While foreign investment can be risky, it can also help add value, writes Richard Fyers

I was recently approached for advice about the purchase of farmland by Chinese. My Kiwi inquirer said his friends wanted to buy a dairy farm which he had informed them could be run by a sharemilker.

"Don't waste your time unless you are being paid for it," I told him. Many New Zealanders have tried to help potential Chinese buyers of farms but there is only a remote chance of success. He responded, "Oh no, they are keen, have the money and just want a profitable business."

I warned him about the many difficulties: they will not have the money; they will not like the profitability; it will be difficult to manage; it will cost them over $50,000 to go through the approval process and they are unlikely to succeed. Instead, I said, encourage them to buy a rental property, they won't need any approvals and will get a steady return.

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Some weeks later I bumped into him again. He said, "Remember my friends that wanted to buy a dairy farm? Well they were arrested at the Chinese airport on the way here with a bag full of cash. They are in prison so that's the end of that."

The major reason Chinese investment is different from other countries is that it is Chinese Government controlled.

State owned enterprises, companies and individuals must get approval to take money out of China. There are national approvals needed at either central or provincial level from more than one authority. Because of these complicated controls, our official scrutiny of Chinese investors may need extra attention to ensure all approvals are in order.

One thing for New Zealand sellers to watch for is that Chinese bidders for a large business may be introduced to each other during the approval process and may collaborate to spoil the auction. For Chinese investors, in the length of time they need to get approvals opportunities may be lost and sellers may not like long or uncertain settlements.

Chinese SOE and private investment in New Zealand should not automatically be considered "of equal footing". The investment interest of a person or non-governmental entity will invariably be commercial or emotional while the intentions of a state owned entity may also be political. Foreign state investment in any country will receive more attention from approval authorities than non-governmental investment.

The free-trade agreement with China does not require either country to open its doors completely to the other. New Zealand businesses in China must continue to obtain official approvals even for the smallest activity whereas, for the most part, Chinese nationals can invest here without any approvals. China's control of foreign investment is tighter than ours - categorised into encouraged, permitted, restricted and forbidden - with special rules sometimes requiring local participation.

Even after approval to invest, the foreign investment enterprise is treated differently from a Chinese-owned company. The restrictions on foreign investment will continue to be removed as their economy matures. Calls in New Zealand for more regulation of inbound investment are only symptoms of a lack of confidence.

Has the free-trade agreement allowed Fonterra to build a lucrative business in China? Its trading has been profitable but it lost a bundle on San Lu and I doubt its dairy farming in China is profitable yet. The main benefit of Fonterra's farming in China will be public relations and the transfer of our dairy technology. Eventually Fonterra's Chinese farms will have considerable value.

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Unfortunately, the free-trade agreement has not resulted in any obviously lucrative Chinese investment here nor any that shows signs of growing into value.

It will be interesting to watch the approval process for the sale of shares in Dairy Holdings - a profitable dairy farming business partly owned by US individuals. The Government needs to recoup its losses in South Canterbury Finance and will want to maximise the price. Will this influence the approval process?

The bigger, unaddressed, structural issue in New Zealand is the amalgamation of land ownership taking place. We used to have rules to stop this but they have been removed. Landcorp now has 110 farms covering 376,000ha, the NZ Superfund is buying farms and iwi also have vast land holdings. Big farmers' economies of scale outperform small holders who then find it harder to exit to investors while the big get so big not even large New Zealand players can afford them. We should reintroduce restrictions on amalgamation, iwi should sell down land to members and the Government could also sell down land either in economic units or by listing on the stock exchange.

Foreign investment is always more risky than investment at home. We should make it easier for Chinese investors and try to treat them in the same manner as our own. They will add value.

* Richard Fyers is a commercial lawyer, company director and executive member of the NZ China Trade Association.