This article is based on a series of interviews with clients and colleagues based in mainland China, and explores the attitudes of Chinese businesses to overseas investment generally, and into Australia in particular. There was high degree of consistency in responses from clients on their investment plans, and perceived barriers to investment in Australia. The overall picture painted was one of businesses and investors still interested in overseas investment in certain sectors and in certain markets, but who are currently adopting a “wait and see” approach given travel restrictions and a significant level of uncertainty in global markets. The attitude to investment in Australia was of a medium level of interest, with concerns primarily around regulatory risk (FIRB approval).

The issue: as the government-to-government relationship declines, can we expect investment to continue?

2020 has been a challenging year for China on the international stage. Bans on participating in 5G rollouts; growing pushback on the PRC’s claims relating to the South China Sea; US sanctions on certain Chinese companies and individuals; COVID-19; high level government visits to Taiwan; the implementation of the National Security Law in Hong Kong and many other issues have all contributed to the perception – both within and outside of China – of an international environment significantly more hostile to China than anything seen in the last 30 years. The Sino-Australian relationship has also appeared to have generally deteriorated over the past two years, with a notable uptick in friction during 2020.

In the Australian business community, there is a genuine question mark over what impact the current political situation is having on investment decisions by Chinese enterprises. In M&A transactions, investor sentiment – an amorphous concept at the best of times – can significantly drive market trends and deal outcomes.

To try to understand the sentiment of Chinese investors towards outbound M&A investment, we have conducted a series of discussions with colleagues in our mainland-China offices, as well as clients who regularly invest overseas, to understand their views on Chinese overseas investment generally, and the attitude to investing in Australia specifically.

Question: are Chinese investors still actively looking at outbound investment?

Yes, however there is almost certain to be a slowdown in the short term.

At a fundamental level the drivers for outbound investment are still very much there (access to technology and brands, linking offshore businesses more closely with the domestic Chinese market, diversifying geographical and market risk). However, investors want certainty and this is a very uncertain environment.

There is a perception amongst sections of the business community in China of strong and growing anti-China sentiment in developed economies, however this wasn’t a deciding factor in whether or not Chinese investors would do deals. Business people are pragmatic and will always look to certainty and returns. The issue is a perception of foreign governments using regulatory responses (such as changes to Australia’s foreign investment laws) to target Chinese investment specifically, making businesses reluctant to make the investment which would be necessary to even properly consider an outbound investment project.

The inability to travel internationally is also a significant barrier; with many Chinese investors not willing to do deals without being able to personally meet counterparts or inspect key assets. Moreover, although China was significantly less affected by COVID-19 than many other places, it still had a devastating effect on many businesses and consumers earlier in 2020 from which it will take some time to recover.

Question: what sectors are most in demand by Chinese investors?

Technology, AI, advanced manufacturing, healthcare, and strong consumer goods brands are all sectors of great interest to Chinese investors. Of particular relevance to Australia, there was also interest in biotechnology, natural resources (excluding coal) and clean energy.

Question: what markets are being looked at most closely as investment locations?

The overwhelming response here was: Europe. In particular, the Netherlands and Germany were repeatedly mentioned as jurisdictions of interest. This is borne out by data from China, which indicated that the bulk of Chinese outbound investment was being channelled into Europe (and, specifically, the Netherlands) in 2020. With the EU set to tighten screening of foreign investment, this may cause capital flows to be redirected.

Australia was mentioned as a market of interest to many Chinese investors, however it was clearly not front of mind.

Question: has the tension between the Australian and Chinese governments impacted willingness to invest in Australia?

There were mixed responses to this question. The strong feeling is that the deteriorating relationship between the two governments has certainly not helped facilitate investment, but Chinese investors are still willing to look at the right Australian assets. A key concern is perceived regulatory risk in Australia: tightened foreign investment rules in Australia, and Mengniu’s recent decision to withdrawal its bid for Lion Dairy following informal advice from the Treasurer that he would not approve the acquisition, have meant Chinese investors view an investment in Australia as a risk.

Question: is it difficult to get Chinese outbound investment approvals for investments into Australia?

No, there does not seem to be any government policy in China restricting investments into Australia. The key thing which Chinese agencies will look at, for any outbound investment project, is the nature of the asset being acquired. There was some comment that outbound investment approvals from Chinese government, generally, were being delayed (but not blocked) more recently. This did not appear targeted at investments in Australia, but rather to overseas investment more generally.

In summary, the sentiment of Chinese investors towards outbound M&A investment in Australia is still there. However for Australian businesses looking to seek this investment, it is important to take steps to address the key concerns of Chinese investors. There are a range of strategies available to address these concerns, some of which are easy fixes and some of which will require close collaboration with government stakeholders.