During his recent visit to Hangzhou for the G20 summit, Prime Minister Malcolm Turnbull defended Australia’s position in relation to foreign investment from China. This followed last month’s decision, announced by Treasurer Scott Morrison, and following assessment by the Foreign Investment Review Board (FIRB), to block the sale of NSW electricity provider Ausgrid, to Chinese and Hong Kong bidders. In the wake of the decision, Chinese media reported that President Xi Jinping had called for a “fair, transparent and predictable environment” for foreign investment in Australia. Following bilateral talks between Turnbull and Xi at the G20, and with Chinese investment in Australia one of the major topics, Turnbull stated: “We mostly say yes, we invariably say yes, but from time to time we say no.” The chart below shows that the flow of direct investment from China into Australia has been outstripping that going the other way for some years now, and particularly in 2014 when direct investment from China into Australia was almost 15 times larger than that going out of Australia into China. Direct investment flows between Australia and China Source: ABS cat. no. 5352.0 Foreign direct investment (FDI) refers to investment in a business by a foreign investor(s) which gives them controlling ownership of the business purchased. It’s only one component of investment flows between countries, but as the most direct and active component, it often attracts greater attention and scrutiny. The disparate flows of inbound and outbound direct investment between Australia and China suggests that Chinese investors looking to Australia have had considerable success at a time when the rate of Australian direct investment into China has remained subdued. This of course doesn’t just reflect the ease of investment into the respective countries – it’s also a symptom of China running a current account surplus with a significant quantum of funds looking for a home, while Australia is a net importer of savings. However, Chinese direct investment flows into Australia moderated in 2015, falling to less than a third of their 2014 level, based on ABS investment flows data. This is likely a by-product of slowing economic growth in China, but has also come at a time of foreign investment integrity measures being introduced by the FIRB late in 2015, which may act to slow the rate of funds flowing into real estate investment (though 2016 data will be needed to confirm this). FIRB’s latest annual report indicates that, of total foreign investment flows into Australia approved in 2014-15, China accounted for more than a quarter of the proposed value, with the next largest share held by the United States on 15%. More than half of this Chinese approved investment was in the category of commercial and residential real estate, only marginally higher than the share of investment from other countries going into property. The 2015 decrease in inbound direct investment from China was also reflected in a 33% decrease in total FDI in Australia. However, the fall was stemmed by a 145% increase in direct investment from Japan, making that country the largest single-country source of FDI in Australia in 2015. When it comes to outbound FDI, for the first time in the past decade total direct investment flowing out of Australia was negative. This means that in 2015, in net terms Australians were taking their money out of foreign countries, and bringing it back to Australia. Most of the net negative flows of outbound direct investment were from funds being repatriated from the US (32% of total) and the UK (26% of total). Despite the large fall of inbound FDI in 2015, the negative flow of outbound direct investment from Australia means that the gap between inbound and outbound FDI in Australia in 2015 stood at just over $50 billion. This is on par with the level of net FDI seen over the past five years (but much higher than the average net FDI inflow of $15 billion per annum seen over the decade to 2010). Australia remains a large importer of savings, with direct investment an important component of that, particularly over the past five years. David Rumbens is a Deloitte Access Economics partner and co-author of our Weekly Economic Briefing.