This paper identifies a number of issues that require greater attention to strengthen the investment relationship between China and Australia.
This is a revised and edited version of the presentation on 27 February 2013 in Sydney by Professor Zha Daojiong, Inaugural Lowy Institute-Rio Tinto China Fellow.
Australia has been remarkably successful at attracting Chinese investment in recent years. Australia has been the top destination for foreign direct investment (FDI) since the mid-2000s. Despite this, the investment relationship has not been without difficulties. In Australia, there is unease about Chinese investment in strategic sectors such as mining and agriculture. In China, there is a feeling that Chinese investment is discriminated against in Australia’s screening of incoming investment applications. Because Chinese investment in Australia is a relatively new phenomenon and because the geographic and cultural distances between the two countries are wide, there is a high risk that misperceptions – both Australian and Chinese – will trump reality.
Australia and China have an obvious interest in managing these problems, both in terms of the economic relationship and the broader bilateral relationship. Australia has been a net importer of foreign direct investment (FDI) since Federation. China is new as a source of FDI in the Australian economy. It is still relatively small despite significant growth since the 2008 global financial crisis. In terms of stocks, Chinese FDI has grown from 0.92 per cent in 2008 of total FDI in Australia to 2.63 per cent in 2011. Approved investment flows from China into Australia rose dramatically in 2008, to be followed by a downward pattern of fluctuations in subsequent years, until a new surge in 2012.
Despite the comparatively small amount of Chinese FDI in Australia, understanding the drivers of Chinese investment is important. First, FDI in general is vital to Australia’s economic wellbeing. Chinese FDI is likely to grow globally and at the same time there will be more competition for Chinese investment. Thus, to remain competitive in attracting Chinese FDI, it is important for Australia to understand how it is perceived by Chinese investors. Second, Chinese FDI has attracted significant attention in the media and broader public in Australia. A nuanced analysis of the drivers will serve as a good basis for informed discourse on Australia’s national interest in regards to Chinese FDI.
For China, Australia is an attractive investment destination for a number of reasons. It is already a major resource provider to China and is a low risk destination for Chinese investment given its political stability and institutional strength at the government and business levels. It is also important in terms of helping Chinese companies gain experience investing in developed countries. This is not just important to the companies themselves. It also helps to build China’s national reputation as global economic player, overcoming the country’s long standing and pervasive image of being little more than a low-cost labour provider capable of succeeding in poor developing countries only.
The aim of my research was to identify a number of issues that do require greater attention in both countries’ efforts to strengthen the investment relationship. It is by no means a comprehensive treatment of the relationship, but instead is concerned largely with Chinese perceptions of Australia as an investment destination. It is based on over forty interviews conducted in Canberra, Sydney, Perth, and Melbourne during my fellowship at the Lowy Institute from January through March 2013. The interviewees were selected on the basis of their expertise and experience with Chinese FDI. The interviewees can be broadly grouped into five main categories: Chinese investors in Australia; senior Australian managers in companies that have received significant Chinese investment; consultants, both Australian and Chinese nationals, who advise Chinese companies on Australian investments; senior Australian government officials at the state and federal levels; and experts in academia.
My research mainly focused on direct investment the resources sector. Investment in this sector accounts for 91% (79% mining; 11.8% oil & gas) of Chinese FDI in Australia. The resources sector also tends to attract greater public scrutiny which often means that Chinese investment in this sector becomes a focus for political debate within Australia or even diplomatic discussions between the two countries.
The first section of the presentation addresses the structural factors driving Chinese FDI. The second section offers general observations about why Chinese companies see Australia as an attractive investment destination, particularly in the resources sector. The third section is my assessment of Chinese perceptions of the risks of investing in Australia.