Chinese investment in Australia plunges to record lows

​Chinese investment in Australia has plunged to its lowest level in almost two decades, excluding the pandemic years, and is expected to continue to contract as the world’s second-largest economy slows.

KPMG and the University of Sydney’s latest Demystifying Chinese Investment in Australia report said Chinese investment in Australia fell by 37 per cent to $US892 million ($1.36 billion) last year. It was the lowest level since 2006, excluding the pandemic year of 2021.

The decline of Chinese investment in Australia is partly to blame on rising tensions between the countries that rose under the government led by Scott Morrison, above left. Above centre and right, Xi Jinping and PM Anthony Albanese.Credit: Alex Ellinghausen and AP

It noted that Chinese investment in the US last year also dropped to $US1.8 billion, its lowest level since 2006, if the pandemic year of 2020 is excluded.

The decline of Chinese investment in Australia is partly to blame on rising political tensions between the two countries that escalated under the Morrison government, particularly after then prime minister Scott Morrison called for a global inquiry into how the COVID-19 outbreak started.

The deteriorating relationship between China and Australia saw China impose trade sanctions on $20 billion of Australian exports. Most of those sanctions have since been lifted, with the removal last month of punishing tariffs on Australian wine.

However, even before those political tensions, Chinese investment in Australia had started to trend down. It has fallen every year since 2016, when it was $US11.5 billion.

This declining trend occurred as successive Australian federal governments tightened restrictions on foreign investment in a number of sensitive sectors, from infrastructure to critical minerals. Critical minerals, among them nickel, lithium and cobalt, are important to the green energy transition, advanced manufacturing and defence technology.

“While Chinese investor confidence toward merger and acquisition in the Australian market remains low, we are seeing increasing interest in greenfield investments, particularly in the electric vehicle, [solar panel], batteries, and industrial machinery sectors,” the report said.

“This is driven by the perception that these investments offer lower upfront financial risks and the potential for high long-term rewards. Such investments also help Chinese investors avoid the complexities and entrenched challenges associated with merging or acquiring existing businesses in Australia.”

Still, Chinese investment in areas such as solar panels is causing international tension. US Treasury Secretary Janet Yellen in a visit to China this month expressed concern about Chinese overproduction in areas such as electric vehicles, solar panels and other clean energy technology.

In 2023, the cost of producing solar panels in China fell by 42 per cent, giving its manufacturers an enormous cost advantage over international rivals, particularly the US, according to energy analysts Wood Mackenzie. China dominates the global production of solar panels, representing 80 per cent of the market.

The KPMG and University of Sydney report said a further reason Chinese investment in Australia had declined was that Chinese money was increasingly being redirected towards Belt and Road Initiative (BRI) projects. Last year, Chinese investment in those projects rose 28 per cent to $US32 billion.

China’s BRI policy aims to bolster its economic and security interests with multiple nations through overseas development. Investment in BRI projects accounted for a quarter of China’s $US130 billion in non-financial foreign direct investment last year.

The report warned that the growth in Chinese investment in BRI projects posed a competitive threat for Australian business, as funds shifted from developing infrastructure to supporting processing sectors. “Such a move could present competitive challenges in sectors where Australia has historically attracted investment.”

An example of this threat was the billions of dollars of Chinese investment that flowed into Indonesia, helping it develop into a global nickel hub. The investment and technology from Chinese companies enabled Indonesia to process raw ore into higher-grade nickel, which Australia had done.

With this improved capability, Indonesian nickel has flooded the market, forcing down the price of the metal, which has hurt Australian miners, and resulted in cuts to jobs and production. China is the world’s largest buyer of nickel.

However, research by the Lowy Institute released last month was more cautious on BRI-financed infrastructure projects in South-East Asia. It noted that funding allocated to many of those projects had been cancelled or downsized because of cost blowouts, local political instability and China’s own economic pressures.

China’s economic growth is forecast to slow to 4.5 per cent this year from 5.2 per cent, according to the World Bank, as high debt, a weak property sector, and trade frictions take a toll.

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