Prepare for a wave of Chinese private investment

A new era of Chinese investment in Australia is upon us, and this time it’s not driven by large state-owned enterprises but by more nimble Chinese private interests.

Kingho, one of China’s largest private mining companies, has announced an all-cash tilt at the cash-strapped mining junior Carabella Resources, which has coal assets throughout Queensland.

Though the deal is only valued at $66 million, a pittance in the world of mega-mining transactions, the Chinese suitor is expected to cough up $900 million in the future to fund Carabella’s various projects.

Kingho also wants to run its global mining operations outside of China, which spans from Sierra Leone to Kazakhstan from its Australian headquarters in Sydney, according to chief investment officer Dennis Shen. 

Kingho’s bid takes place only a day after New Hope, one of China’s largest private agribusinesses, acquired Australia’s fourth largest abattoir – Kilcoy Pastoral Company in Queensland for an undisclosed amount.

What we are witnessing is a new era of Chinese investment in Australia – not driven by large state-owned enterprises but by more nimble Chinese private interests.

The Chairman of New Hope Group, Liu Yonghao, one of China’s richest men, said recently in South Africa that private companies are looking to invest abroad as they want to move up the value chain, acquiring new technology and expanding overseas market.

This is not just taking place in Australia, but worldwide. Chinese real estate tycoon and the country’s richest man, Wang Jianlin, bought the second largest cinema chain in the United States recently and he wants to invest more. 

Back in Australia, some of the most notable Chinese takeover bids in recent times were from private companies such as Shandong Ruyi, which controversially bid for the Cubbie Station – the largest cotton farm in Australia – as well as Cathay Fortune (a Chinese private equity firm) which made an abortive bid for Discovery Metals.

While private companies are expanding their footprint Down Under, large Chinese state-owned enterprises have become gun-shy after a string of investment failures. CITIC Pacific’s Sino Iron project, which is six billion over budget and four years behind schedule, only just produced its first shipment of iron ore this week.

A Chinese steel industry executive told Business Spectator last week that state-owned resource companies have become weary of investing in large scale Australian projects because of their poor record of success. “We haven’t had a win yet,” he said.

Massive Chinese investments in magnetite iron ore projects lay dormant in the Mid-West region of Western Australia as Premier Colin Barnett tries desperately to get Chinese investors to build necessary infrastructure in the region including the Oakajee Port.

A lot of Chinese state-led investment in iron ore assets took place at a time of sky-rocketing prices and when Beijing was worried about the market power of Rio-BHP duopoly (they still are). Big Chinese state-owned miners were happy to pay a price premium in order to secure supply.

They poured money into projects without conducting proper risk assessments and believed they could build Australian projects with battalions of cheap but skilled Chinese construction workers. They soon found out that a truck driver gets paid more than their executives.

The National Development and Reform Commission, which approves large scale overseas investments, is taking a hard-line on loss-making projects abroad and holding executives accountable for their investment decisions. The head of Sino Steel reportedly lost his job after the company mothballed the $1.3 billion Midwest project.

Richard Gannon, a managing director from Deutsche Bank, who is advising Kingho on the takeover bid, said the last eighteen months have been a challenging time for Chinese large state-owned investors but Australia still remained an attractive investment destination.

But while politicians are still haggling over the merits of Chinese state-owned investment in the Australian resource sector, the reality is that a new wave of private money is coming to Australia.

Though they may not have enough financial power to gobble up a chunk of Rio or BHP, they certainly have ample ammunition to provide much needed capital to junior miners who are struggling to fund their projects.

Private Chinese investors are less concerned about security of supply than their state-owned counterparts. They are profit driven; execute deals faster and are not afraid of engaging with local stakeholders including the media.  

It’s important that Australia embraces this new money. It’s time for us to reflect on our attitude towards foreign investment, which has been dominated by anxiety over state-owned investment. 

Follow Peter Cai on Twitter: @peteryuancai

Subscribe to the China Spectator newsletter: http://bit.ly/ChinaSpec

Related Articles