Chinese investment in Australia a game of cards

The Lowy Institute’s “Australia in the World” Poll 2016 published last month showed that 87% of Australians were against “the Australian government allowing foreign companies to buy Australian farmland.” Similarly, the ABC’s Vote Compass produced data on 25 May that showed that 80 per cent of Australians support tighter controls on foreign investment in Australian farms.

Although neither poll asked specific questions about Chinese investment in agriculture, there is reason to think that recent Chinese farmland acquisitions (and interest in some prominent agricultural properties) could be a factor in public sentiment on the issue.

This is despite the fact that data released at the beginning of this year by the Australian Bureau of Statistics (ABS) shows that China, in the words of Australia’s Federal Treasury, “remains a relatively minor source” of foreign direct investment. Chinese direct investment in Australia is dwarfed by the direct investment of the United States, United Kingdom and Japan. Indeed, Chinese investment comprises just 4.4 per cent of total foreign direct investment into Australia.

Total Stock of Foreign Direct Investment by Country
Total Stock of Foreign Direct Investment by Country*

Yet talk of Chinese investment often sends many Australians into conniptions. Indeed, the concern many Australians have over the level of Chinese direct investment appears to have been a factor in the delays of the sale of the Kidman & Co properties to Dakang Australia, which has as its largest shareholder Chinese entity Shanghai Pengxin. The Shanghai Pengxin bid had previously been frustrated by the fact that the Kidman holding included a property close to the Australian weapons testing range at Woomera. But even after the Chinese company agreed to carve the sensitive Anna Creek property near the defence facility from the deal it was again put on hold last month, just prior to Prime Minister Malcolm Turnbull calling the federal election. A decision now cannot be made until after a new government is formed following the election on 2 July.

This seems silly. Not surprisingly Pengxin’s chief investment officer compared Australian politics to Netflix’s series House of Cards.

Ownership share of major projects (investment costs)
Ownership share of major projects (investment costs)

If the concern is the level of Chinese investment in major projects in Australia, figures produced by Australia’s Treasury show that Chinese-ownership share of major projects is minuscule at 3 per cent of the total. Indeed the US and UK are the largest investors in major projects, at 26 and 27 per cent respectively. That’s right; over half of the ownership share of major projects are held by just two countries – the US and UK.

So; what’s spooking the Australian government about making a decision on the sale of the Kidman properties to a Chinese bidder. One clear factor is concerns held by Australians in regional areas of the country in particular about the sale of the nation’s agricultural assets to foreign investors. Of course, they are not only concerned about Chinese investment in the sector. For example, in November 2013 the then Treasurer Joe Hockey blocked the sale of GrainCorp to the US agribusiness company Archer Daniels Midland (ADM). At the time, Hockey said he was blocking the deal in the national interest because he felt it was “not the right time for a 100 per cent foreign acquisition of this key Australian business.” He said another factor was the high level of community concern the sale was attracting.

It would appear that both ADM and Shanghai Pengxin have underestimated the sway of the broader Australian community, and of the National Party in particular, over the Federal Coalition Government when it comes to decisions on foreign investment in Australia’s agriculture sector.

But China still seems to come in for particular attention when it comes to investment in Australia, including in other sectors. The level of Chinese investment in Australian real estate largely drives this. It has resulted in a tightening of federal government regulations around foreign investment in residential property and the introduction of a new tax requiring those designated as foreign residents to pay 10 per cent withholding tax on properties valued at more than $2 million. Additionally, the NSW Government requires proof of residency and citizenship for property purchases in Sydney, while the Victorian Government applies 7 per cent higher stamp duty rates and a 1.5 per cent land tax surcharge to foreign buyers. The NSW Treasurer, Ms Gladys Berejiklian, is now also considering a land tax surcharge on foreign buyers of residential property.

Although these measures apply equally to all foreign investors in real estate, they are clearly targeted at Chinese investors. They have only been introduced since 2014, after Chinese investment in Australian real estate spiked. Foreign Investment Review Board (FIRB) figures show that Chinese investment in the property sector is by far the largest. At $24.3 billion in 2014-15, Chinese investment was more than triple that from the US and six times that from Singapore.

The prominence of Chinese investors in the residential property sector has had a spill over effect into Australian perceptions of Chinese direct investment into the broader economy. Although there is a lack of research into Australian concerns about Chinese investment into Australia, anecdotal evidence suggests many Australians are concerned that China is buying key Australian assets such as mines and prime agricultural land, as well as other businesses. The concern is partly about foreign ownership of strategic Australian assets, and partly driven by cultural xenophobia. The latter statement is validated by the fact that less concern exists around direct investment from the US and UK, which are seen as culturally similar to Australia.

Indeed, there is less concern about Singaporean investment in Australia than there is about Mainland Chinese investment. Perhaps this is because Singapore is largely perceived as sharing the same democratic and legal institutions and values as Australia whereas Chinese institutions and values remain enigmatic.

The challenge then for Chinese investors in Australia is how to improve the perceptions prevalent among the general community. One clear initiative Chinese investors should take is to engage more with local communities around an acquisition target. Xenophobia is about fear of the unknown. Chinese corporations looking to invest in Australia should engage more with local communities and the broader Australian community to demonstrate that they are not a threat to the well being of Australians; rather, they need to demonstrate they will contribute more to the well being of Australians. For example, many Australians fear that Chinese companies are investing heavily in Australian agriculture in order to secure product for Chinese markets at the expense of Australians. If the Chinese corporations making these purchases demonstrate that their investments are driven by business strategies rather than by Chinese geo-political interests, much of the concerns held by Australians would be assuaged. Chinese corporate investors could do this by appointing a local board or advisory panel comprised of well-known Australian business leaders and other prominent identities. They should also explain to Australians what they would be bringing in terms of investment, technology and management skills, and the resulting job creation in the local economy.

Further, Chinese investors should commence earnest discussions with stakeholders in Australia about social impact and sustainability programs to further demonstrate they have the best interests of Australia at heart.

Another factor affecting Chinese investment in Australia is the perception that Chinese companies, even privately owned companies, are State-Owned Enterprises (SOEs) or extensions of the Chinese State. For example, Huawei was affected by this negative perception during its early years in the Australian market, and the view has meant it has been excluded from bidding in the Federal Government’s tender to build the National Broadband Network (NBN), the country’s high-speed communications infrastructure system.

Added to this is the concern many have that Australian companies are not afforded the same access to the Chinese economy that Chinese companies enjoy here.

Federal and State politicians will often ask potential Chinese investors for their views on this matter in meetings. They need to have some clear messaging to respond. Shrugging shoulders, shyly smiling, and saying “that is a matter for the Chinese Government” does not wash in these situations. In fact, an unsophisticated response to these questions from a politician could undo much of the other work a corporation has done to pave the way for its investment deal.

While much of what needs to be done is easer said than done, it is necessary for Chinese investors to map stakeholders and their interests in order to genuinely engage with them. Interestingly the task for Chinese investors into Australia (and other foreign markets) is no different to the task that confronted Western companies when they started their investments in China 20 or 30 years ago. Just as Western companies had to communicate what they were taking to China previously, Chinese companies now need to let Americans, Europeans and Australians know what benefits they are bringing to these markets. Failing to do so could hamper Chinese investments, causing more approval delays and even rejections by Australian and other western nations’ authorities.

While a halt to Chinese direct investment is in nobody’s interest, the politics of western democratic nations are not about real issues so much as realpolitik considerations. That is the house of cards Chinese corporate investors must work within.

* Graphs in this article were taken from the Treasury paper “Foreign Investment into Australia: Treasury Working Paper, 2016-01”.

Written by Alistair Nicholas, Executive Vice President – Director, Special Projects. Alistair was previously based in Bejing for 13 years and is a former Australian Trade Commissioner and a former international trade advisor to several former Federal Coalition Ministers. A bilingual version of this article will appear in the magazine Higher View Business, which is carried on China Eastern Airlines.