Chill wind sets in on Australia investment

While flows from China fall amid strains, change of tone in Canberra offers hope

It should come as no surprise that Chinese investors are giving Australia a wide berth.

Analysts say that unless there is a thaw in relations between the two countries, the situation may not improve much in the near future. Moreover, other factors are also contributing to the decline in Chinese investments.

Investment flows into Australia started declining in 2017, and the trend has become even more pronounced as the souring in ties sets in.

According to the latest "Demystifying Chinese Investment" report from KPMG and the University of Sydney, Chinese investment in Australia plummeted by almost 70 percent last year, hitting the lowest level since 2007.

The report showed that Chinese firms invested some $600 million in Australia in 2021, compared with $1.9 billion in the previous year.

David Olsson, national president of the Australia China Business Council, said that while the fall in investment over the previous year was "significant", he was not surprised.

"While many commentators point to tensions in the bilateral relationship as the cause of the decline, the reality is more complex," he told China Daily.

"Certainly, bilateral tensions and COVID-19 travel restrictions have played a part, but there are structural changes taking place as well."

Hans Hendrischke, a professor of Chinese business and management at the University of Sydney's business school, said he was surprised by the extent of the decline in Chinese investments in Australia in 2021, from a "comparative perspective".

"It was steeper than (the drop in) Chinese investment into the United States for that year, while Europe experienced an increase in (Chinese) direct investment," he told China Daily.

The report notes that China has shifted its attention from Australia and is now focusing on Europe and countries associated with the Belt and Road Initiative. Last year, Chinese investment in Europe rose by around 25 percent.

Two main factors

Hendrischke, a co-author of the report, said two factors have played a role in the most recent decline: The COVID-19 pandemic, which prevented the personal contacts that are crucial for smaller investments, and the difficult relations between Australia and China.

"A turnaround will depend on reestablishment of official dialogue and confidence building from both sides. There are enough potential projects that could be revived at short notice," he said.

The report shows that Chinese investment deals in Australia last year almost halved in number to 11, from 20 in 2020. Chinese companies invested a total of $110.1 billion in Australia between 2007 and 2021, but the investments have been plummeting since 2017.

With a change of guard in Canberra following Australia's federal election on May 21, analysts are hoping for a thaw in relations.

The new government, led by Prime Minister Anthony Albanese, is expected to be more open to resuming dialogue with China, compared with the previous government headed by Scott Morrison.

On June 24, China's ambassador to Australia, Xiao Qian, in an address to the Australia-China Relations Institute at the University of Technology Sydney, said there is "good potential for cooperation" between Canberra and Beijing in the near future.

China is Australia's largest trading partner and the biggest customer for its iron ore, but relations deteriorated in recent years especially under the Morrison government.

Wei Li, a lecturer in international business at the University of Sydney, said that despite the highly politicized atmosphere, Chinese investors are holding on to their Australian assets.

"I don't see a major trend of Chinese companies withdrawing their investment in Australia yet," Li said. "The main sentiment is to wait and see."

Following the change of guard in Australia, Olsson said, there has been a "noticeable change in tone toward China from the new government, which has been reciprocated".

"The environment is now more conducive to the resumption of senior-level dialogue, which will be an important first step in renewing confidence in the Australian market among Chinese investors," he said.

Australia has "many characteristics that make it attractive to investors, including strong governance, top talent, world-class infrastructure" and proximity to fast-growing regional markets, Olsson said.

"It is these natural advantages that I think will ensure that Chinese investors will continue to keep Australia on their investment radar."