Recently, the High Court of New Zealand overturned a decision by the Overseas Investment Office to allow Chinese company Shanghai Pengxin to purchase the Crafar Farms, sparking worries about the ability to attract future FDI, maintaining positive trade relations with China, and the situation’s implications for future partial sales of state owned assets. A new decision should be reached within days, with some foreseeing the inevitability of the sale due to the potential increased export business driven by Shanghai Pengxin’s connections. The court ruling in NZ and the frenzies surrounding the potential farm sale demonstrate our simultaneous fascination for and wariness of China. With significant experience in FDI and trade agreements, China can easily perceive the public relations issues and react with public diplomacy and economic incentives. This brief post is the first of a series examining the Crafar Farms case.
China is NZ’s second-largest export market, and NZ is the only developed country with a free trade agreement with China. The Overseas Investment Office’s initial decision to approve Shanghai Pengxin’s purchase of Crafar Farms, then, according to some was swayed by Chinese lobbyists or an effort to keep trade relations blooming. In August 2011, Treasury and OIO officials met with the Chinese political consul to discuss foreign investment rules in NZ, but apparently did not discuss the Crafar Farms deal. In order for foreigners to gain ownership of ‘sensitive assets’, they must prove that their ownership will provide ‘substantial and identifiable benefits’ to NZ; Shanghai Pengxin attempted to display benefits, which were agreed to by locals and importantly, Fonterra. In the High Court ruling, however, Justice Miller stated that an overseas buyer not only has to prove such benefits to NZ, but they must “offer a deal more beneficial than any local sale”. In this case, he ruled that the OIO overstated the benefits which Shanghai Pengxin would offer to NZ. Tim Watkin illustrates:
“Like some robed bouncer, he’s told Shanghai Pengxin – and all potential foreign investors – that we have a dress code in this country and if they want to come in they’d better polish their shoes and put on their best suit. And given the value of productive farm land to our country’s wealth, our national identity and our great-grandchildren’s prosperity, that’s probably not a bad view to take.”
In fact, the OIO decision originally established the following:
“The Chinese Government recently confirmed that it saw New Zealand as an attractive place for investment and was encouraging Chinese companies to invest in strategic assets such as dairy farms. If this Application is refused without convincing reasoning linked to non-compliance with the Act or the Regulations (which we submit is not the case), that decision will be widely reported both domestically and internationally and will be likely to send a negative message about New Zealand’s attitude towards Chinese investment and about whether the commitments made in the New Zealand-China FTA are being honoured.
“The transaction will also confirm New Zealand’s compliance with the New Zealand-China FTA and therefore enhance New Zealand’s strategic interests.”
Strategic assets such as farm land will continue to be sold in NZ, and in fact much farm land has already been sold to foreigners as of late; over the past 18 months, 72 farms were sold to foreign buyers out of a total pool of 10,000 dairy farms and 35,000 sheep and beef farms. This statistic was noted by PM John Key in reaction to a new poll stating that 76 percent of voters want tougher restrictions on sales of land, including farms, to foreigners. With the media publicity, High Court ruling, trade relations with China being so critical and the significance of the dairy industry to the NZ economy, the Crafar Farm deal has struck a chord with New Zealanders that the Government is attempting to mask. Given that the potential New Zealand buyers are trying hard to win over the public and the courts, and that the Chinese government created a new fund to assist with financing international takeover bids, the public perception of the value of foreign direct investment will likely become a more consistent topic. The NZ Government, then should be transparent in its influence with foreign investors when they are in direct competition with locals for strategic assets.