Global trends and context for Australia

2018 – A year of uncertainty. 2018 was a year of uncertainty in global economic affairs amidst slower global growth, decline of global foreign direct investment (FDI) and general apprehension about worsening conditions for international business. Preliminary UNCTAD figures confirm concerns about deglobalization. Global foreign direct investment (FDI) in 2018 declined by 19 percent to USD 1.2 trillion, down from USD 1.5 trillion in 2017. The downturn in global FDI has affected most developed countries. Europe experienced the sharpest decline in total inbound FDI with 73 percent, whilst the US experienced an 18 percent decrease. Australia has done comparatively well with a 39 percent increase in total global inbound FDI from all foreign companies.

China remains a major global foreign investor, with the latest official figures showing that in 2018 China’s ODI actually grew 4.2 percent from a year earlier to reach USD 129.8 billion in 2018. This includes USD 120.5 billion of non-financial investment, which increased by

0.3 percent, and USD 9.3 billion of financial ODI, which increased by 105.1 percent. Chinese non-financial ODI in 56 countries along the ‘Belt and Road’ rose by 8.9 percent from a year earlier to USD 15.4 billion.

Chinese direct investment in the United States continued a steep decline, with data compiled by Rhodium Group showing that it reached USD 4.8 billion in 2018, down from USD 29 billion in 2017, and from USD 46 billion in 2016. Chinese investment into Canada also sharply fell by 47 percent from CAD 8.4 billion (USD 6.2 billion) in 2017 to CAD 4.4 billion (USD 3.4 billion) in 2018. In Europe, overall Chinese direct investment fell after the closure of several mega deals in prior years (e.g. Syngenta, Switzerland). However, major European economies

continued to attract Chinese investment, such as France (USD 1.8 billion, up 86 percent), Germany (USD 2.5 billion, up 34 percent), Spain (USD 1.2 billion, up 162 percent), Sweden (USD 4.1 billion, up 186 percent), while smaller Eastern European economies such as Hungary, Croatia and Poland experienced even higher growth rates. The United Kingdom registered the highest investment of any European country with deals worth a total USD 4.9 billion6.

What is causing this change?

The overall trend of Chinese overseas investment is changing due to policy changes in China and in some developed markets. Domestically, and in line with its goal to reduce financial risks, the Chinese Government started implementing a series of measures since early 2017 to ensure that overseas investments by Chinese firms: (i) are not speculative; (ii) are undertaken after fully considering major potential risks; and (iii) are consistent with the company’s strategy and the country’s socio-economic development goals. As part of these efforts, authorities released a list specifying the categories of overseas investments that will be encouraged, restricted and prohibited. Externally, several jurisdictions have made and/or are considering making changes to their foreign investment review powers, which means that investments in some sectors may be limited or prohibited altogether.

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Overview of Chinese Investment in Australia

Chinese investment in Australia declined by 37.6 percent in USD terms or 36.3 percent in AUD terms in 2018, from USD 10 billion in 2017 (AUD 13 billion) to USD 6.2 billion (AUD 8.2 billion).

This annual result (in USD terms) brings Chinese ODI back to the second lowest level since the mining and gas driven investment peak year of 2008. The number of transactions has also decreased 28 percent for the first time since 2011. Based on our data, 74 transactions were completed in 2018, compared with 102 in 2017.

Chinese investment in Australia by industry

The continued reduction in Chinese investment in Australia reflects a combination of factors, including changing drivers of Chinese ODI such as an increased demand for outbound investment in high value-added sectors to ‘bring back’ expertise and high-quality brands and products that can support China’s industrial upgrading and meet the evolving demands of Chinese middle-class consumers.

As part of this trend, large strategic investments in resources, energy and infrastructure have given way to smaller investments, primarily by private investors, into projects that are tactical and directly linked to Chinese consumer market demand. This is particularly evident in the targeting of the Australian healthcare sector by Chinese investors. Investment in Australian healthcare providers helps alleviate the absence or shortage of quality care facilities in China, for example reproductive care offered by Genea Limited and liver cancer treatment by Sirtex.

Real estate investment in 2018 was characterized by risk minimization and declining deal sizes. Analysis by Knight Frank shows that two thirds of all commercial real estate transactions were in the AUD 5 to AUD 50 million range. Considering that the two largest transactions by Yuhu Group accounted for one third of the value of all commercial real estate investment, there is a distinct focus on smaller transactions by private sector investors.

Mining investment has likewise shifted towards lower deal sizes, with the only large deal in 2018 being the acquisition of a majority stake in a mining asset in Laos which was owned by MMG Australia. Investment in lithium mining, while low in 2018, is driven by strong market demand in China and globally. This trend is likely to continue thanks to Australia’s status as the major global lithium supplier.

There were no major 2018 investments in areas such as energy (oil and gas), infrastructure and construction, food and agribusiness and renewable energy.

(Special Permission by KPMG, complete report available at KPMG.com.au)

By KPMG