The lapsing of the Rio Tinto-Chinalco deal and the arrest of four Rio employees by Chinese authorities earlier this year certainly provided an opportunity for the doomsayers to make dire predictions about the future of Chinese investment in Australia. If there was ever any substance to these predictions, perhaps the recent announcement of the biggest Australia-China trade deal ever – ExxonMobil and PetroChina’s  US$41bn liquefied natural gas agreement – will put an end to the pessimism.

“The failed Rio-Chinalco deal has caused many to expect a slowdown in Chinese interest in Australia, but it has been proven otherwise,” said Andrew Hensher, co-head of Chang Pistilli & Simmons’ PRC business unit. “The business relationship between China and Australia is strong enough to withstand one mere setback.”

Even before the unveiling of the ExxonMobil-PetroChina deal, there was little sign of the relationship cooling – although the political manoeuvring and media coverage has hardly been helpful. 

 “The number of [inbound China-Australia] deals has remained steady,” said Mallesons international managing partner, Nicola Wakefield Evans. “There is some nervousness that the Australian government is making foreign investment more difficult, but this is not supported by the decisions coming out of FIRB, which has not changed its approach to approvals or raised the bar for investment.”

The gas sale agreement between came only weeks after Yanzhou Coal’s acquisition of Brisbane-headquartered Felix Resources, which will be the largest-ever Chinese deal in the Australian coal sector once completed. Yanzhou engaged Corrs Chambers Westgarth, King & Wood and Baker & McKenzie for legal advice in different jurisdictions, while Felix was advised by Allens Arthur Robinson.

“China is a substantial consumer of many Australian resources. There is no reason why the rising interest will not follow the same pattern as past investment influxes,” said Andrew Knox, a partner of Allens Arthur Robinson, who headed the Yanzhou and Felix deal. “The outcome will be closely scrutinised as there appears to be a significant appetite for more deals, dependent on there being substantial prospects [here] for a successful deal.”

Diversification

At Mallesons, the number of queries from prospective Chinese clients looking to invest in Australia has been on the increase over the last 18 months, says Nicola Wakefield Evans. While there has been no single sharp spike in queries in that period, she has noticed a  recent diversification in the sectors targeted by investors – from the predictable interest in resources to property, manufacturing, real estate and agriculture, to name a few.

The increasing diversity of Chinese investment can be partly attributed to a growing sense of confidence. Nevertheless, the resources sector is still seen as a safe harbour.
 
“Initially, resources was clearly the area of greatest need for the Chinese economy – the Chinese investors were looking to secure long term supply,” says Wakefield Evans. “It’s important to understand that many Chinese  companies had never made an outbound investment before – and it makes sense to invest in the resources sector, which would be more familiar to most [Chinese] investors.”

Property is no doubt one sector to feature in the growing Chinese comfort zone.
Sovereign wealth fund China Investment Corporation recently invested A$700m in the Australian property trust Goodman Group, hiring Freehills for advice on the transaction.  “CIC is very sophisticated - its successful investment in Australia will give Chinese enterprises greater comfort,” said Leon Pasternak, a partner at Freehills who acted for CIC.

“Chinese investors are seeing opportunities as the value of Australian properties falls during the GFC,” added Andrew Hensher. “This would be considered purely an investment to build funds and to gain foothold, as opposed to a strategic investment. With these funds, there are no reasons why China will not invest beyond resources.”

Earlier this year, China’s Haier Group acquired a 20% stake in the struggling New Zealand white goods manufacturer Fisher & Paykel. The strategic investment boosted Haier’s profile and expansion ambitions – not to mention the revenues of Freehills, which advised Fisher & Paykel and Clayton Utz, which advised Haier on the transaction.

Form of investment
 
Wakefield Evans identifies three broad categories of Chinese investment – acquisition of a controlling interest, an initial stake acquisition and what she describes as a “bet each way” – investments such as cornerstones, joint ventures and long term supply contracts. The need to take a “bet each way” is again perhaps indicative of a desire to test the market and to build relationships with Australian companies before taking a more decisive step.

The listing of Chinese companies on the Australian Securities Exchange (ASX) is a trend worth watching. Thus far in 2009 three manufacturers from the mainland have launched IPOs in Australia. The ASX is considered a “fast track” for Chinese companies who would normally have to wait for up to two years to list on their domestic stock exchange.

“The relatively straightforward ASX listing requirements makes it an attractive proposition for smaller Chinese companies,” said Pierre Lau, a senior associate at Melbourne-based firm Chambers & Co. “To smaller companies in Asia, Australia’s business environment and market track record over the last decade also makes the ASX a more viable option, without sacrificing sophistication.”

Still, only a few Chinese companies thus far have opted for an ASX listing. “It is hard to say if there is a window of opportunity – everyone is probably waiting on more positive and consistent signals coming from the equities market in general,” said Jonathan Murray, partner at Steinepreis Paganin. The firm was responsible for the listing of YTC Resources on the ASX in 2007. YTC Resources is backed by the Yunan Tin Group of China.

PRC companies listed on the ASX

PRC investments in Australian resources companies 2008/09

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