Australia's government may block China Mengniu Dairy Co Ltd's purchase of some of the country's best-known milk brands, the Australian Financial Review reported, citing sources who blamed "diplomatic issues".
Treasurer Josh Frydenberg has gone against the advice of the Foreign Investment Review Board (FIRB) which was in favour of approving the A$600 million ($430.98 million) deal, the newspaper said, without identifying its sources.
That would mark the first government veto since Australia in July announced its biggest shake-up of foreign investment law in almost half a century. That gave the treasurer last-resort power to vary or impose conditions on deals even after FIRB approval, or force divestment in the event of a national security risk.
The revision came partly in response to fear that the economic impact of the COVID-19 pandemic would make buying strategic assets easier for cashed-up foreigners.
The law does not mention any specific country of origin. China Mengniu's approach, however, came against a backdrop of increasing Sino-Australia tension after Canberra called for an international inquiry into the origins of the novel coronavirus, which was first reported in China at the end of last year.
China Mengniu offered to buy Lion Dairy & Drinks Pty Ltd from Japan's Kirin Holdings Co Ltd in November, just 10 days after receiving the competition regulator's approval to buy infant formula maker Bellamy's for A$1.43 billion. It gained antitrust approval for the Lion deal in February.
"The government does not comment on the details of foreign investment screening arrangements as they apply, or could apply, to particular cases," Frydenberg said in an emailed response to Reuters' questions about the report.
A spokesman for Kirin said, "We have heard nothing is decided, so we cannot comment based on speculation."
A spokeswoman for China Mengniu did not immediately respond to requests for comment.
China Mengniu's Hong Kong-listed shares were down 3.1% in a broader market that was down 2.1%. Kirin shares were down 0.4% in Tokyo versus a 1% fall in the benchmark index.
Diplomatic relations between Australia and China soured further in May when Canberra joined Western peers in criticising a security law that Beijing imposed on the former British colony of Hong Kong.
That came after Beijing imposed import tariffs on Australian barley and suspended some beef imports. In June, it advised Chinese students and tourists to avoid travelling to Australia, citing racial discrimination.
On Tuesday, China's commerce ministry announced an anti-dumping probe into imports of Australian wine.
Chinese investment to Australia more than halved in 2019 to $2.4 billion, and the number of deals is likely to keep falling this year due to the diplomatic tension as well as the coronavirus outbreak, bankers said.