Foreign Investment

The big story of foreign investment in the last couple of years has been China.
Although Japanese investment has increased considerably over the past year as well, we stopped worrying about Japan in the 1990s.

Given these facts it is quite interesting that in the most recent release of 5352.0 - International Investment Position, Australia: Supplementary Statistics, 2008 shows that direct Chinese investment was still minimal up to the end of 2008 (the end of the period under review).

While Australia trades heavily with East Asia our investment links are poor.

When considering foreign investment statistics we need to distinguish between stocks and flows. Stocks are the accumulated investments over time measured at a particular point in time and flows (or transactions) register investment over a time period (in this case one year, 2008)

According to the ABS Australia’s net international investment position at the end of 2008 "was a liability of $713.8 billion, an increase of $58.7 billion on the previous year."
The breakdown for FOREIGN INVESTMENT IN AUSTRALIA was:

The level of foreign investment in Australia increased by $66.9 billion to reach $1,724.4 billion at 31 December 2008. Portfolio investment accounted for $921.2 billion (53%), direct investment for $392.9 billion (23%), other investment liabilities for $302.6 billion (18%) and financial derivatives for $107.8 billion (6%). Of the portfolio investment liabilities, debt securities accounted for $689.1 billion (40%) and equity securities for $232.1 billion (13%).

The leading investor countries at 31 December 2008 were:
United Kingdom ($427.1 billion or 25%)
United States of America ($418.4 billion or 24%)
Japan ($89.5 billion or 5%)
Hong Kong (SAR of China) ($56.3 billion or 3%)
Singapore ($43.1 billion or 2%)
Switzerland ($38.1 billion or 2%)

In addition, the level of borrowing raised on international capital markets (e.g. Eurobonds) was $145.3 billion or 8%.

It is clear that people who speak English like investing in each others' countries. Investing in countries like China is a difficult process and many restrictions remain. It's a bit of a joke really when people suggest that the Chinese will be offended if we don't get rid of the Foreign Investment Review Board. Instead, the Chinese well understand that strategic overview of investment is a worthwhile process regardless of what the economic liberal commentariat suggest.

The breakdown for AUSTRALIAN INVESTMENT ABROAD was:

The level of Australian investment abroad reached $1010.6 billion at 31 December 2008, an increase of $8.2 billion on the previous year. Portfolio investment abroad accounted for $373.1 billion (37%), direct investment for $281.1 billion (28%), other investment for $196.1 billion (19%), reserve assets for $47.5 billion (5%) and financial derivatives for $112.9 billion (11%).


The leading destination countries as at 31 December 2008 were:

United States of America ($394.6 billion or 39%)
United Kingdom ($158.1 billion or 16%)
New Zealand ($66.1 billion or 7%)
Canada ($38.8 billion or 4%
France ($35.4 billion or 4%).
Netherlands ($30.0 billion or 3%)

Transactions (flows) over the past year still don't record the huge growth of Chinese investment (although it is likely that they will in 2009. Remember that these transactions include all types of foreign investment not just foreign direct investment (FDI) which covers investment at a level of greater than 10 per cent in a particular company.

FOREIGN INVESTMENT IN AUSTRALIA "recorded a net inflow of $149.0 billion for the year ended 31 December 2008, a decrease of $11.0 billion on the net inflow of $160.0 billion for the previous year."

The leading investor countries were:

United State of America ($27.0 billion or 28%)
United Kingdom ($25.9 billion or 17%)
Japan ($20.3 billion or 14%)
Germany ($14.6 billion or 10%)
Hong Kong ($11.4 billion or 8%)
Switzerland ($8.8 billion or 6%).

AUSTRALIAN INVESTMENT ABROAD "recorded a net outflow of $100.8 billion for the year ended 31 December 2008, an increase of $6.6 billion on the net outflow of $94.1 billion for the previous year."

The leading destination countries were:

United States of America ($53.3 billion or 53%)
New Zealand ($14.5 billion or 14%)
Singapore ($8.0 billion or 8%)
United Kingdom ($7.4 billion or 7%)
Canada ($5.7 billion or 6%)
Luxembourg ($3.6 billion or 4%)

This set of statistics also show the amount of income paid out to foreigners and received by Australians from foreign investments.

Australia has a net income deficit (which is a vital component of our current account deficit) which is not surprising given that investment in Australia has long been greater than saving in Australia.

Income debits totalled $86.7 billion for the year ended 31 December 2008. This result is up $1.2 billion on the income debits in the previous year.

The main countries to which income accrued for the year ended 31 December 2008 were:


United States of America ($18.3 billion or 21%)
United Kingdom ($13.9 billion or 16%)
Japan ($7.4 billion or 9%)
Switzerland ($5.6 billion or 7%)
Netherlands ($3.2 billion or 4%)
Hong Kong ($1.7 billion or 2%)

One of the big changes in recent years has been the significant increase in Australian investment abroad.

Income credits totalled $41.8 billion for the year ended 31 December 2008. This result is up $3.5 billion on the income credits in the previous year. The main countries from which income accrued for the year ended 31 December 2008 were:

United States of America ($14.7 billion or 35%)
New Zealand ($4.4 billion or 10%)
United Kingdom ($4.1 billion or 10%)
Canada ($3.8 billion or 9%)
Netherlands ($1.5 billion or 4%).

For a more recent catch up on capital flows in and out of Australia see Australian Capital Flows and the Financial Crisis from the Reserve Bank Bulletin written by Patrick D’Arcy and Crystal Ossolinski of the International Department.

In this article they note that between 2000 and 2007 capital flows increased significantly compared to GDP and were relatively stable. The last 18 months or so have been more chaotic. Even though Australia has done well the global financial crisis they note that it still had a huge impact on capital flows.

Not only was it difficult for borrowers to obtain funding in international markets, but many international investors repatriated existing offshore investments. In essence the crisis induced a temporary bout of ‘home bias’ among global investors.

But the decline in foreign investment in Australia was partly covered by the repatriation of investment back to Australia.

Most of the volatility was related to credit markets (bank lending and asset-backed securities) and like in the Asian financial crisis before hand FDI was unaffected. Big investments can't be quickly withdrawn and generally direct investors are in for the long haul (unless it's investment by private equity companies - but that's another story).

This interruption to credit markets was significant for Australia given that before the crisis bank lending and asset-backed securities amounted to about 8 per cent of GDP per year between 2004 and 2006 - a huge amount.

It is clear in hindsight that govt action had a beneficial effect on supporting capital flows during the crisis. These include the setting up of US dollar swap lines between the US Federal Reserve and the RBA.

Reflecting the fact that the US dollar funds available under this facility were cheaper than available in the market, particularly in the December quarter, Australian banks replaced some of their short-term foreign funding with funding through this means.

According to D’Arcy and Ossolinski capital flows returned to "their pre-crisis configuration in the first half of 2009. Reflecting the improvement in global market conditions and the introduction of the government guarantee on bank debt, offshore debt issuance by Australian banks recovered solidly over the first half of 2009." This negated the need for the swap facilities.

The decline of the Aussie dollar also encouraged capital inflow (remember that an increase in the Aussie makes investment abroad more attractive to Australians and less attractive for foreigners).

Australians have also decreased their level of equity investment outside of Australia, which means that "the composition of net capital inflows has shifted towards sizeable equity inflows. In the decade prior to the crisis there was net equity outflow."

Another impact of the crisis has been the increase in public debt (see my earlier blog for an analysis of public debt in Australia), part of which has been funded by foreigners.

Federal government debt increased by $33 billion in net terms over the first half of 2009, and around $5 billion of this was recorded as being purchased by foreign investors. However, partly offsetting this is the ongoing investment in foreign equity assets by the public sector, mainly through the Future Fund, which amounted to $2 billion over the first half of 2009.