China’s rekindled love affair with Australia

At the height of Australia’s mining boom Chinese buyers were scouting the country for mining assets and the Foreign Investment Review Board was flooded with applications. Between 2008 and 2012, the board examined 1495 applications, each worth more than $50 million, 126 of which were worth $1 billion or more.

But China’s appetite for Australian mining receded last year. Buyers, especially large state-owned enterprises, were reluctant to open their wallets and expressed preference for smaller and producing mines rather than green field projects.

Now they are back again. In the past few weeks, we have seen a sudden resurgence of Chinese appetite for Australia mining assets. Guangdong Rising Assets Management made an offer to buy Pan-Aust, a Laos-focused copper producer, for $1.5 billion. Early in the month, Chinese steel-giant Baosteel also teamed up with freight operator Aurizon to bid for Aquila Resources for $1.4 billion.

This is not even mention the blockbuster $6 billion deal for the Melbourne-based MMG, a Chinese-controlled mining company to acquire the Las Bambas copper project in Peru. This deal will make MMG one of the leading copper producers in the world.

Chinese interests are also becoming very active in the Australian infrastructure space. Chinese Merchants Group secured a 98 lease of the Port of New Castle, in partnership with Hastings Fund Management. The port is a large coal exporting terminal.

Mining acquisitions by Chinese companies increased 63 per cent in the first four months of this year and are expected to gather speed as Beijing relaxes its outbound investment rules. Under China’s outbound foreign investment regime, companies need to get regulatory approvals from the National Development and Reform Commission, the Ministry of Commerce and foreign exchange regulator.

The approval process is complex and often takes months to complete. It has become a source of constant complaints from both Chinese buyers and foreign targets, who are weary of the regulatory uncertainty. Chinese suitors often have to cough up a significant reverse breakup fee to soothe the concerns of their foreign targets.

Since May 8, Beijing has relaxed its grip on outbound foreign investment system. For deals that are under $US1 billion and not in sensitive sectors, Chinese investors are no longer required to get regulatory approval from the NDRC, the main regulator for foreign investments.

Unfortunately, Beijing deems fit to retain the requirement for Chinese companies bidding for the same asset abroad to obtain the so-called road pass -- industry parlance for approval of the company that the NDRC consider to be the best bidder, according to Li Junjie, one of China’s leading M&A advisors (Challenging China’s one bidder policy, January 16).

However, the significant relaxation of the rule means it will be much easier for Chinese companies to invest abroad than ever before. Chinese outbound investment is also likely to be supported by Beijing’s large foreign reserve, which is about $4 trillion.

China’s huge cash pile is no longer seen as a source of strength but a burden for the country’s policy-makers. Premier Li Keqiang said recently during a visit to Africa that China’s foreign reserve had become a burden for the country. Yes, you can have too much money.

Beijing has been actively looking for ways to diversify its cash pile away from the slowing and eroding low interest investment in the US treasury bonds and turning that money into equity -- resources assets abroad is one of the better options.

The decline in commodities prices from copper to iron ore since April last year have also wetted the appetite for Chinese buyers. China is the world’s largest importer of copper and iron ore.

A combination of relaxed outbound regulatory environment, easy cash and declining commodities prices will likely result in more Chinese bids for Australian assets. It is the time for investment bankers to brush up on their Chinese again.