Australia: Chinese investment in Australia - the rooster crows before sunrise breaks the dawn

In 2016, China's total outbound M&A volume increased for the seventh consecutive year by US$219 billion, accounting for more than half of Asia Pacific's outbound volume and, in a first, exceeding US outbound M&A investment.

In this, the year of the Fire Rooster – a year of intelligence, fast pace and anxiety – as the Chinese authorities strengthen their scrutiny of outbound M&A activity and tighten checks on capital outflows – Chinese acquirers are likely to continue to focus on strategic acquisitions in healthcare and tourism in 2017. To realise the full benefits of M&A in these two sectors, bolt-on acquisitions by Chinese investors in vocational training services, for example, aged care and hospitality, is likely to grow in 2017.

In response to heightened concern about regulatory risk, we suspect the formation of consortia (with an underwrite by non-PRC investors) and the potential for the reintroduction of break fees will be more likely.

CAPITAL OUTFLOW CONTROLS

As predicted in our 2015 M&A Review, the weakening yuan, the slowdown in the Chinese domestic market, and the relaxation of controls on outbound capital saw a drive to seek returns offshore. Indeed, China's foreign exchange reserves fell by US$320 billion to US$3.011 trillion in 2016 (on top of a record drop of US$513 billion in 2015) and in February this year fell below the all-important US$3 trillion level.

To support China's reserves, in 2016 Beijing required the State Administration of Foreign Exchange (SAFE) to strictly enforce the US$50,000 limit on outbound transfers coupled with a personal pledge that the money is not being used to buy overseas property, securities or insurance.

In addition, at the end of 2016, new rules were placed on outbound investments by centrally-controlled state firms, including a "negative list" of investment projects in which centrally-controlled state firms would not be allowed to invest.

At this stage the impact of the new rules is one of timing. Anecdotally, provided an acquisition has the requisite Government support, while transfers are delayed (in some cases over a month), the money does flow.

With SAFE in a defacto "approval" role (despite the relaxation on outbound approvals previously undertaken by the NDRC and MOFCOM), heightened concern about regulatory risk may result in the reimposition of break fees to ensure Chinese bidders are confident about their ability to close transactions.

REGULATORY PUSH BACK

Unsurprisingly and consistent with the rise of global populism and increased M&A activity by Chinese bidders, 2016 was also characterised by concern about Chinese ownership of strategic assets and the possible security implications relating to the acquisition of technology and data. Chinese bids to the value of US$35 billion failed in 2016 as a result of this regulatory push back – with the largest number of knockbacks being proposed Chinese acquisitions in the United States.

The Committee on Foreign Investment US (CFIUS) increased scrutiny of Chinese deals for reasons which were not always immediately clear. Anbang Insurance Group's acquisition of Hotel del Coronado, which is located near a US naval base, fell through after US national security officials opposed the deal. In an unusual move, CFIUS approached Fosun International about a month after it closed on a deal to buy an 80% stake in property and casualty insurer Ironshore for $1.84 billion with concerns about how Fosun would handle professional liability coverage to the US. In the four week period between 22 January and 23 February 2016, three deals were rejected by CFIUS – all in the technology space and all faced undisclosed security concerns, including GO Scale Capital's proposal to acquire an 80.1% stake in Philips' Lumileds division, China Resources Microelectronics' and Hua Capital Management's bid for Fairchild Semiconductor and Tsinghua Unisplendour's proposal to acquire a 15% stake in Western Digital.

The concerns about Chinese investment in the US, culminated in the recommendation from the US-China Economic and Security Review Commission that CFIUS's mandate be extended to authorise CFIUS to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of US companies.

Concerns extended to the United Kingdom and Europe in countries without specific foreign investment regimes. For example, listed Shenzhen company Midea Group's efforts to buy out German industrial robot maker Kuka provoked a political furor in Germany, resulting in Midea offering numerous guarantees on preserving local sites and jobs. Similarly, Chinese investment in the Hinkley nuclear project in England resulted in intervention by the new British Prime Minister.

Consistent with these concerns in February of this year, Germany, France and Italy requested the EU grant them a right of veto over Chinese high-tech takeovers and a right to intervene in direct investments by state-controlled entities.

The Australian Government broadcast its focus on security matters with the appointment of David Peever (former Chair of the Minister of Defence's First Principles Review of Defence) and David Irvine (former director general of ASIO and the Australian Secret Intelligence Service) in 2015, stating:

In the years ahead it will be increasingly important for FIRB to not only have commercial expertise and background to deal with complex commercial transactions but to also have an even greater understanding of the broader strategic issues including national security.

This focus was most prominently seen last year when the FIRB Board unanimously agreed that the sale of Ausgrid to State Grid Corporation and Cheung Kong International posed an unacceptable security risk after consultation with Department of Defence, ASIO and DFAT.

Recognising the concerns of foreign investors about predictability and transparency of a foreign investment, Treasurer Scott Morrison announced in January the establishment of a Critical Infrastructure Centre and foreshadowed a package of foreign investment policy reforms intended to provide guidance about the national interest test.

The events of 2016 make clear there is increased international inter-agency sharing of security information and concerns, highlighted by the FIRB checklist that asks applicants to provide details of any relevant information pertaining to domestic or international investigations, rulings, ineligibilities, or conditions imposed as part of previous foreign investment approvals, or exclusions relating to the purchaser.

For Chinese bidders the lessons from 2016 make it evident that national security is a sensitive area and bidders (as has always been the case for politically sensitive acquisitions) should engage early with FIRB and proactively address key concerns. The Treasurer's approval for the acquisition of Kidmans by the Hancock/Shanghai CRED consortium is an exemplar of effectively addressing sensitivities.

CLOSING THE DEAL

In a fragile M&A environment concerned with deal completion risk, PRC bidders (whether state-owned, private or otherwise) wishing to invest in Australia need to actively address market concerns.

As we predicted in our 2015 M&A Review, Chinese investors continue to demonstrate flexibility and a willingness to test the waters, being increasingly receptive to a variety of transaction structures including consortium arrangements (for example, on Genesis HealthCare), the acquisition of strategic minority stakes (for example, HNA's 13% stake in Virgin Airlines) and an appreciation of the political context by offering mitigation measures to preserve jobs and operational independence.

In 2017, we anticipate Chinese bidders will also need to contend with a general wariness of boards and concern about Chinese bidders' ability to close the deal. Continuing to adopt a flexible approach through the use of break fees paid as upfront deposits, as was the case in Tianqi's bid for Talison (see Corrs' thinking piece Reverse break fees payable upfront – The new name of the PRC M&A game), and the use of bidding consortia involving non–Chinese entities who in effect provide funding support, will assist to provide comfort that a bidder is committed to closing the deal.

OUTBOUND INTEREST

We anticipate that Chinese buyers in 2017 will focus on consumer and leisure opportunities associated with a rising middle class.

HEALTHCARE – GOING OUT, BRINGING IN

As predicted in our 2015 M&A Review, Chinese acquirers continued to focus on the Australian healthcare market and the healthcare sector globally:

  • GenesisCare – China Resources and Macquarie acquiring a 66.6% stake in cancer and cardiac services business GenesisCare. GenesisCare is Australia's largest provider of cancer and cardiac care, and the biggest private provider of cancer care in the UK and Spain.
  • Bio Products Laboratory Limited – China's Creat Group Corp acquired Bio Products Laboratory Limited – a maker of human blood plasma products in the UK – for US$1.2 billion in one of the largest international pharma acquisitions by a Chinese company.
  • Gland Pharma and Ambrx – Fosun Pharma made a non-binding offer to buy 96% of India's Gland Pharma Ltd (focused on injectable drugs) and with a consortium of Chinese companies jointly acquired Ambrx Inc.
  • Epic Pharma – China's Humanwell Healthcare group also recently bought New York-based Epic Pharma LLC for US$550 million.

From pharmaceuticals to medical products to consumer health, China's healthcare sector continues to develop at breakneck speed with health spending predicted to rise to US$1 trillion in 2020.

Growth in demand for care is likely to remain strong for a number of reasons:

  • chronic conditions – diabetes and hypertension are proliferating rapidly as the population ages, many more people move to cities, and lifestyles change;
  • affluent middle class – increasing incomes and more extensive insurance coverage improve patients' ability to pay;
  • demand for treatment – cancer, depression, and respiratory illness remain largely underdiagnosed and undertreated in China. Better and earlier diagnosis, as well as demand for treatment from the middle class will significantly expand the number of patients;
  • Government support – the PRC Government is actively committed to developing and providing strategic support for the biomedical industry, including pharmaceuticals and vaccines, medical devices and diagnostics.

Australia is an excellent destination for astute Chinese buyers to "go out and bring in" technology and expertise in healthcare. The acquisition of an Australian healthcare company with know-how, trained staff and stringent compliance with Australian regulatory standards will answer the PRC Government's push to upgrade the "Made in China" brand.

THERE'S NOTHING LIKE AUSTRALIA – 2017 AUSTRALIA-CHINA YEAR OF TOURISM

Chinese tourists spent a record US$164.8 billion overseas last year and as we foreshadowed (see Corrs' thinking piece Year of the Monkey Riding the Third Wave), in 2016 Chinese investors have set their sights on the fast growing tourism industry, including:

  • China's HNA (which owns China's fourth-largest airline, Hainan Airlines) acquired Carlson Hotels (the US owner of the Radisson brand), acquired a 13% stake in Virgin Australia and established a joint venture in China with Spain's NH Hotels; and
  • Jin Jiang acquired the Louvre Hotels portfolio of brands.

For the year ending 30 November 2016, 1.193 million Chinese tourists visited Australia representing a 19% increase from 2015. Tourism Australia surveyed Chinese consumers about their key considerations when choosing a destination and 45% cited food and wine. Although packaged tours are common, the category known as "free and independent travel" is becoming increasingly popular, especially with younger tourists – an indication that Chinese travellers are interested in different "experiences".1

Chinese investors accounted for 38% of investment in Australian tourism in 2016 with Chinese investors having already snapped up hundreds of millions of dollars in Queensland tourism assets, including iconic resorts Daydream Island and Lindeman Island, the Sheraton Mirage Port Douglas and Gold Coast hotels such as ­Palazzo Versace, the Hilton Surfers Paradise, the Sofitel and the Crowne Plaza.

Riding the tourism wave is likely to continue in 2017. At the end of January this year, Dalian Wanda pledged to invest $1 billion for development in the Sydney CBD with Wanda having already acquired a controlling stake in a $900 million-plus Gold Coast property in August that it hopes to turn into a luxury hotel and serviced apartment complex.

As the tourist cycle comes full circle, the announced sale of the Japanese real estate group Cosmos Initia Co Ltd's Fraser Island Kingfisher Bay Resort, Eurong Beach Resort and accompanying tour and marine businesses means Chinese buyers will have an opportunity to ensure that legions of Chinese tourists in Australia shop, dine and play at a property owned by them.

Footnote

1 See http://www.tourism.australia.com/markets/market-regions-greater-china.aspx.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Chambers Asia Pacific Awards 2016 Winner – Australia
Client Service Award
Employer of Choice for Gender Equality (WGEA)

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Corrs Chambers Westgarth
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Corrs Chambers Westgarth
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions