Chinese investment in Australia has collapsed. At the height of the commodity boom in the first half of 2008, China deployed some US$16.2 billion into direct commitments in Australia. According to new data from KPMG and the University of Sydney, the number was a scant US$585 million in 2021, or less than four percent the peak annual amount. What happened?
There are at least two reasons why the volume of Chinese money at play in Australia has evaporated:
Bilateral Relations. Australian relations with China are in the deep freeze. The root cause of wide-ranging aspersions may have been a diplomatic row in 2017, when Prime Minister Turnbull spotlighted Chinese interference in Australian politics. There has been in a downward spiral in relations ever since, including a ban on Chinese flag-bearer Huawei participating in a nationwide 5G rollout. For its part, China has shut down imports of Australian beef and imposed tariffs on Australian barley.
Pandemic Turmoil. Canberra has been severely critical of how Beijing handled developments in Wuhan, calling for an independent probe into the origin of the pandemic. China predictably pushed back on this judgement. Chinese state media even declared that Australia is “chewing gum stuck on the sole of our shoe.” In context, Beijing may also have been taking issue with the volume of coronavirus-conspiracy theories sprouting from Australia.
From the Chinese side, another reason that Australian investment has cratered may be that the One Belt One Road initiative in developing economies has crowded out opportunities in Australian assets. Using public debt markets as a rudimentary measure, the yield in 2021 on local-currency emerging-market bonds at 5.0%-to-5.5% was materially greater than offered by the 10-year Australian government bond at 1.0%-to-1.5%. Global market volatility has realigned those figures this year.
Weakness in Chinese cross-border activity is not just a country-by-country affair. Beijing has throttled some types of external investment since 2017. The government has remained amenable to traditional opportunities, but Chinese officials have been culling deals that reach beyond state economic guardrails for some time.
There is hope for improving ties between Australia and China. In early July, foreign ministers from both nations took advantage of the G20 meeting in Bali to make a “first step towards stabilizing the relationship” after a three-year hiatus in face-to-face discussions. That development may fix a better trajectory for a post-pandemic economic rebound in Australia.
Australia has long been considered a test market for Chinese direct investment in Western economies. Over the cycle ahead, Chinese deal activity worldwide—outside of the more commonly studied One Belt One Road program—is likely to be characterized by two features siphoned from the Australian experience. Consider these points:
Scope of Activity. The Chinese have self-audited their commitments to Australia as the nation became politically precarious for them. This approach is echoed elsewhere in the West with a broad decline in Chinese commitments over recent years, amplified greatly by the pandemic. We expect a quiet, matter-of-fact approach to continue. The only notable deal in developed economies last year was an opportunistic transaction for about US$4 billion in the Netherlands. A Chinese private equity firm bought Philips’ household appliances division.
Areas of Focus. The Chinese have primarily targeted holdings on the real-assets front in Australia; they will do the same in other nations. Prominent in the mix are mining commitments, including iron ore, as China reached for natural resources to fuel its domestic boom. The benefit of this exposure right now is that real assets tend to hold their value during periods of high inflation and have a low correlation with financial assets. One of China’s largest investments globally in 2021 was a commitment to the Brazilian oil sector through China National Offshore Oil Company.
Real assets of course reach beyond natural resources. There is generous Chinese exposure to property in Australia, both commercial and residential. Infrastructure is also important. China’s Landbridge Group, for example, has a multi-generational lease on operations at Darwin Port in the Northern Territory.
Curiously, a report by the Australian Broadcasting Corporation shows that country sources for investments in Australian assets includes Bermuda and the British Virgin Islands in top-10 pole positions. That information implies that some Chinese investors could be masking their presence in Australia through offshore jurisdictions. They may also choose to do so elsewhere.
One essential point in assessing Chinese activity in Australia is that China—despite the combative setting—has not abandoned or tried to weaponize its direct investments. Some contend that the approach is a matter of self-preservation; others argue that it is a commitment to the long game. ■
Our Vantage Point: Chinese investors will be silent players in Western economies for the cycle ahead. Selectively, we may see small commitments to real assets, given how these deals align with their investment preferences.
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