Just how important is Chinese investment to the Australian economy? Very, suggests the latest data, which show that Australia retained its position in 2016 as the world’s second largest recipient of Chinese ODI with close to $90 billion of new investment since 2007.
The figures contained in the report Demystifying Chinese Investment, compiled by KPMG and the University of Sydney, show a continued surge in Chinese investment last year.
A record 103 deals were signed with Chinese companies, with A$15.4 billion ($11.5 billion; €10.5 billion) of transactions recorded. That’s an 11.7 percent rise on 2015 and the highest figure since the global financial crisis.
“There are signs of a growing maturity by Chinese investors in the Australian market,” the report said. “The number of joint ventures is increasing with more repeat investments by established Chinese companies. This has set a foundation for growth in future investment.”
While commercial real estate (36 percent) and large scale infrastructure (28 percent) took the lion’s share of the 2016 figures, Chinese demand was strong for consumer-related sectors, particularly in healthcare (9 percent), agribusiness (8 percent) and sectors relevant for Chinese tourism and education.
Xiong Jin, a Beijing-based partner with King & Wood Mallesons, agrees that aside from infrastructure investments, assets, which are considered to serve the growing middle class of China, are attractive opportunities.
“There’s been a substantial increase in healthcare acquisitions, as well as those in food and agriculture. Australia has always been seen as the top end of the agricultural products and supplies in the Asian region and that position has been reinforced on a yearly basis,” he says.
The latest consumer-related private equity deals include Hong Kong-headquartered PAG’s A$100 million investment in The Cheesecake Shop, Australia’s largest specialist cake retailer which operates more than 200 stores across Australia, New Zealand and the UK.
In healthcare, a consortium formed by Macquarie Capital and the Hong Kong subsidiary of China Resources Group, completed its A$1.7 billion acquisition in October of cancer and cardiac services business GenesisCare from KKR. And in late 2015, Chinese buyer Luye Medical Group reportedly beat private equity suitors Baring Private Equity Asia and Bain Capital with a final bid of A$938 million to acquire Australia’s third-largest private hospital group Healthe Care.
China’s insatiable appetite for Australian assets has had a big impact on rural and regional Australia, with hundreds of millions of dollars poured into new technologies and new equipment for local business, but it is also prompting scrutiny from regulators.
In March last year, Australia tightened its foreign takeover rules to ensure all sales of critical infrastructure such as ports and power grids got Foreign Investment Review Board approval. A year earlier, the rules were overhauled, increasing local capital requirements from 15 percent to 20 percent, as well as more significant changes for agribusiness and land acquisitions.
Tighter Chinese restrictions on outbound deals is also slowing down the deal process, Xiong says.
“Unfortunately in China this is the new normal. As a Chinese buyer, you previously only needed seven business days to get the filing certificate. These days you can look to three to four weeks if you are lucky.”
Xiong explains that when Chinese investors make an outbound investment, they need a filing certificate that involves either a registration process or a verification process. The verification process involves a substantive review that is required only if the investment involves “sensitive assets” or “sensitive countries” and if such investments exceed $2 billion.
But the registration process, which is meant to be procedural in nature, has also become more time-consuming. In a typical filing process, Chinese buyers would first have to apply to the National Development and Reform Commission (or their provincial counterparts) and then the Ministry of Commerce (or its provincial counterparts) for the filing certificate, and then they have to apply to the State Administration of Foreign Exchange through authorised commercial banks to transmit foreign currency funds out of China.
But Xiong is quick to point out that private equity practitioners like him have seen a more flexible, tailor-made approach from the Chinese-government in recent years, which is largely dependent on the general economic situation, the exchange rate of the yuan versus other major currencies and its implication on China’s forex reserves.
“Because the yuan has been stable against the US dollar in the past two or three months and with the general improvements of the economic sentiment, the government has relaxed controls over cross-border investments and also encouraged investors to borrow offshore. There’s been a substantial increase in offshore financing, as well as a rise in bond issuance by Chinese investors to capture the offshore market,” he says.
But while China deals are growing, there remains a natural suspicion from the Australian sellers’ perspective, with the main concern being: “Can they get their money out of China?” Xiong says.
“I think that it’s a fair conclusion that as a Chinese buyer you’d be at a disadvantage if everything is equal. Of course, Australian companies themselves would like to sell to an Australian private equity firm or a local company in which they can easily get deal certainty,” he says.
“I think the reality is much more complicated than that – everyone wants to sell at a better price and it essentially becomes a balance of risks if the Chinese bidders come to them. The premium will be higher to justify the sellers taking a risk with perceived deal certainty issues.”
He adds that from a Chinese bidder’s perspective, seeing these issues would generally make them better prepared when they come to the auction table: “There’s no point to waste your time or assets in the process.”
Like the rest of the world, Australian investors are also aiming to capitalise on business opportunities as China strives to meet the rising demand for high-quality products, brands and services among its growing middle class.
Last September, Raphael Arndt, the chief investment officer of Australia’s A$123 billion sovereign wealth fund the Future Fund, said it was growing its private equity investments in strategies that capture ‘New China’ opportunities – healthcare, tourism, agriculture and internet-enabled retail – brought about by its middle class.
In addition, the Queensland Investment Corporation, the investment arm of the state of Queensland, has inked an MOU with Ping An Asset Management Company to pursue more cross-border collaboration. It is expected that the partnership will target innovation-themed investments, an area QIC has been focused on in recent years.
“My perspective is that Australia has a natural fit with Chinese investment and trade,” Xiong says. “In fact the China-Australia Free Trade Agreement coming into effect in 2018 will only strengthen trade between the two countries.”
Investment in Australia has given local businesses more firepower to access the Chinese market and more capability to expand in the region. As one Sydney-based private equity veteran points out: “Chinese buyers provide an opportunity for us to exit the companies we’ve invested in and I think that’s positive for the economy.”