Challenges prevail for unprepared investors in free trade environment

Published on
February 26, 2015

International investors considering Australian opportunities as a result of free trade agreements (FTA) between Australia and their country should not take greater access for granted.

The lifting of caps that limit foreign investment levels, flowing from recent landmark FTAs with China, Japan and South Korea, will not mean free access to the market. A number of restrictions have been included in agreements which may yet create future hurdles for investment in Australia by foreign companies.

In the case of China, investment in Australia has increased from $3 billion to approximately $32 billion over the past decade, but this still only accounts for 1.3 per cent of total foreign investment in Australia.

Chinese investment in Australia has been particularly concentrated in the resources sector, however we can expect to see greater diversification of this investment into other areas such as agribusiness, commercial property, healthcare and aged care services, retail, tourism, and infrastructure.

In addition, China’s middle-class is expected to reach 850 million people by 2030, and this provides great potential for increased Chinese investment in Australia.

The China-Australia Free Trade Agreement (ChAFTA) will promote continued growth of Chinese investment into Australia by raising the Foreign Investment Review Board (FIRB) screening threshold at which investments in non-sensitive sectors by private sector entities from China are considered from $248 million to $1.078 billion.

But while China is now Australia’s biggest trade partner, Chinese investment in some areas continues to arouse antagonism on both sides, such as the controversy over agricultural land and foreign direct investment by state-owned businesses.

Under the ChAFTA, the Australian Government has retained the ability to screen Chinese investments at lower thresholds for sensitive sectors, including media, telecommunications and defence-related industries. The government will also be able to screen investment proposals by private investors from China in agricultural land valued from $15 million and agribusiness from $53 million.

During the decade-long ChAFTA negotiations, China wanted its state-owned enterprises to be exempt from FIRB scrutiny for investments of $1 billion or less. However, the Australian Government has stood firm on this point and FIRB will continue to screen proposed investments by Chinese state-owned enterprises regardless of value. These provisions are consistent with Australia’s trade agreements with Korea and Japan.

This additional Australian Government scrutiny of Chinese government-related investments has led to feelings of mistrust and discrimination by Chinese investors in Australia. These perceptions were highlighted in a 2012 report by the Australia China Business Council, a peak body representing Australian and Chinese business interests. The report highlighted Chinese investors do not feel as welcome in Australia compared to other countries competing for Chinese investment. These perceptions will need to be managed carefully by Australia if the desired benefits of the ChAFTA are to be fully recognised.

Meanwhile, a 2012 poll by the international and geopolitics think tank The Lowy Institute found a majority (56 per cent) of Australians believe ‘the Australian government is allowing too much investment from China’.

At least part of the concern about Chinese investment may be explained by a more general aversion to foreign investment, with 46 per cent of Australians agreeing with the proposition that ‘the Australian government is allowing too much foreign investment from all countries, not just China’.

These perceptions regarding foreign investment mean international investors hoping to take advantage of the FTAs in place with Australia will need to approach investments in Australia sensitively and strategically.

They will need to engage with local communities, business and political leaders, while constantly communicating with the Australian public to ease negative perceptions about their investments or business proposals.

While the advent of FTAs has provided greater clarity around the rules of foreign investment, they have also heightened public interest in how foreign investment is going to impact the Australian community. This provides further impetus for the need for targeted engagement strategies for those offshore entities looking to invest here.

Through Rowland Global Access, Rowland will continue to work productively with international investors and companies to support them in understanding and accessing key Australian markets.

Rowland Global Access can assist companies to establish and maintain effective, high-level relationships and networks with all levels of Australian government, business and the media in their markets of interest.