Chinese investment into Australia is likely to continue to rise as State Owned Enterprises (SOEs) become more commercially minded and expand their use of a variety of entry strategies, according to a new report by KPMG and University of Sydney China Studies Centre.
Titled Demystifying Chinese Investment, the report analyses Chinese Outbound Direct Investment (ODI) into Australia and the behaviours exhibited by the organisations behind the deals.
Australia has been the biggest single destination for Chinese outward foreign direct investment (FDI) worldwide over the past six years, with investments totalling USD45.1 billion.
Peter Fung, Global Chair, KPMG Global China Practice, says: “We see a significant increase in outbound activity by Chinese investors into Australia and elsewhere. As our new report highlights, Chinese SOEs overseas have shown strong commercial motivation and they operate in a manner similar to many international companies. For example, they are interested in making capital investments to secure high quality, stable supplies of natural resources, acquiring companies to secure technology and new brands and exporting Chinese brands and accessing new markets. Increasingly they are recognising the importance of having strong Australian partners, employees and stakeholder relations.”
The report notes that Chinese ODI in Australia is dominated by relatively few large projects funded by China's central state owned sector. This concentration of established SOEs in a small number of projects sets Australia apart from other international investment locations for China. Of the 11 major Chinese investors in Australia, only two are local SOEs – from Shanghai and Shandong. The remainder are long-established central SOEs with a considerable track record of international activities.
"A more sophisticated understanding of Chinese SOE ownership would be helpful for foreign investment review considerations and government policies," said Doug Ferguson, head of KPMG Australia's China Practice. "The reality is that Chinese SOEs abroad act in many ways like other international corporations."
The report identified four characteristics distinguishing Chinese ODI in Australia from those of other countries – namely, a focus on mining and energy, 'mega-sized' deals, SOE investor dominance, and a preference for investments with listed companies.
Over the last six years (from September 2006 to June 2012) 116 completed deals were recorded by the research partners, totalling USD 45.1 billion invested by Chinese enterprises in Australian businesses. Almost 80 percent of this was directed into mining industries and a further 12 percent into the oil and gas sector. Other industries barely rated in terms of overall ODI volume. Investment diversity has been greatest in New South Wales, where 30 percent of China’s investment volume was directed into real estate, agriculture, architecture, renewable energy, finance and other sectors.
The average size of deals was larger in Australia compared to other countries, with 19 of the completed deals having a transaction value of more than USD 500 million, and almost half having a transaction value of over USD 100 million each.
"A high level of investment is conducive for Chinese participation in infrastructure and transport projects, which are critical to the long-term development of the Australian economy," said Professor Hans Hendrischke of The University of Sydney’s China Studies Centre.
"Given the focus on mining and energy and the resultant size of transactions in these sectors, it makes sense that SOEs would currently dominate investment in Australia, as they have easier access to finance and established networks accumulated through years of minerals trading with Australian businesses."
An assessment of the ownership structure of the 11 largest Chinese investors and their investments in Australia resulted in three preliminary observations. First, unlike other international investment locations for China, the majority of investment is by long-established central SOE’s with a considerable track record of international activities. Although M&A is the most dominant form of Chinese ODI in Australia, the variety of entry strategies used by large Chinese SOE's is the second notable point. Chinese SOEs are additionally behaving similarly to other international investors in Australia.
"SOEs are interested in making capital investments to secure high quality, stable supplies of natural resources, technology and new brands and accessing new markets. Increasingly they are recognising the importance of having strong local Australian partners, employees and stakeholder relations," added Ferguson.
"Commercial pressures have increased significantly on Chinese companies in recent years and investment decisions are driven more by the desire for attractive profit margins than by political considerations. Over the last two decades, SOE reforms in China have been carried out with the aim of transforming them into entities that are viable in a global market economy," he concludes.
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KPMG and The University of Sydney China Studies Centre have, in the past 21 months, undertaken a thorough review of Chinese direct investment in Au...