They Might As Well Be In Zhejiang Province

The Chinese interest in buying up a significant chunk of New Zealand’s dairying real estate has hit the headlines over recent weeks. Hard-pressed dairy farmers, perhaps including the Crafars or their receivers and creditors, might understandably be grateful that at least somebody is ready to pay a good price for dairy farms, especially when the Australian banks seem unwilling to lend for such a purpose.

Should we welcome the willingness of overseas buyers to invest in our productive industries? Or should we be concerned that a significant part of New Zealand and its productive capacity is passing into foreign control?

Those, after all, are the questions that now have to be answered by the Overseas Investment Office. The issue gives rise to allegations of xenophobia on the one hand, and a concern for New Zealand’s viability as an independent country on the other. And it arises at a time when it has emerged that Chinese investors have spent billions in acquiring important interests in a range of leading Kiwi companies such as Mainzeal and Fisher and Paykel Appliances.

It also has to be assessed in the light of New Zealand’s unenviable record of having already sold off a higher proportion of our national assets than any other advanced country. We had sold to overseas owners by 2006 $82.7 billion’s worth of our national assets, a 700% increase since 1989. The repatriation overseas of the profits made from these assets imposes a further burden on our endemically unbalanced current account, and the need to borrow more overseas as a consequence means that our problems are considerably exacerbated.

We should, in trying to assess these considerations, immediately rebut any suggestion that the nationality of the prospective purchasers is a relevant factor. Whether Chinese or Americans, British or Japanese, the issues are the same. Should we be happy to see our productive capacity pass in to hands other than our own?

It is at this point that the particular features of the proposed purchase become relevant. It is one thing to wave through the foreign acquisition of a New Zealand manufacturing company. New manufacturing capability, we hope, will always emerge. A company that passes into foreign ownership may see its profits go overseas and may even move its operations out of New Zealand, but there can always be the hope that the next one will come along before too long.

Even if the foreign purchase is of some asset of national infrastructure – a rail network or an airport – experience suggests that once the foreign owners have sucked out all the profit they can, they might well sell the asset back into New Zealand ownership. Whatever downside is suffered is not necessarily forever.

It is here, however, that the current Chinese bids have to be regarded as both different and more worrying. First, the asset that is being chased is an important piece of real estate, an asset of which there is a finite amount. We cannot in this instance sell it off and then look to recreate some more.

Our most important productive industry – dairying – is entirely dependent after all on the availability of suitable agricultural land. If that land is no longer available to us, then we suffer a permanent diminution in our productive capacity and therefore in our national wealth.

So it becomes very important to understand the nature of the Chinese interest in our dairy farms. We know that, in one major case at least, the proposal is not just to buy a large number of South Island dairy farms. It is also to build a factory or factories in which the milk from those farms will be processed and from which the product will then shipped to consumers in China. This is, in other words, a process which will be entirely controlled from cow to consumer by Chinese money in the Chinese interest. The farms will be to all intents and purposes part of China and will entirely serve the interests of the Chinese economy. They might as well be located in Zhejiang province.

The scale and purpose of this intervention strongly suggests that it is not intended to be a fly-by-night investment that will be quickly sold on. This is clearly intended to be a permanent transfer of productive capacity from New Zealand to China. It feels as though it reflects not just the Chinese commercial interest but the national interest as well.

Let us be clear. New Zealand workers may be allowed to keep their (relatively low-paid) jobs for the time being (though under the free trade agreement with China even that cannot be guaranteed), but the profits of the productive capacity and the capital value of the asset will have passed out of our control and will have become a Chinese asset rather than ours.

Given the huge sums that Chinese investors have available, is there any limit to the proportion of our productive industry we would be prepared to see sold off? If there is, should we not be clear what it is? And would this not suggest that this is not your average foreign purchase, but one to which the Overseas Investment Office should pay special attention?

Bryan Gould

24 April 2010

This article was published in the NZ Herald on 28 April.