[CommSec Research]Australia doubles investment in China

dyno

Australia doubles investment in China

International investment position

• In 2010 the level of Australian investment in China almost doubled to $11.9 billion from a year earlier.
• The level of foreign investment in Australia increased by $61.3 billion to reach $1,967.8 billion at 31 December 2010. Portfolio investment accounted for 58 per cent, followed by direct investment (24 per cent), other investment liabilities (12 per cent) and financial derivatives for $104.2 billion (5 per cent).
• The strength of the Australian dollar is a clear driver in deterring foreign investment and making it more attractive for Australian companies to invest overeseas. Total new foreign investment in Australia fell from $162.5 billion in 2009 to $94.0 billion in 2010. The Australian dollar averaged US$0.79 in 2009 and US$0.92 in 2010. So far in 2011 the Aussie has averaged US$1.02.
• Chinese foreign investment in Australia rose from $16.6 billion to $19.5 billion in 2010. In contrast US foreign investment totalled $549.9 billion in 2010, while UK investment totalled $472.6 billion.

What does it all mean?

• The latest foreign investment data has put into context the impact the Australian dollar is having on the attractiveness of Australia as an investment hub. Over 2009 the Aussie dollar averaged just US79c, and total two-way foreign investment flows were around $162 billion into Australia. However over 2010 the dollar averaged US92c and net flows into Australia fell by 43 per cent. It is not only foreign investors that have been deterred by the strength of the dollar but also domestic investors have found it more attractive investing overseas.
• So far over 2011 the Aussie dollar has averaged US102c and given the Aussie is expected to hold around US110c in the next few months it is likely that inbound investment flows will be even more muted. In fact the rapid rise of the Australian dollar goes a long way in explaining the underperformance of domestic equities compared with overseas peers.

• Since the start of the financial year the ASX 200 has risen around 12 per cent, well below the Dow Jones which has gained a staggering 34 per cent. Similarly the S&P500 has risen almost 32 per cent, while the tech-heavy Nasdaq has out-performed, rising over 36 per cent. Even in Europe the London FTSE has gained almost 24 per cent, while the German Dax has managed to eke out an increase of almost 26 per cent. Whichever way you cut it, the under-performance of domestic equities is plain to see.

• Contrary to popular belief, China is not a major investor in Australia. In fact it is far back in the pecking order with investment from the US, UK, Japan and Singapore far surpassing China. Over coming years Chinese investment is likely to continue to grow rapidly but the rise in investment is of a very low base and at present it is still almost 30 times less than what the US has invested in Australia.
• Chinese investment even looks more sedate when two-way flows are considered. The strength of the Australian dollar and attractiveness of the Chinese growth story has seen Australian investment in China surge from $6.3 billion in 2009 to $11.9 billion in 2010. Certainly China is also investing in China with total investment rise from $16.6 billion to $19.9 billion in 2010. Clearly the rhetoric around China buying up all Australian mining assets and farms is overdone. While China is investing in Australia we have not been shy to put our dollars to work in the Chinese economy either.

What do the figures show?

Foreign investment flows:

• The level of foreign investment in Australia increased by $61.3 billion to reach $1,967.8 billion at 31 December 2010. Portfolio investment accounted for 58 per cent, followed by direct investment (24 per cent), other investment liabilities (12 per cent) and financial derivatives for $104.2 billion (5 per cent).
• Total new foreign investment in Australia fell from $162.5 billion in 2009 to $94.0 billion in 2010. The strength of the Australian dollar is a clear driver in deterring foreign investment and making it more attractive for Australian companies to invest overseas. The Australian dollar averaged US$0.79 in 2009 and US$0.92 in 2010. So far in 2011 the Aussie has average US$1.02.
• Total Chinese foreign investment in Australia rose from $16.6 billion to $19.5 billion in 2010. In contrast US foreign investment totalled $549.9 billion in 2010, while UK investment totalled $472.6 billion.
• In 2010 new Chinese investment in Australia totalled $1.65 billion and over the same period of time Australian new investment in China totalled $1.43 billion.

• The leading investor countries at 31 December 2010 were: United States of America ($549.9 billion or 28 per cent), United Kingdom ($472.6 billion or 24 per cent), Japan ($117.6 billion or 6 per cent), Singapore ($43.8 billion or 2 per cent), Netherlands ($42.4 billion or 2 per cent), and Hong Kong (SAR of China) ($40.8 billion or 2 per cent).

What is the importance of the economic data?

• The Australian Bureau of Statistics (ABS) provides annual figures on International Investment flows. The figures assist is gauging the source of money flowing into the economy.

What are the implications for interest rates and investors?

• The domestic economy is certainly facing headwinds, with the higher Australian dollar curbing tourism and making exports less competitive. At the same time overseas fund managers are locking in profit on domestic equities and reweighting portfolios. As such the domestic equity market is likely to underperform overseas peers in coming months.

jolinroy

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