Calder, said.

Not surprisingly, the report found 99 per cent of Chinese investment in WA during that six-year period was in the mining sector.

The report revealed China’s direct investments in Australia were signified by four key trends: a strong focus on mining and energy; a preference for large investment deals; a dominance by state-owned-enterprises; and a preference for investing through publicly-listed companies or mergers and acquisitions. 

Ninety-five per cent of China’s direct investment in Australia involved SOEs; 25 per cent more than the global average.

It is the large size of the individual deals and the state-controlled nature of the Chinese businesses making them that have attracted political attention. 

Recently, federal opposition leader Tony Abbott proposed changes to the size of transactions on agricultural land that could be examined by the Foreign Investment Review Board – to $15 million or more from the current trigger of $244 million.

However, the report argued that the transaction size wasn’t a pressing issue as Chinese SOEs partaking in international investment behaved similarly to international companies.

“Commercial pressures on Chinese companies have increased significantly in recent years, with investment decisions being driven more by the desire for attractive profit margins than by any political considerations,” the report said.

West Australian Farmers Federation president Dale Park supported this claim, saying that regardless of whether investment was backed by a sovereign or private party, they were still required to adhere to Australia’s commercial laws.

“There’s the potential for larger investment but it really comes down to whether or not we want it,” Mr Park said. 

“The Chinese are very sensitive to public opinion and if they perceive they aren’t wanted here then they’ll take their business elsewhere, which will be to our detriment.”

Between 2006 and 2012, 116 direct investment deals were made by Chinese entities; of these deals 92 were made by 42 SOEs.

The study found Chinese SOEs favoured ASX-listed companies and mergers and acquisitions as they provided greater transparency through public and private company reporting.

China’s merger and acquisition strategies ranged from pure off-take to joint ventures, strategic alliances, creeping acquisitions and control, the report said. 

Aside from the often-contentious issue of Chinese ownership of Australian resources and land, the recent drop in the iron ore price and the Chinese government’s initiative to have slower, more stable growth has many worrying that the mining boom may be slowing.

Mr Calder, who is also WA president of the Australia China Business Council, said there was still a way to go before any significant, sustained falls in Chinese demand that would translate into further significant falls in commodity prices.

“There will be hiccups along the way and people will regularly misinterpret them to be much worse than they are,” he said.

“China will continue to grow but it won’t be an even, flat gradient; instead there will be steep and shallow periods of growth and it’s important that Australia is set up to accommodate for that.”

With 99 per cent of Chinese funds in WA being funnelled into the mining sector, there’s recognition that increased diversification is one way to deal with the increased volatility in the resources market.

 “I think resources and energy will still remain our primary industry, however … we need to be more welcoming of Chinese investment and seize opportunities emerging from new segments,” Mr Calder said.

“There’s been an intensification of interest from China in agriculture over the last 18 months but that has had very little translation into actual investment.”

Speaking along these lines at Canberra University last week, China’s deputy ambassador, Xue Bing, urged Australia to diversify its business with China and make a more concerted move towards finance, infrastructure and agriculture.

Mr Calder said the untapped potential of Australia’s farming land provided a “terrific opportunity for Australia and China to co-operate”. He said the vast majority of agricultural produce was exported, and that fears for Australian food security were ill-informed. 

“We have a shortage of farmers and we have a shortage of youth in farming, we ought to be looking at schemes to get more investment and more support for young farmers,” Mr Calder said.

“We could look at schemes to encourage the Chinese to support young farmers as part of its investment.”

Another industry with significant opportunities is education; not only does it bring tuition-based revenue, it has strong ties with tourism. 

Murdoch University director of international student liaison and recruitment, Dirk Mulder, said the Chinese placed great value on overseas education.

Since 2007, Perth Education City, the state’s peak industry body for international education, reported a 73 per cent increase in Chinese higher education enrolments.

However, Mr Mulder said the strength of the Australian dollar and limited supply of tertiary institutions, particularly in WA, had led more Chinese students to go to the US since that country eased its visa application process a couple of years ago.