Making hay while China shines: FDI in Australia

{CF_IMAGE}

Put simply foreign investment has been and will continue to be fundamental to maintaining the standards of living that Australians enjoy.

"Put simply, foreign investment has been and will continue to be fundamental to maintaining the standards of living that Australians enjoy." -Mark Whelan 

This new report - produced by Deloitte Access Economics for the Australia China Business Council and sponsored by ANZ - focuses on the opportunities presented from new sources of investment from China, a country that will continue to be key to Australia’s prosperity into the future

The growth of China’s economy has already provided significant benefits to Australia.

Chinese demand was a key driver of the resources boom which delivered a temporary but significant boost to Australia’s income over the last decade.

Now rising incomes and a growing middle class are supporting a new wave of growth in Australia. Increasing affluence among Chinese consumers has boosted discretionary spending on many items including quality food and health products, attractive holiday destinations and internationally esteemed education institutions.

Just as with the mining boom, increased demand for services and other consumption-based products will also require further investment to scale up Australian industries to meet these opportunities.

Indeed, Australia needs to spend around 20 per cent of GDP each year just to replace depreciation and maintain its capital stock at current levels.

Not all of this investment can be sourced domestically. While Australians have comparable saving rates relative to other advanced economies we simply do not save enough to fund our capital needs.

This means each year we see inflows of foreign investment to make up the gap.

While the majority of foreign investment in Australia continues to be held by the United States and the United Kingdom, China has recently emerged as a significant new source of investment.

Chinese investment in Australia quadrupled in value between 2010 ($A19 billion) and 2016 ($A87 billion).

Importantly, the majority of new Chinese investment is in services and consumption-led activities such as health, tourism and agribusiness, assisting Australia in its transition to towards broader sources of growth.

Significant benefit

When an overseas investor commits capital in the form of direct investment they typically do so because they see an opportunity to unlock unrealised value in the business.

 This includes:

• Better linking the business into global supply chains or international markets not currently accessed by the business;

• Bringing strong management, industry, or technological ‘know-how’ to a business which allows it to realise greater value from its current operations; or

• Injecting capital which allows a business to efficiently and quickly scale up to meet growing demand for its output. 

These benefits help create opportunities for Australian businesses. Australian workers also benefit through more employment opportunities, higher wages and greater consumer choice.

Australian agribusinesses will benefit from increased demand for high quality food from China but require capital to increase productivity and output and to better compete with global players.

Australian health businesses are well positioned to benefit from China’s growing demand for health products but often require assistance when expanding into the China market.

Australian tourism businesses are well placed to benefit from the rapid increases in Chinese visitations.

The know-how needed to both market products in China, and make Australian offerings ‘China ready’ can be vital to attracting additional visitors to Australia.

Can’t be taken for granted

China’s growth and transition to a consumption-led economy will therefore go hand in hand with Australia’s own structural change towards these high value industries. The two countries will continue to be partners in prosperity.

But this is not an opportunity which can be taken for granted. Just as with the mining boom, realising this opportunity will require significant investment to scale Australian industry up to meet the demand.

Chinese investment is more than just a source of capital, it brings knowledge and connections. Australia has much to gain, but we cannot go it alone. 

Prosperity

Much of Australia’s current prosperity is owed to the inflow of foreign capital. Over the last decade, foreign investment has helped Australia benefit from the mining boom, with inflows of capital helping build the sector’s productive capacity rapidly in order to benefit from the unprecedented increase in demand for our resources.

Activating Australia’s potential through new opportunities and industries requires an understanding of the foreign consumer - what they want and how this should be marketed to them.

This is another aspect to the benefit that Chinese ownership can bring to Australian businesses to complement increased effort and resourcing by Australian firms to better understand and capture growth opportunities in China.

Australia’s economic future will continue to depend both on China and Chinese investment.

Mark Whelan is GE Institutional at ANZ