A global risk consulting firm has warned that Australian companies need to conduct due diligence on potential foreign investors to assess risks before entering deals as China becomes the lucky country's primary source of proposed investment.
Kroll, a global risk mitigation and response solutions group, and Mergermarket, an independent mergers and acquisitions (M&A) intelligence service, have released the 10th issue of Kroll’s Spotlight Asia series, to trace the shifting trends of Chinese investment in Australia.
The report noted that real estate attracted US$8.8 billion (AUD$12.5 billion) worth of Chinese investment in 2014 FIRB approvals.
“Activity has been concentrated on residential property in Sydney and Melbourne,” the report said.
“China’s high-profile anti-corruption clampdown, however, has brought to the fore worries that the Australian property market may be a target for those seeking a safe haven in which to park flight capital of questionable origins.
“Similar risks are extant in the M&A market, and their manifestation can lead to regulatory backlash.”
Violet Ho, senior managing director, and Richard Dailly, managing director at Kroll, said that if an Australian company has been bought with flight capital obtained via illegitimate means, the entity may become subject to both financial and reputational risks, should either the Chinese government track down corrupt officials and laundered funds in an attempt to recoup losses, or the Australian government or competitors determine integrity weaknesses of their own.
Australian businesses looking to profit from inbound investment at this time of change need to be able to distinguish between legitimate red flags and stereotypical misconceptions, they said.
“Rather than run the risk of slipping into xenophobic hysteria,” Ms Ho said, “there needs to be an education process – local businesses need to acquire a working understanding of what to look for, what to look into, and how to interpret information they come across in the process of getting to know an interested foreign party.”
Mr Dailly said that pre-transactional due diligence is “vital to achieving an alignment of interest between the different parties, enabling each side to become more aware of who they are really dealing with and to make astute, better-informed decisions in the interests of a sustainable, risk-managed transaction and relationship.”
The report found that China has become Australia’s chief source of approved proposed investment, supplanting the United States for the first time as the country’s top foreign investor.
Chinese investment in 2014 increased 75 percent, from US$11.3 billion (AUD$16.1 billion) in 2013 to US$19.7 billion (AUD$28.1 billion).
In terms of M&A in 2014, Australia saw nearly twice the number of deals from Chinese bidders announced in 2013, due in part to a shift towards middle-market deal-making, according to the report.
The year so far has been eventful for bilateral trade relations between Australia and China.
The landmark China-Australia Free Trade Agreement (ChAFTA) was signed on 17 June.
ASX-listed wealth manager Equity Trustees said in its submission to the Senate Foreign Affairs, Trade and Defence Committee, that the deal will lead to increased participation by Australia in China's financial services sector, and vice versa.
Equity Trustees executive general manager of corporate trustees services Harvey Kalman said: “Positioning Australia to compete means assessing and, where appropriate, embracing opportunities to create an environment that opens doors for the Australian financial services sector.”
Mr Kalman said the ChAFTA will be a key part of this.
“If we can increase recognition, not only in China but throughout Asia, for Australian Financial Services Licences (AFSLs) and Collective Investment Vehicles (CIVs) it will increase the strength of our financial services sector and its ability to compete, benefiting local investors and the economy overall,” he said.