China growth: Great ‘wall of cash’ is heading Australia’s way

“The Celestial Empire saw itself as the world’s premier political entity: first in size and population, first in age and experience, untouchable in its cultural achievement and sense of moral, spiritual and intellectual superiority” — David Landes, The Wealth and Poverty of Nations.

Sixteenth-century European explorers found a condescending, insular and delusional China, dismissive of foreigners and foreign technology, content to revel in the glories of its long past. China charted the oceans before the Portuguese even thought about it, yet, remarkably, found little of interest and disbanded its fleet.

China’s blend of economic freedom alongside political authoritarianism has underpinned the most rapid economic development of any country in history. In the 20 years to 2014 its national income per person leapt more than 16-fold to $US7519, while democratic India’s, starting from about the same level, rose to $US1630, according to World Bank figures.

Australians have welcomed China’s decade-long binge on their iron ore, coal and increasingly liquid natural gas, which has boosted the Australian dollar and enriched government and corporate coffers alike. But the inevitable outward expansion of Chinese business and people alarms them.

A Lowy Institute survey in 2013 showed more than 55 per cent of Australians thought we were accepting too much investment from China, a nerve pinched again in June when the Abbott government signed a landmark free-trade deal with China, 10 years in the making.

Even without it, Chinese investment was set to soar. The Foreign Investment Review Board approved $27.7 billion ($12bn in real estate) of proposals in the 2014 financial year, more than from any other country, with a developing country edging out the US, with $17.5bn approved, for the first time. Property is the new favourite investment class.

Chinese investors bought more real estate in Sydney and Melbourne combined (worth almost $US3.5bn) than in each of London, Paris or New York — another Australian record.

“There is a huge wall of money coming our way,” says Warwick Smith, head of the Australia China Council. “China’s biggest single export is its capital: it is already the largest creditor to the US and every country in the Asian region has China as its biggest trading parent, including Japan, (South) Korea, Thailand.

“Of the five largest banks by market cap in the world, four are Chinese — JP Morgan squeaks in on a good day,” he adds.

Australian household names such as Hoyts and engineering firm John Holland have been bought by Chinese businesses. One of China’s richest men, Xingfa Ma, owner of ball bearing manufacturing company Tianma Bearing Group, last month bought two cattle stations in Australia’s far north for $47 million. Also in July, the sovereign wealth fund China Investment Corporation snapped up a $2.4bn collection of Sydney office towers, including the eye-catching Deutsche Bank Place.

Chinese companies rarely speak to the media but multinational Yuhu Group, which owns commercial real estate in Sydney, says it plans “steady year on year growth in real estate and agriculture” in Australia. “We see the huge potential of this country, with its growing population and abundant underused resources. Population, weather, time zone and lifestyle are much more conducive than New Zealand and Canada,” it says in a statement.

Chinese influence is manifesting itself demographically, too. On current trends by 2024 the number of Chinese-born Australians will grow from 447,000 in 2014 to almost one million, exceeding the number of New Zealanders living here. In the most recent census almost 900,000 Australians claimed Chinese ancestry. As the accompanying graphs show, grants of temporary and permanent visas to Australia are increasingly dominated by Chinese nationals.

Globally, Chinese outbound investment increased by 10 per cent over the year to $US120bn in 2014, finally surpassing total foreign inward investment in China, according to a recent KPMG study. Reserve Bank governor Glenn Stevens says total flows could reach $400bn a year.

“If you thought that possibly the size of portfolio flows in and out of China might be the same size relative to China’s (gross domestic product) as such flows are around the rest of Asia, then those flows are going to end up being much, much bigger than they are right now,” he said in early August.

While the pace of Chinese investment has accelerated, its character is changing as the country’s economy matures. “China’s interest in resources has waned considerably and property is now the favoured target given the rising share of private and individual investors,” says Andrew Parker, a partner at PwC specialising in Asian deals. Indeed, private investors now make up most of Chinese investment in Australia.

“We’re seeing a shift in the balance away from state-owned to private investors, partly because SOE investments are being studied under President Xi (Jinping)’s anti-corruption campaign,” Geoff Raby, a former Australian ambassador to China, tells Inquirer.

Chinese authorities have also started unpicking the impediments to outbound investment. The threshold required for ­approval by the state National Development and Reform Commission was lifted from $US300m to $US1bn in May last year. Authorities are also planning to lift a $US50,000 annual foreign exchange transaction cap on individual Chinese.

Australians shouldn’t fear Chinese investment for two main reasons. Despite the attention it receives it is still a small share of the $2.8 trillion foreigners have invested in Australia. More significantly, foreign investment is what has underpinned Australians’ longstanding ability to buy more from abroad in goods and services than they sell.

“China is joining the ranks of the US, UK, and Japan in developing Australia — this is not something to be concerned about as long as everything occurs transparently,” says Smith.

The total value of Chinese investment in Australia at December last year was $64.5bn, up from $52bn a year earlier. But the traditional funders of Australia’s current account deficit — the US, Britain and Japan — still dominate. US investment, which has also been surging since the 2005 US-Australia free-trade agreement, came to $758bn at that time and British investors owned $484bn worth of Australian property and business.

“After the (global financial crisis) Japan quietly but rapidly built up its investment in Australia, but China grabbed the headlines because it was new and was in the high-profile resource and energy sector,” says Parker.

Much of the focus has been on Chinese purchase of property, which has increased dramatically. But the total value of residential sales in Australia over the year to April was $263bn (of which $104bn was in NSW). Yet approvals for Chinese purchase of both residential and commercial property came to $12.4bn.

James Laurenceson, deputy director of the Australia-China Relations Institute, is frustrated that Australia’s rising investment in China is typically ignored in discussions about investment. He has a good point: Australian investment in China has risen significantly: from $1.2bn in 2004 to almost $60bn last year (although two-thirds of it is loans).

“We also need to be careful when interpreting the FIRB data,” he cautions. “State-owned enterprises, which are a significant proportion of Chinese investors, require FIRB approval from the first dollar of investment; so do new dwelling investments, which the Chinese favour,” he adds.

“And the trouble with FIRB data is that an application doesn’t necessarily translate into an investment.” There can be “double counting” says Parker, citing the example of recent competing bids for Brisbane’s Queens Wharf development by consortiums with Hong Kong and mainland Chinese involvement.

Until now, Chinese private investors have needed FIRB approval for any investment proposal greater than $252m; courtesy of their free-trade agreements with Australia, American, New Zealand, Japanese and Korean investors have enjoyed a $1.1bn threshold.

Our China FTA will slash red tape and tariffs across a range of goods and, even more importantly, services, which tend to be more sheltered from competition. “We’ve shown we’re good at extractive goods — iron, gas, coal ore coal, etc — but we have huge opportunities in China in services too,” Smith says, highlighting latent demand for Australian architects, accounts and legal services.

Together with the FTAs with Japan and South Korea, the China FTA will create 15000 new jobs by 2020, boost real wages by 0.5 per cent and supercharge agricultural and service exports, according to modelling for the government from the Centre for International Economics.

As mentioned, it will also lift the non-state-owned investment thresholds, in non-sensitive sectors, to $1.1bn, the same as the Japanese and Koreans enjoy.

Paynter says new rules are unlikely to deter Chinese investors, who were keener to see themselves on the same level playing field as other investors.

Source: The Australian


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