China's appetite for New Zealand still growing

Chinese investors have shown interest in New Zealand farms. Photo / Christine Cornege

An obvious reason for the inward flow of Chinese capital into New Zealand is the huge surplus of Chinese investment capital and foreign currency reserves. Of more interest however, is the apparent desire to acquire new "knowhow" and expertise, and to obtain access to raw materials and supply channels.

Outside the agricultural sector, we have seen China-based Haier's acquisition of a cornerstone stake in Fisher & Paykel for $80 million. Another example, although not one with such obvious technology value, was the acquisition by Hong Kong based CKI Holdings of Vector's Wellington electricity lines business for $875 million. Notable here was the rumoured presence of one of the world's largest infrastructure companies in the sales process - Chinese state-owned enterprise State Grid Corporation.

There has been greater activity in the agricultural sector. The most recent example is Agria's partial takeover of PGG Wrightson, following on from its 2009 cornerstone acquisition. PGG Wrightson services the farming sector with particular expertise in livestock, seeds, nutrition and grain.

Chinese demand for NZ assets in the dairy sector remains particularly strong. The key drivers appear to be a desire to get direct access to market and to sidestep monopolist dairy giant Fonterra. Notable examples have been the $82 million investment in Synlait Milk by Shanghai stock exchange-listed company Bright Dairy and the proposed acquisition of Crafar Farms by Hong Kong based Natural Dairy. This was blocked by the Overseas Investment Office, only to see another Chinese buyer, Shanghai-based Pengxin International, take its place. The current sales of one of New Zealand's largest farming businesses, Dairy Holdings (out of the South Canterbury Finance stable), will undoubtedly attract Chinese interest.

Chinese appetite for New Zealand assets looks set to increase and Chinese capital, like other sources, will become more prevalent just like the ubiquitous "Made in China" stamped on our imports. Whilst much of the capital flows from corporates and government entities, the expectation is that private capital will follow, especially as private Chinese investors look to diversify their asset base by acquiring hard assets offshore.

Xenophobia by the public and politicians remains with respect to any foreign investment. Yes there are cultural differences, but these will become better understood over time. New Zealanders looking to take their place on the world stage need to be conscious of these, particularly with respect to management, governance and rights to intellectual property.

But Chinese capital should provide access to the world's largest market without the usual barriers to entry, and benefits such as sources of cheaper production and access to new technology. New Zealand investors need to lock these in. While access to rescue capital was the principal focus for both Fisher & Paykel and PGG Wrightson, they entered into co-operation agreements with their Chinese cornerstone investors encompassing the sharing of know-how and research and development, along with access to markets. The value of these arrangements is not yet proven, but let's hope material benefit is seen in our neck of the woods.

Most sensitivity remains around the sale of farm land. The Overseas Investment Act remains an uncomfortable piece of legislation that attempts to strike a balance between promoting inwards investment into New Zealand (so long as a net benefit to the country is generated), and not allowing the Crown jewels to be sold off. John Key's description of "tenants in our own land" appears to be developing into a catchphase.

Recent amendments designed to ensure New Zealand's economic interests are safeguarded as an additional pander to this public sensitivity and create a broader discretion on the part of the Government.

The process remains obscure and unsatisfactory from an investor's point of view, but while the political sensitivity remains, I cannot see any real shift to certainty.

Michael Pollard is a corporate partner at Simpson Grierson.