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Trade

Chinese investors turn away from Australia after Canberra crackdown

Investment fell 61% last year after deals were scuppered over security concerns

International students from China walk along the waterfront by the Sydney Opera House in Australia.   © Reuters

SYDNEY (Financial Times) -- The value of Chinese investment in Australia collapsed last year in the face of tougher scrutiny by Canberra, a breakdown in bilateral relations and a global downturn in foreign investment owing to the pandemic.

The dramatic drop in Chinese investment came as other members of the Five Eyes intelligence network, including the US and UK, rushed to tighten oversight of foreign investment on national security grounds.

New data show Chinese investment fell 61 per cent to A$1bn (US$780m) in 2020, down from A$2.6bn a year earlier and a peak in 2016 of A$16.5bn. The year 2016 was a high point in Sino-Australian ties that coincided with a free trade deal. In contrast, just 20 transactions were recorded last year.

Chinese investment in 2020 was limited to just three sectors -- real estate, mining and manufacturing -- a big shift compared with previous years when activity spanned all industries, according to a database tracking Chinese investment managed by Australian National University.

Shiro Armstrong, director of the East Asian Bureau of Economic Research at ANU, said the collapse in investment mainly reflected the impact of Covid-19 and tighter scrutiny of foreign funding by Canberra, particularly those from China.

Global foreign direct investment fell 42 per cent during the pandemic while foreign investment into Australia dropped 46 per cent, according to UN data, he added.

"This is quite a remarkable story when you think that Australia was the largest destination of Chinese investment globally during the height of the commodities boom. We received much more investment than the US, and that has just collapsed," Armstrong told the Financial Times.

Australia-China relations have sunk to their lowest level in a generation, following Canberra's call for an international probe into the origins of Covid-19 and its introduction of tough laws against foreign interference and stricter scrutiny of foreign investment.

Canberra introduced in March last year temporary changes to its investment framework, which subjected all overseas investments to scrutiny by its Foreign Investment Review Board. This led to lengthy delays, particularly for Chinese investors, according to bankers involved in transactions.

The government also forced the abandonment of two high-profile deals -- China Mengniu's A$600m bid for Japan-owned Lion Dairy and China State Construction Engineering Corp's A$300m bid for Probuild, a South African-owned construction company -- by privately signalling its disapproval.

"The message from the government is that Chinese investment is not welcome. It couldn't be louder or clearer," said Geoff Raby, an adviser to Chinese companies and a former Australian ambassador to China.

"The most egregious case was the blocking of the sale of Lion Dairy, which had no strategic or national security justification for this at all. Firb approved this but the treasurer blocked the investment."

Canberra in January tightened its foreign investment framework, introducing extra national security tests and a "last resort power" to unwind transactions, even after they have been approved. This measure could lead to controversial acquisitions, including Chinese company Landsbridge's purchase of Darwin port, being reconsidered by the government.

Beijing has accused Australia of "weaponising" the concept of national security to block Chinese investment, an allegation denied by Canberra. Beijing's imposition of capital controls in 2017 has also reduced foreign investment flows out of China.

Josh Frydenberg, Australia's treasurer, said the rules "strike a balance between maintaining Australia as an attractive destination for foreign investment, maintaining public confidence in the integrity of our investment framework, and protecting Australia's national interest and national security".

The collapse in investment has not yet been reflected in Sino-Australian trade, which continues to boom owing to surging iron ore prices despite Beijing's imposition of tariffs and other trade barriers on selected produce.

However, analysts said the deteriorating investment climate would eventually flow through to trade.

"Over time, the fall in investment will also mean lower bilateral trade, an outcome which Beijing is actively seeking to punish Australia for its perceived political transgressions," said Richard McGregor, a senior fellow at the Lowy Institute.

In November, the UK announced the biggest shake-up in foreign investment rules in two decades to prevent overseas companies buying up sensitive assets, amid concern about China's influence. A month later, Congress passed a law forcing Chinese companies to delist from US exchanges unless they complied with domestic accounting rules.

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