Friday, September 17, 2010

Foreign Investment In and Out of Australia

At the moment I'm going through the Australian Bureau of Statistics' International investment position, Australia: supplementary statistics, calendar year 2009, Cat. no. 5352.0. Canberra, 2010.

The tables provide a wealth of information that helps to put current levels of Chinese investment in perspective. See my earlier post dealing with total foreign investment (into and out of Australia).

The Analysis and Comments section shows the top 5 countries but we have to go into the downloadable tables if we want to work out China's position in relation to total foreign investment (which includes portfolio investment (both equity and debt), direct investment, other investment liabilities and financial derivatives.

For the record the levels (stocks) of foreign investment in Australia were:
The level of foreign investment in Australia increased by $136.1 billion to reach $1,897.7 billion at 31 December 2009. Portfolio investment accounted for $1097.8 billion (58%), direct investment for $436.1 billion (23%), other investment liabilities for $284.8 billion (15%) and financial derivatives for $78.9 billion (4%). Of the portfolio investment liabilities, debt securities accounted for $728.9 billion (38%) and equity securities for $369.0 billion (19%).

 To put it all in perspective China's position in relation to levels and flows at the end of 2009 were:

FDI is foreign direct investment, which means investment greater than 10 per cent in a company. Anything less is considered portfolio investment.

There's no doubt Chinese direct investment has been increasing rapidly over the last couple of years and in 2009 Chinese FDI accounted for 13.6 per cent of the total. The Netherlands was the biggest investor in 2009 and Japanese FDI was double Chinese FDI. Singapore, much of whose FDI is from its sovereign wealth funds was virtually equal to the Chinese amount.

The following charts show that at present Australian inward and outward investment remains focused on the Anglosphere.

At the end of 2009, total Australian investment (which includes both debt and equity) in ASEAN was only 3.2 per cent of the stock of total Australian investment abroad. ASEAN accounted for only 4.5 of the stock of Australian foreign direct investment (FDI). (FDI is investment beyond a 10 per cent of ownership threshold) This compares to the United States, which accounts for 35.7 per cent of the stocks of total investment abroad and 28.9 per cent of FDI.

The figures for the United Kingdom are 15.8 per cent (total investment) and 18.7 per cent (FDI). China accounts for 0.6 per cent of total Australian investment abroad and 0.7 per cent of FDI. Combined investment in Hong Kong and China constituted 3.2 per cent of the total. Japan was the largest Asian destination with 2.8 per cent of total investment abroad.

Asian countries have been less reluctant to invest in Australia as the following charts reveal. The United States and the United Kingdom still dominate inward investment (both total and direct). Investment from ASEAN countries comprised only 2.7 per cent of the stock of inward investment at the end of 2009 and 4.8 per cent of inward FDI. The last chart shows flows over the past 3 years and ASEAN investment has been growing, accounting for 9.4 per cent of flows. Given the focus of recent times on Chinese investment, the figures below would probably surprise many Australians. China accounts for 0.9 per cent of the stock total investment in Australia, 2.1 per cent of FDI and 5.7 per cent of flows over the past 3 years (2007-09). Japanese investment has increased rapidly in recent years with little publicity.  Some Chinese investment comes into Australia through Hong Kong and through ‘tax havens such as the Cayman Islands and the British Virgin Islands’.

Source for all tables: ABS (2010) 5352.0

Chinese investment in Australia will be a controversial issue over the next decade or so. China has built up huge amounts of capital reserves, which means that it has the capital to invest in foreign resource assets. The Chinese will attach the same importance to the supply of resources to fuel industrialisation as the Japanese have done since the 1960s. And the major fear about Chinese investment in the resource sector for Australia is the same as it was for Japanese investment: that a major buyer of resources will control supply and prices, leading to lower revenue for Australians. This is a particular worry with Chinese investment, given the fact that it is coming from state-owned enterprises. So Australian policy-makers need to do whatever they can to maximise prices. Over the medium-term, policy-makers need to think strategically about the ownership and control of Australian resource assets. A major challenge for the Rudd Government will be balancing the need for investment in resource extraction and limiting the ability of a major buyer of Australian resources from becoming a supplier. The government should also exact concessions from the Chinese to open up opportunities for Australian investment in China.

Another key issue will be growing Asian investment in Australian property - both residential and commercial. The issue of Asian investors, especially if they are state-backed investors, buying Australian farms will be an emotive issue for many Australians. Governments will need to take care on this issue.

Leaving foreign investment decisions entirely to the short-term focus of the ‘market’ will not necessarily produce sound longer-term outcomes that reduce Australian vulnerabilities. There is a role for government through the Foreign Investment Review Board to consider the national interest when making decisions on foreign ownership of economically important national assets. Equally, however, policy-makers need to avoid making Asian investment an issue that excites xenophobic sentiments in the Australian population. Ownership, as long as it is widely spread, may matter less than the ability of government to extract benefits from Australian resource exports through taxation and royalties.

Any debate about foreign investment needs to involve a base line understanding that Australia has always been reliant on foreign investment, and that increasingly, as countries in the region become more important to the global economy, much of this investment will come from Asia. A long-term decline in commodity prices will mean less investment and greater incentive to consider all foreign investment. This includes investment from Chinese sources keen to ensure long-term resource supply. But the problem is the extent of Chinese state control of investments in the resources sector. Some difficult decisions lie ahead. It is unlikely that the Coalition will support increased restrictions, but some sections of the Labor Party and the unions might come out against Chinese investment if it increases dramatically.