"WEAVING A NET IS BETTER THAN PRAYING FOR FISH AT THE EDGE OF THE WATER"
2014 was the year Australia was knocked off its mantle as the most favoured destination for Chinese outbound investment. It's a clear sign China's investment appetite is changing – from a focus on natural resources to a wider portfolio of sectors including agriculture, manufacturing and technology.
As China reinvigorates its go global strategy, can Australia regain its charm and offer Chinese investors more than just minerals? Which sectors will attract inbound investment and what role will Australia's FTA with China play?
In his Report on the Work of the Government (released on 5 March 2015 as part of China's Third Session of the Twelfth National Party Congress) Premier Li Keqiang has stated that in the final year of the 12th Year Plan the Chinese Government will "speed up the implementation of the go global strategy". This push for going global is supported by the PRC Government's liberalisation of the outbound investment system introduced in May 2014.
According to the Report (supported also by the National Development Reform Commission's 2015 Draft Plan for National Economic and Social Development released 5 March 2015 also as part of the National Party Congress) only 2% of all outbound Chinese investment required review and approval with the remainder being lodged online only.
However, Australia has not been the recipient of this renewed focus on outbound investment, with 2014 representing a year of consolidation for Chinese buyers in Australia. While almost a fifth of all public M&A deals in Australia last year were driven by Chinese bidders, most transactions were by existing holders seeking to "average down" the cost of their investment. Most of the major deals - such as Baosteel in the joint takeover of Aquila Resources Limited and Guangdong Rising Assets in the indicative offer for PanAust Limited – involved a Chinese bidder that already had a significant and long standing investment in the target. The existing stakes in these companies were acquired closer to the top than the bottom of the resources cycle. So it's likely PRC investors are picking what they see as the bottom of the resource cycle and looking to average down the costs of acquisition – fundamental given the current focus by the Chinese Government on profitability of SOEs (see Boost in Chinese buyers is good news for Australian companies - Understanding the drivers for this is key).
THE SHIFT IN CHINA'S INVESTMENT FOCUS
Australia's fall from the top as China's preferred investment destination reflects the changing priorities of Chinese investors. In earlier years PRC investments were all about securing access to natural resources with Australia a clear beneficiary. But now Chinese buyers are diversifying and turning their attention to new industries.
Premier Li's Report suggests the likely beneficiaries of Chinese outbound investment 2015 will be investments which grow China's market share in railway, electric power, communications (Unicom's recent opening of an office in Sydney a prime example) and the provision of building materials. China intends to scale up export credit insurance to provide export credit insurance in these areas.
In addition Chinese investment is likely to focus on sectors which provide Chinese companies with channels of distribution, intellectual property and know-how and access to quality and safe food for distribution in China – each key to China's shift to a developed services economy.
AUSTRALIA CAN REGAIN ITS CHARM
2015 is the Chinese year of the sheep and Australia, it is said, was built on the back of sheep. In this symbolic year it is the new China Australia Free Trade Agreement (CHAFTA) combined with a plummeting dollar that will ensure Chinese investment continues to help build Australia (despite high profile but case specific divestments). The political significance of the FTA with China goes beyond the promise of securing a greater share of the world's largest market (see Australia's FTA with China - Better to grow slowly than stand still). It is the imprimatur for Chinese companies to make acquisitions and invest in Australia.
We expect 2015 to be a different story to 2014 with a boost in inbound PRC investment especially in sectors like large scale residential property (which will support China's provision of building materials), greenfield infrastructure and food technology. With the ongoing focus on anti-bribery and corruption and reform of SOEs we expect to see a decline in SOE investment and a return to POE predominance.
The signs of a more vibrant M&A market for Chinese investment in 2015 are all there. The internationalisation of the RMB, the falling Australian dollar especially off the back of a more positive outlook for economic growth in the United States will see a better outlook for inbound PRC investments in the coming year.
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