Chinese Investment in Australia

Investment has been one of the most contentious issues in the bilateral relationship. As a small country with a low savings base, Australia has always relied on foreign capital to fund the domestic investment necessary for economic growth. But this investment has previously come mostly from the US, the UK and Japan. China’s rise as a global economic power, and natural complementarities between the Australian and Chinese economies, means that China is now the great hope for greater capital inflows for the country. But while the Australian and Chinese business communities push for increased Chinese investment, polls consistently show that a majority of citizens believe that Australia is ‘allowing too much investment from China’, making foreign investment a major political issue in the Australia–China relationship.

Overall, China holds the fifth-largest stock of accumulated Outbound Direct Investment (ODI) in Australia — behind the US, the UK, Japan and the Netherlands — amounting to almost A$30 billion and accounting for four percent of Australia’s total ODI stock. Reports indicate that Australia was the second-largest destination for Chinese ODI from 2005-2014 — behind the US — and comprised twelve percent of total Chinese ODI.

It is difficult to give precise information on investment as only investments over a certain size are monitored, hindering the ability to measure smaller investments, such as in real estate. Large-scale investment was for a long time concentrated in the resources sector [topic page link], with approximately eighty percent of recorded Chinese investment from 2005-2013 going into mining projects. But this trend changed in 2014, as mining and energy accounted for only nineteen percent of Chinese ODI in Australia, overtaken by commercial real estate at forty-six percent and infrastructure at twenty-one percent.

Australian investment in China is comparatively minor with an accumulated stock of A$6.35 billion, equal to less than two percent of Australia’s outgoing ODI stock and less than one percent of total ODI in China. This is mainly because China has high foreign investment barriers, particularly in resources and finance, and because of Australian lack of familiarity with the Chinese business environment.

Chinese ODI into Australia has long been dominated by State-Owned Enterprises (SOEs), as these entities monopolise Chinese resources and infrastructure and are encouraged by the central government to invest abroad (although a May 2015 survey reports that private bodies accounted for sixty-six percent of Chinese ODI in 2014). All SOE ODI, as with any investment into Australia from foreign state bodies, is subject to examination and a ‘national interest’ test by Australia’s Foreign Investment Review Board (FIRB), a non-statutory body that advises the Federal Treasurer.

This examination and review process has proved highly contentious. Since 2005, the FIRB has blocked only three projects, and interposed in only nine percent of Chinese resource projects, but studies show newcomer Chinese investors still perceive the Australian ODI process as cumbersome, confusing, and targeted at China. In 2008, in what was widely perceived as a reactionary response to the beginnings of large-scale Chinese ODI, Australia introduced added FIRB assessments and conditions for SOEs. Tensions flared in 2009 when negative media reporting and FIRB delays contributed to the scuppering of SOE Chinalco’s [topic page link] US$19.5 billion investment in mining giant Rio Tinto. Chinese suspicions of bias were fuelled further when Huawei [topic page link] was denied participation in building Australia’s National Broadband Network on ‘national security’ grounds.

Concerns frequently raised about Chinese ODI in Australian public debate include: the flight of profits and jobs from Australia because of Chinese ownership, the compromise of food and resource security due to Chinese control, and the possibility of the Chinese government strategically leveraging SOE investments against the Australian government. Today, profitability is widely accepted as a key determinant of SOE investment decisions. But some industry observers maintain that Chinese perceptions of their investment being unwelcome and untrusted in Australia have diminished Australia’s ODI attractiveness.

However, there are some indications that perceptions of Chinese investment are improving. During the 2015 New South Wales state election campaign, the state government proposed to tender ninety-nine-year leases for forty-nine percent of NSW electricity distributors. When it became public that the government had met with China’s State Grid Corporation about a possible deal, the ALP Opposition leader Luke Foley suggested that such Chinese investment presented a national security risk because it would allow the Chinese government to be able to cut off the state’s electricity and gather intelligence on the Australian military. Foley’s argument was widely dismissed in media and political circles and many accused the NSW Opposition of stoking ‘xenophobia’ for political gain.

Macroeconomic factors also affect Australia’s attractiveness as an investment destination. Falling global commodity prices, skyrocketing Australian labour costs, Australian infrastructure capacity constraints, the attempted introduction of an Australian mining tax, the Chinese desire for international diversification, and a strengthening Australian dollar may all have proved to be factors in a notable decline in Chinese ODI in Australia during 2010–2014 compared to 2005–2009. Studies show Australia now presents below-average transaction success rates and implied returns on investment for Chinese investors, and recent data confirms that despite continued interest from Chinese investors, Australia is falling out of favour relative to competitors such as the US and Brazil.

Chinese ODI in Australian agriculture has been a matter of particular debate recently, ignited by the controversial sale of the indebted Cubbie Station, Australia’s largest farm, to the Chinese-controlled Shandong Ruyi consortium. Treasurer Wayne Swan approved the deal in September 2012 on FIRB advice, but fears of ‘selling the farm’ provoked significant public disapproval and rancorous reactions. The clamour was led by the rural-based National Party, and then Senator Barnaby Joyce, who labelled the decision a ‘disgrace’ to Australian agriculture and claimed that ‘the Foreign Investment Review Board is in a mess and is simply not interested in protecting the national interest’. Supporters of the sale accuse Joyce of having a ‘xenophobic attitude’ and point to statistics showing China owns less than one percent of Australian farmland, arguing that Chinese ODI is ‘positive and essential to securing the long-term health of the sector’ and ‘the potential for Australia to become the food bowl of Asia’.

However, after the National Party entered government with the Coalition in September 2013, Prime Minister Tony Abbott offered ‘closer scrutiny’ of agricultural ODI by lowering the FIRB screening threshold for agricultural land from A$252m to A$15m, introducing a A$55m screening threshold for agribusiness investment and instituting a foreign ownership of land register.

Political sensitivity in Australia over Chinese investment has prompted China to repeatedly seek the modification of Australia’s automatic review threshold for SOE investment. But community attitudes meant successive Australian governments were unwilling to do so. This became a crucial stumbling block in China-Australia Free Trade Agreement (CHAFTA) [topic page link] negotiations. In November 2014, the Abbott government signed a Declaration of Intent for CHAFTA that raised the review threshold on private Chinese investment from A$248 million to A$1.08 billion, but any decision on preferential treatment for Chinese SOEs has been delayed until the finalisation of the free trade agreement, some time within the next three years. Previously, on a state visit to China in April 2014, Abbott flagged the prospect that Chinese SOEs who prove they are ‘good corporate citizens’ could earn more lenient FIRB treatment. He remarked that ‘we now appreciate that most [Chinese SOEs] … have a highly commercial culture’.

Over the past number of years, there has been considerable community concern over and wide media coverage of ‘super rich Chinese’ buying residential property in Sydney and Melbourne, thereby pricing Australian first homebuyers out of the market. FIRB announced that in 2013-2014 China was the largest source of approved real estate investment proposals, totaling A$12.4 billion, and industry reports estimate Chinese buyers will invest A$60 billion in Australian housing over the years 2015-2020. Anecdotal evidence from media reporting suggests that Chinese investors are typically wealthy families buying apartments for children studying in Australia, or diversifying their assets. In March 2014, Treasurer Joe Hockey launched a parliamentary inquiry into real estate prices, which found that while housing prices are rising rapidly, only the prices of new high-end city apartments in Sydney, Melbourne and the Gold Coast are likely to be significantly impacted by overseas investment.

Nevertheless, in February 2015 the Abbott government announced new rules (since implemented in the May Budget) that impose a minimum A$5000 application fee on foreign property purchases and increase penalties for investors who breach Australian property law. In March 2015, Treasurer Joe Hockey ordered Xu Jiayin 许家印, China’s fifteenth-richest man, to sell an illegally acquired A$39 million Sydney mansion. It was the first forced property divestment since 2007, though Hockey claimed that around 100 more cases are under investigation. Many Australian real estate agents have accused the Abbott government of populism that discourages Chinese investors.

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