Record investment in infrastructure and agriculture helped propel overall Chinese investment in Australia to US$11.49 billion...
Record investment in infrastructure and agriculture helped propel overall Chinese investment in Australia to US$11.49 billion (AU$15.36 billion) in 2016, the second highest level since its 2008 peak. Continuing last year’s growth trend, a record number of deals saw Chinese companies continuing to diversify their investments into different industries and geographies – with Energy sector investment surpassing Mining for the first time. Tasmania received a record AU$280 million in agribusiness investment, while NSW remained the dominant state recipient of Chinese investment (53 percent).
On the international stage, Australia maintained its position as the second largest recipient of aggregated Chinese direct investment, attracting around US$90 billion since 2007, behind the United States which has received more than $100 billion of investment in the same period. However, Australia’s relative growth has fallen behind other countries.
In Australia, commercial real estate1 remained the dominant sector for investment for the third year running, accounting for 36 percent of the total deal volume. However the nature of real estate investment shifted significantly in the past twelve months, with residential development sites (commercial developments) accounting for 51 percent of real estate deal value in 2016 (compared to just 27 percent in 2015, when office investment was dominant).
Record Infrastructure investment of AU$4.34 billion was achieved, driven by the multi-billion dollar Asciano Ltd and Port of Melbourne transactions. Agribusiness investment grew from a humble $375 million in 2015 to over AU$1.2 billion in 2016 – its highest year on record. Energy investment topped AU$1.15 billion while healthcare investment also remained strong at AU$1.35 billion.
2016 was a breakthrough year for Chinese private company investors, who accounted for 76 percent of deal number and nearly half of the total project value.
These are among the key findings of the latest Demystifying Chinese Investment in Australia (May 2017) report by KPMG Australia and The University of Sydney, analysing Chinese outbound direct investment into Australia in calendar year 2016i. Knight Frank contributed data and analysis on real estate transactions, and Powell Tate provided insights on gaining a social license to operate in the agribusiness sector.
“There are signs of a growing maturity by Chinese investors in the Australian market – with more private company investment and a higher number of joint ventures alongside more repeat investments by established Chinese companies,” commented report co-author, Doug Ferguson, Head of Asia & International Markets, KPMG Australia. “The past year was a breakthrough year. Despite the impact of uncertainties about Australia’s foreign investment review regime, Chinese investment in Australia continued to diversify and records were smashed.”
Professor Hans Hendrischke, Professor of Chinese Business & Management at the University of Sydney Business School commented: “Australia has proven itself to be a preferred destination for Chinese capital, but we must be cognisant that the growth in investment is slowing compared to other parts of the world such as the United States and the EU. Going forward, efforts by the Chinese Government to increase oversight and accountability for overseas investments as well as geopolitical factors are expected to have an impact on investment flows globally.”
Investment by Industry
Chinese direct investment in Australia continued to be dominated by commercial real estate (36 percent), with an increased focus on infrastructure (28 percent) and continued material investment in the healthcare sector (9 percent). Mining fell to 5 percent (down from 9 percent the previous year), and for the first time was outperformed by Energy (gas and oil) at 8 percent. Agribusiness had a standout year, leaping from 3 percent to 8 percent of total investment.
Commercial real estate remained the leading sector for Chinese investment in 2016, down marginally from 2015. The focus of investment changed over the past year with major office investments, particularly in the gateway cities of Sydney and Melbourne, more difficult to secure. Chinese investment in residential development sites increased further, branching out from inner city high rise developments to encompass major medium density and greenfield developments. Hospitality continued to be of interest, in line with Chinese tourism growth, with Chinese investors acquiring AU$1.7 billion of hotel assets over the past two years, and expectations that this level of investment will continue to accelerate over the coming year.
Infrastructure was the second largest recipient sector for capital by Chinese investors, driven by two mega-deals – Asciano Ltd and Port of Melbourne. Chinese companies with technical expertise and financing capabilities remain keen to work with Australian and international partners in infrastructure provision.
In the Agribusiness sector, a record number of 12 deals worth AU$1.2 billion was invested by Chinese companies in 2016, marking a three-fold increase from the value in 2015. Investment concentrated in the dairy, meat, seafood and wine sectors driven by the rapidly rising demand for premium quality food in the Chinese market.
Investment in healthcare was dominated by the Genesis Care deal in which China Resources Holdings invested AU$383 million. Other projects included health care providers and pharmaceutical companies.
In mining, eight Chinese mining investments totalling AU$839 million in gold and other non-ferrous metals were recorded. Compared to 2015 this was a decline of 35 percent, with mining falling to sixth position of investment sector priorities.
Investment by Geography
NSW attracted over half (53 percent) of all investment in 2016; with Victoria in second place (25 percent). South Australia attracted AU$1.27 billion in 2016 compared to AU$540 million in 2015; and Western Australia grew to AU$1.38 billion from AU$114 million in 2015. Tasmania also returned as an investment destination, with $280 million in agribusiness transactions.
Investment by Deal Size
Unlike previous recent years, there was an even spread of deals by deal size in 2016 ranging between AUD 100 to 500 million (27 percent) and AUD 25 to 100 million (47 percent).
2016 saw few mega-sized infrastructure deals, with commercial real estate, agribusiness, health, energy and mining deals mainly below AUD 500 million and generally within the AUD 25-200 million range.
Investment by Ownership
2016 featured the largest number of deals overall and the largest number of deals by private Chinese company investors. Private investors signed up 78 deals with a total value of AU$7.6 billion. Private investors were the most active in commercial real estate, agribusiness and healthcare sectors.
Regulatory changes and outlook
The 13th Five Year Plan (FYP) provides a framework for the design and implementation of policies to guide and facilitate China’s transition from an investment-intensive, export-led growth model to one driven by consumption and innovation.
“China’s 13th Five Year Plan has the potential to usher in a ’golden age’ of inbound and outbound investment activity through the implementation of an ambitious and comprehensive program of reforms. This will help drive ongoing investment by Chinese companies in Australia, while presenting partnership and development opportunities for Australian businesses across multiple industries,” said Vaughn Barber, Global Chair of KPMG’s Global China Practice, based in Beijing.
Further, Chinese government agencies are taking steps to strengthen their oversight of overseas investments by Chinese companies. The main considerations behind these policies are understood to be mitigating excessive capital outflows (which are having a negative effect on the value of the RMB); and reducing financial risks (caused by outbound investments that have not undergone appropriate due diligence, that are overly leveraged and/or do not make sense from a business and/or financial perspective).
Real estate, hotels, film, entertainment and sports clubs are among the industries singled out as exhibiting a tendency for “irrational” overseas investment2. This is expected to impact investment flows to these sectors in the future. However, the report notes this is not necessarily bad news.
“In our view, strengthening regulatory oversight of Chinese overseas investments should lead to better, more value-accretive transactions for China and host countries. We believe China’s ODI will continue to exhibit robust growth over the long term, and especially in the sectors and markets whose development is necessary to achieve the goals laid out in the 13th Five Year Plan,” said Mr Barber.
Mr Ferguson concluded: “Australia has a strategic opportunity to grow and diversify an already strong economic partnership through deeper cooperation with China. However, clarity will be key for any new investment regulation that emerges from Australia’s upcoming Foreign Policy White Paper. Specific and transparent policy guidance will encourage investment and ensure partnerships between foreign and local companies continue to drive co-operation with Chinese investors.”
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1Note ‘real estate’ referred to in this report does NOT include residential apartment and homes sales.
2According to a statement jointly released by the National Development and Reform Commission, Ministry of Commerce, the People’s Bank of China and the State Administration of Foreign Exchange, Xinhuanet.com, 6 December 2016.
The dataset is compiled jointly by KPMG and The University of Sydney Business School and covers investments into Australia made by entities from the People’s Republic of China through M&A, joint venture and greenfield projects. The dataset tracks Chinese investment by subsidiaries or special purpose vehicles in Hong Kong, Singapore and other locations. The data, however, does not include portfolio investments such as the purchase of stocks and bonds which do not result in foreign management, ownership or legal control.
The database includes direct investments recognised in the year in which parties enter into legally binding contracts and if necessary, receive mandatory FIRB and Chinese Government investment approvals. In certain instances, final completion and financial settlement may occur in a later year. For consistency, the geographic distribution is based on the location of the Australian invested company and not on the physical location of the actual investment project. Completed deals which are valued below USD 5 million are not included in our analysis, as such deals consistently lack detailed, reliable information.
Unless otherwise stated, the data referred to throughout this report is sourced from the KPMG/University of Sydney database, and previously published reports. KPMG and The University of Sydney team obtains raw data on China’s ODI from a wide variety of public information sources which are verified, analysed and presented in a consistent and summarised fashion. Sources include commercial databases, corporate information, and official data from Australian and Chinese sources including Australian Bureau of Statistics, Foreign Investment Review Board and Ministry of Commerce P.R.China.
The data is regularly updated and continually revised when new information becomes available. In line with international practice, KPMG/University of Sydney traditionally record deals using USD as the base currency.