Getting the signal through noise of Chinese investment

Getting the signal through noise of Chinese investment

Tue, 16/10/2018 - 15:35

Huawei’s exclusion from the 5G network comes amid rising public concern about the overall level of Chinese investment in Australia. Photo: Reuters

It is no surprise China continues to be the top source of new foreign investment proposals in Australia in the current global economic climate, according to data from the Foreign Investment Review Board.

Yet, while the approval rates for Chinese projects are high (the FIRB rejected just three out of more than 14,300 international proposals in 2016-17), it is a series of high-profile and highly public cases of potential Chinese capital setting the tone for this critical bilateral investment relationship.

From Huawei’s exclusion from tendering for Australia’s 5G network, to Hong Kong-based CK Group’s $13 billion bid for Australia’s east coast gas pipeline network, ‘controversial’ Chinese investments have continued to claim the headlines and fuel fiery debate.

Amid the noise, it is worth taking stock of the Australia-China investment relationship, and where it’s heading.

A recent business forum in Melbourne organised by Asialink Business and CAANZ (Chartered Accountants Australia and New Zealand) helped flag the signals and chart a course to navigate the noise.

Changing investment landscape 

According to research from KPMG and the University of Sydney, Chinese investment in Australia dropped to $US10.3 billion ($13.3 billion) in 2017, a fall of about 11 per cent.

This is despite continued investment in commercial real estate, renewed investments in mining and a rise in healthcare backing.

The decline reflects trends in global international investment flows from China during the year, as well as changing regulatory, political and economic landscapes.

The report noted Australia remained the second largest recipient country of accumulated Chinese investment, after the US, with $US99 billion since 2008.

And while there were about the same number of deals in 2017 as 2016 (100), the average deal sizes fell, with 76 per cent of them below $100 million.

Another interesting trend was that, while the total volume and value of state-owned enterprises investment dropped for the first time since 2014, investment by private Chinese companies increased to 83 per cent of the total deals volume in 2017.

Delicate balance

Foreign investment has been essential to Australia’s economic development. 

But, as shown by the Huawei example (and potentially by the CK bid), there is a delicate balance between protecting national interests, managing public perceptions, and ensuring the best long-term outcomes for the economy. 

The investment tightrope walk is becoming more difficult as Chinese projects that are more ‘visible’ to average Australians – like phone networks and real estate – move to the top of foreign investors’ wishlists.

Huawei’s exclusion from the 5G network comes amid rising public concern about the overall level of Chinese investment in Australia.

The 2018 Lowy Institute Poll showed a sharp rise among Australians, who say the government is “allowing too much investment from China”; almost three quarters (72 per cent) now take this view (up from 56 per cent in 2014).

The rising public anxiety in Australia is not lost on investors. 

Previous research by the Lowy Institute has also found that “Chinese investors do not feel as welcome in Australia compared to other countries”.

But it’s worth remembering we have been down this road before. 

Japan, for example, is now one of our most established investment partners. Yet support for Japanese investment declined from 64 per cent in the early 1970s to just 49 per cent in 1989.

At the peak of negative sentiment, a Japanese-Australian joint tourist venture on Sydney Harbour was blocked due to its potential impact on the environment and public access to the foreshore.

Economist Ross Garnaut noted at the time that the decision “caused this highly publicised case to generate perceptions in Japan that discriminatory policy was being applied”.

Winning hearts and minds

Against this backdrop, winning the hearts and minds of the public and developing a strong social contract has become an essential part of successful Chinese investment in Australia.

To their credit, many Chinese investors are taking note.

MMG, one of the Chinese investors that blazed the path in Australia, captures their social commitment in its motto – ‘we mine for progress’. 

Formed in 2009 when Chinese state-owned enterprise China Minmetals Corporation (CMC) acquired the majority of assets of Australian mining company OZ Minerals, MMG was not the first major investment by a Chinese state-owned enterprise in Australia.

But CMC broke the mould in how it established the structure of the new subsidiary, acquiring not just MMG’s physical assets, but its talent and brand, and creating an English-speaking board and representatives from both MMG and CMC to maximise expertise and transparency.

This approach has led to outstanding results, taking MMG’s enterprise value from $1.3 billion at acquisition to $14 billion today.

And, as Chinese investment moves away from mining and resources towards sectors that are more visible and relate to personal data or critical infrastructure, fostering this social contract is becoming even more critical to success.

Navigating the noise

When navigating this complex landscape, the community needs to know their interests are well protected by the existing investment institutional architecture, which they are.

But they also need to understand the array of benefits that come with foreign capital and how to make the most of these opportunities. 

These benefits go well beyond money. The positive spillovers can include technology transfer, knowledge and innovation exchange, jobs and increased access to global value chains.

Our regional neighbours are alive to the broad scope of these benefits. 

South-East Asia, for example, has become a beacon for investors looking for opportunities in the digital economy. 

Cases like Japan’s SoftBank partnering with China-based Didi Chuxin to invest $US2 billion in Grab, the dominant ride-hail startup, or Alibaba’s $US4 billion investment in Lazada to fuel the rapidly growing e-commerce market are becoming increasingly common.

Encouraging open discussion will help foster a clear understanding of how the investment landscape is changing and where the opportunities and risks are, to ensure we can walk the tightrope between community perceptions, national interests and economic prosperity. 

Luke Hurst is director of research and information at Asialink Business, Australia’s National Centre for Asia Capability. He has a PhD in international economics from ANU.