China Business: Chinese ventures are growing

By Martin Thomson

Latest foreign direct investment targets high-value and consumer-related sectors, writes Martin Thomson.
President Xi Jinping is on the record as wanting to increase foreign direct investment by China. Photo / Greg Bowker
President Xi Jinping is on the record as wanting to increase foreign direct investment by China. Photo / Greg Bowker

New Zealand's prosperity and foreign direct investment into our economy are inextricably bound.

Our current account has been in deficit for most years since 1951, making the economy heavily reliant on foreign capital. Encouraging the right sort of investment is essential for New Zealand's economic well-being.

Historically, China has not been a large provider of foreign direct investment to New Zealand. But that is changing. There is strong outbound investment from China globally. This is expected to continue - some say at a growth rate of more than 10 per cent a year.

President Xi Jinping is on the record as wanting to increase foreign direct investment by China.

China's "going out" policy, announced in 1999, was the start. It was founded on the Chinese Government encouraging Chinese companies to invest offshore. By 2015, outbound direct investment flows were at an historic high of US$118.02 billion.

The nature of that investment, however, has been changing and is set to change more. KPMG noted in its China Outlook report of March 2016 that Chinese outbound direct investment had more recently targeted high value-added and consumer related sectors, as well as healthcare, entertainment and high-tech.

This change has been cemented by China's 13th Five Year Plan (for 2016-2020), revealed in October 2015. The plan sets goals and targets for China's development, and is the first under President Xi's leadership.

Recognising the economy had become unbalanced, it urged Chinese companies to invest overseas, sell more Chinese technology and services offshore, and more fully integrate into global supply chains.

This means that in future we can expect to see more production established by Chinese companies in other countries.

This integration is a marked strategic change and recognises the Chinese economy needs to be more than the "export-import" economy it has been historically. It is also making a transition from investment-led to consumption-led GDP growth.

Thus President Xi forecasts that Chinese outbound direct investment will increase by US$1.25 trillion in the next 10 years, or a total of about US$200 billion annually.

So while outbound direct investment (some argue) may have briefly slowed last year, the overall aim is ongoing growth in offshore investment.

Chinese investment in New Zealand continues to grow overall. It will accelerate (although we need to understand that we are one of many countries competing for much-needed capital).

During Prime Minister John Key's recent visit to China, he attended a business networking event, hosted by Jack Ma of Alibaba fame. He confirmed to investors that New Zealand was open for capital.

If we're clever, we can facilitate foreign direct investment into areas of need in the economy.

Chinese investment in New Zealand has increased by 370 per cent from 2009, admittedly from a low base, with a current annual growth of NZ$1 billion. It sees New Zealand as stable economically and politically, with investor-friendly policies.

But China is not our largest foreign direct investor. According to KPMG's review of Overseas Investment Office decisions (in the year to December 2014), Canada was the "most significant source of FDI (in that year)".

Also contrary to perceptions, China's investment in New Zealand is relatively diversified. Of a $6.6 billion investment total (May 2015 - NZTE database), capital was spread through primary industry and food, forestry, manufacturing, financial services, infrastructure and hotels.

In fact China's choice for the largest sector for its investment most recently has been infrastructure and utilities.

With growing financial stress apparent in the agri-sector, and given China's appetite to get involved in countries' supply chains, there is a new opportunity for investment emerging in New Zealand. This may challenge New Zealand a little in 2016-17, but history shows this kind of investment is mutually beneficial.

A moderating factor on Chinese investment into New Zealand has always been the Overseas Investment Office. This regulator looks at investments of more than NZ$100 million and all investment in sensitive land and fishing. Issues are now apparent around the OIO process - especially the length of time approvals can take.

This needs fixing for capital to flow more freely.

The arrival of three major Chinese banks in 2014 has also changed the investment landscape. They facilitate further investment, and are capable of debt-funding mergers and acquisition activities in New Zealand.

A further, less noticed, arm of Chinese capital flows into New Zealand via investor category immigration. Chinese immigrants are by far the biggest source of investor category immigration at 55 per cent of that class.

They bring money with them, which they invest in the New Zealand economy. A New Zealand China Council Report in October 2015, stated that the average value of investment made by these migrants is NZ$2.32 million.

There is potential for investment in the tourism sector. Driven by enormous growth in Chinese tourism to New Zealand (and the prospect of even more), there has been a lag in infrastructure in this sector.

High-quality accommodation is in demand, and must be built.

China has already stepped in with Fu Wah's investment in a hotel in Auckland's Wynyard Quarter; NDG's planned hotel in Elliott St, Auckland, and New Wish Investment's purchase of the Hilton, Queenstown, but there is still more opportunity here.

Recent Chinese investment highlights

• Construction of the $200 million five-star Park Hyatt hotel at Auckland's Wynyard Quarter by Fu Wah International Group commenced in March 2016.

• New Wish Investment Limited obtained OIO approval in February 2016 to buy security interests secured over the Kawarau Falls development, which includes the Queenstown Hilton, valued at $80 million.

• Oceania Dairy, owned by Inner Mongolia's Yili Group, commenced construction of its $200 million expansion of its dairy factory in South Canterbury in January 2016.

• Super Organic Dairy Company's establishment of sheep dairy farms and a genetic sheep breeding programme, including in a joint venture with Waituhi Kuratau Trust, in December 2015.

Martin Thomson is a Partner with DLA Piper New Zealand

- NZ Herald

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