A recently minted but not yet ratified free trade deal between China and Australia should accelerate an already powerful trend of Chinese investment into Australian assets, by cutting red tape and making approvals easier.
Under the FTA, acquisitions of up to A$1.1 billion by private companies will no longer need approval by Australia’s Foreign Investment Review Board (FIRB), which advises the Treasurer and the government. Currently, any deal valued over A$252 million must receive FIRB permission.
State-owned enterprises would still need to see their transactions approved but private-sector buyers are increasingly important players in the China-Australia mergers and acquisitions scene, according to Tony Damian, partner at Herbert Smith Freehill in Sydney.
“Fosun, for example, has its oil-and-gas acquisition,” Damian said. (In 2014, Fosun International closed the A$475 million acquisition of Roc Oil Company.)
Chafta not only gives Chinese companies favourable terms to acquire Australian assets but is also coming at a time when local big business has become more welcoming of Chinese capital.
Plenty of sizeable Chinese acquisitions have been given the go-ahead, including investments worth up to A$5 billion into power transmission assets by China’s State Grid Corporation, which the Tony Abbott administration approved in 2013, just a few weeks after it had rejected a US$3.5 billion bid for GrainCorp by Archer Daniels Midland of the US.
“Significant minority deals are now welcome, because Australian energy and mining balance sheets have become more stressed and need support,” said Matt Embsley, a Hong Kong-based partner at Herbert Smith Freehills.
The big four Australian commercial banks have been beneficiaries of the trend. They provide financing to support these deals, along with related transactions in interest-rate swaps, currency spot trades, and currency derivatives.
“We’ve seen an increase of inbound investment in Australia over the past two years,” said Andrew Whitford, Hong Kong-based head of Greater China business at Westpac. “Before it used to be mainly to natural resources. But now it’s into everything, from agriculture
The biggest inflows now, however, are to property. Whereas China investments to property in the US and the UK reflect the size of those economies, its relative flows to Australia are huge: although Australia accounted for less than 2% of world GDP in 2014, it took in 14% of China’s total outbound flows to offshore real estate, according to a June report by global property services firm CBRE.
The makeup of buyers is also changing, from strictly state-owned companies to a new generation of private companies and tycoons. Real estate is attracting investments from Chinese institutional investors as well as from corporations and rich families. For example, in 2013, China Investment Corporation paid $268 million for Centennial Plaza in Sydney, while Dalian Wanda paid $415 million at the start of this year to acquire Gold Fields House, a landmark building on Sydney’s Circular Quay.
According to CBRE, Sydney is the top draw for real-estate investment, accounting for 87% and 65% of total inflows to Australia in 2013 and 2014, respectively. Melbourne accounts for most of the rest. While companies and institutions have ventured into commercial property, much of the inflow involves individuals buying homes (often illegally into existing builds, instead of into new builds).
That reflects another Australian strength: education, with parents buying flats near to where their children are attending university. The cheaper Australian dollar is also boosting tourism, where infrastructure is poor, and this is expected to become yet another destination for real-estate investment.
“Australia used to export minerals; now we export education,” said Adnan Ghani, executive director at Commonwealth Bank of Australia. “When they graduate many of them will want to stay in Australia and that will support demand for investment into infrastructure and property,” he said.
According to ANZ, there are now around 95,000 Chinese studying at Australian universities, accounting for 25% of all international students.
Given China is already Australia’s biggest trading partner, Chinese investment flows are expected to continue to rise, accelerated by Chafta. Local banks are revving up capabilities in trade finance, lending, and markets.
“China dwarfs relationships now with Korea and Japan and it’s growing fast,” Justin Fabo, a senior economist at ANZ, said. “It’s taking a similar path of development [as Japan and Korea had] but it’s a different size.”
Hidden bank bonanza
Bankers declined to put a number on their China-related revenues. ANZ and Westpac have been the most aggressive in building China and renminbi capabilities; earlier this year Commonwealth Bank Of Australia also obtained a currency-trading license in Shanghai.
Banks don’t report FX volumes on specific currencies, so specific China-related revenues are not released. Australian banks book business originating business in Australia. For example, when State Grid acquired power assets, domestic banks booked their loans at home, so earnings weren’t counted as international, said Westpac’s Whitford.
Australian banks are not the only ones gearing up to service this incoming surge of Chinese investment. So are Chinese banks.
Bank of China has been providing trade finance and foreign-exchange services onshore for decades, more recently to local companies and retail customers.
Today Bank of China, ICBC and China Construction Bank provide lending to their customers, often SOEs from the mainland, as they seek to acquire in Australia. Although domestic banks are competing harder for Chinese clients – by hiring more Chinese-speaking bankers, for example – the wave of demand means more business for everyone, according to an executive at one of the Chinese banks. “The cake is growing much bigger,” he said.