By Jessie Zhang
Over the last year, China and Australia have both exercised intentions for tighter controls on Chinese outbound capital investment into Australia.
The falling renminbi has prompted the Chinese government to enforce tighter regulations on outbound capital flow, meaning overseas investment of more than US$10 billion will be embargoed, and mergers and acquisitions valued at more than US$1 billion will be scrutinized if considered outside the investor’s core business activities. To support these regulatory changes, Beijing has further required SAFE, its central administrative agency for governing foreign exchange market activities, to enforce a US$50,000 limit on outbound transfers and a contractual agreement that the money not be used to purchase foreign assets including property, securities, and insurance.
Despite anecdotal commentary, this is not a hit against foreign investment but rather a strategic move by Beijing to curb increasing debt levels and an expanding housing market bubble that are predicted to pose significant short-term economic risks to the nation. China has cut its projected growth rates from 7 per cent to 6.5 per cent in response to sensitive market conditions resulting in its slowest growth rate since 1990.
The announcement of these new restrictions has caused concern among some Australian developers and the property industry who have benefited greatly from recent Chinese investment. But on closer inspection, these proposed restrictions are not so intimidating, and actually mirror amended foreign real estate investment conditions in Australia.
In June 2016, NAB became the last of the big four Australian banks to tighten lending to non-resident investors following Westpac and ANZ with the Commonwealth Bank never really pursuing off-shore lending opportunities.
The Australian Prudential Regulation Authority, backed by the Reserve Bank, has been putting pressure on banks since late 2015 to curb the growth in investor lending in general, fearing a housing bubble in Sydney and Melbourne, and unsustainable price increases, especially for the inner city apartment market.
Yet despite the increasing number of barriers, investment from Chinese state-owned enterprises and privately-owned companies won’t slow. According to Mark Wizel, National Director at CBRE Australia and based in Melbourne, believes the increasing uncertainty surrounding China’s economic outlook and forecasted devaluation of the renminbi is pushing groups to secure assets and position capital with a view towards the medium term. Wizel says that “Australia provides a stable and dependable foundation for outbound investment strategies for Chinese investors with 25 years of consistent year-on-year growth since 1990-91, and is home to Melbourne, the world’s most liveable city for six years in a row”. Whilst Sydney and Brisbane have both attracted strong interest from Chinese investors and developers, Wizel notes that Melbourne has had a three year head start on the other states due to the deeper links spanning close to 100 years that Australia’s second biggest city has held with China.
Furthermore, Chinese investment into Australia has historically been driven by a small number of ‘mega deals’. To put this into perspective, one of the biggest Chinese investors that Australia has received is the New Hope Group, who invested AU$200 million and declared an intention to invest a further AU$1 billion, by 2020. Similarly, Songcheng Performance Development has purchased land for $55 million for the development of an AU$600 million Gold Coast theme park, and Wanda’s purchase of Hoyts was estimated to sit at approximately AU$900 million.
Despite regulatory changes, industry experts predict that Chinese outbound investment intentions will remain strong through 2017. Mark Wizel suggests “investment activity could potentially slow as deal processes are lengthened, particularly for larger sized deals”. However, Australia will continue to see new Chinese buyers entering the market given that 75% of all commercial property transactions closed by his firm across the back half of 2016 in Melbourne were from mainland Chinese buyers.