New Zealand China Council 1 UNDERSTANDING CHINESE INVESTMENT IN NEW ZEALAND UNDERSTANDING CHINESE INVESTMENT IN NEW ZEALANDNew Zealand China Council 2 UNDERSTANDING CHINESE INVESTMENT IN NEW ZEALAND Disclaimer This Report is for information purposes only and does not constitute legal, financial, tax, financial product advice or investment advice. This Report has been prepared without taking into account the objectives, financial situation or needs of individuals. This report, including interviews and other research, was conducted in 2018 and uses data from 2017- 2018, unless none was available for these periods, in which case the most recent data was utilised.New Zealand China Council 3 UNDERSTANDING CHINESE INVESTMENT IN NEW ZEALAND Rt Hon Sir Don McKinnon Chairman, New Zealand China Council FOREWORD New Zealand has from the earliest times relied on foreign investment in the form of people, capital and technology to develop the local economy. Since New Zealands capital base is limited, foreign direct investment (FDI) is instrumental for ensuring productivity and competitiveness. In recent years China has emerged as a major trade partner but the pattern of investment growth, while significant, has tended to lag behind the expansion of the relationship generally. New Zealand outward direct investment (ODI) to China has risen even less rapidly. A recent survey undertaken by the NZ China Council1suggests New Zealanders have a range of views about foreign investment in general and investment from China in particular. Most New Zealanders appear comfortable with foreign investment provided it is strictly regulated, as is currently the case. Further amendments to current legislation are currently in the pipeline. The survey however pointed to some major mis-understandings China is not, for example, New Zealands largest investor; that place is held by Australia by quite a wide margin. And Chinese investment is not confined to agricultural land and property; in fact, Chinese investment is quite diversified across the economy and across the country. It was to clarify this picture, to take account of recent developments and to address the gaps in understanding that the Council commissioned this report. We are grateful for the work of Pat English and Carol Cheng for helping us assemble and analyse the available information, taking into account both official statistics and data from other available sources. Their work in interviewing a number of Chinese investors in New Zealand as well as New Zealand investors in China is reflected in the case studies spread throughout the report. The case studies also highlight a number of benefits from foreign investment which are often overlooked in the public debate - investment brings not only much needed capital, but also technology, expertise and access to markets. In New Zealands case almost half of Chinese investment is directed to the regions. A number of developing industries have also benefited. The report updates an earlier assessment released by the Council in 2015 and will hopefully provide a basis for further discussion. It responds to the Councils mandate to improve public understanding and provides a factual base from which to build strength and resilience into this critically important relationship. 1. /nzchinacouncil.nz/wp-content/uploads/2018/08/Perception-of-China-Monitor-Survey- 2018-FINAL.pdfNew Zealand China Council 4 UNDERSTANDING CHINESE INVESTMENT IN NEW ZEALAND O2 EXECUTIVE SUMMARY 6 O3 INTRODUCTION 9 O4 NEW ZEALAND CHINA BILATERAL INVESTMENT 10 4.1 NEW ZEALANDS INVESTMENT ENVIRONMENT 10 New Zealand Needs Foreign Investment FDI Profile and Performance Changes in New Zealands Foreign Investment Regime 4.2 CHINAS INVESTMENT ENVIRONMENT 14 Chinas ODI has Grown Rapidly but is Starting to Slow Direction of Chinese ODI Policy Change in China Investing in China CASE STUDIES 1 - Investment Brings Growth to the Regions 12 2 - Investment Builds on Cultural Base 15 3 - Rising T ourist Numbers Need New Hotels 17 4 - Better Managing Waste Brings Environmental Dividends 22 5 - Solutions at Hand for Housing Crisis 24 6 - Fresh Start for Established Meat Brand 27 7 - Agriculture Benefits From New Approach 28 CONTENTSNew Zealand China Council 5 UNDERSTANDING CHINESE INVESTMENT IN NEW ZEALAND O5 CHINAS INVESTMENTS IN NEW ZEALAND 20 5.1 FEATURES OF CHINESE INVESTMENT 20 Growth in Chinese Investment Actual Investment May Exceed Official Statistics Diversification of Chinese Investment Investor Migration 5.2 CHINESE COMPANIES INVESTED IN NEW ZEALAND 29 06 NEW ZEALANDS INVESTMENTS IN CHINA 31 07 FINAL WORD 35 ANNEXES 37 A Regulation of Foreign Direct Investment in New Zealand 37 B Regulation of Investment in China 38 - 39 C Glossary of T erms 42 - 43 D Acknowledgements 44 Note: The report uses New Zealand dollars as the default currency, unless otherwise stated, e.g. US$100. A glossary of terms is provided at Annex C. CONTENTSNew Zealand China Council 6 UNDERSTANDING CHINESE INVESTMENT IN NEW ZEALAND EXECUTIVE SUMMARY New Zealand needs foreign investment. China has emerged as one of New Zealands most important sources of foreign direct investment (FDI). While investment is a natural consequence of the breadth in links between the two economies, the growth in FDI from China, while strong, still lags behind growth in other aspects of the relationship including trade and people- to-people links. Statistics NZ data shows that China, including Hong Kong, is now our second largest investment partner behind Australia with a stock of FDI, measured by official statistics of $8.25 billion at December 2017 , or 7 .67% of total. It has been suggested that actual investment from China may exceed official estimates as investment transactions are often routed through Hong Kong or other countries, including Singapore, as well as other jurisdictions. Capturing the extent of this Chinese investment from so-called “immediate” sources is complex and is only partially captured in this report. As a sovereign nation, New Zealand, like China, controls and manages investment coming into the country by setting policy and applying regulations to direct FDI to where it is most needed. New Zealands policy settings are currently undergoing review. Perceptions of New Zealand as a recipient of FDI are influenced by the opportunities available to investors, the clarity of the policy environment, and the practices of comparable jurisdictions. New Zealand is still a small recipient of global Chinese investment. While growth in Chinese outward direct investment (ODI) into New Zealand and globally has been strong in recent years, that trend is changing as China adjusts its outward investment policies. In 2017-18 Chinese global ODI fell by 29% after almost 15 years of continuous growth. The implementation of the newly promulgated 2018 Outbound Investment Regulations will further impact markets both globally and bilaterally. In March 2019, as this report was in preparation, China enacted a new Foreign Investment Law, bringing together and codifying a number of policies and regulations. Chinese investments in New Zealand are well diversified and distributed around the country. Around 50% of Chinese FDI is directed to the regions. Chinese investors have made investments in sectors that are in need of capital and expertise including primary industries/food and beverage, tourism, infrastructure and commercial construction and housing. While foreign investment, including from China, can be controversial, especially in some sectors, New Zealand has benefited from Chinese investment in numerous ways. These include job creation, economic growth, innovation and increased exports of key products through improved access to markets and distribution. 2New Zealand China Council 7 UNDERSTANDING CHINESE INVESTMENT IN NEW ZEALAND This report includes case studies based on interviews with some key Chinese investors. The single largest Chinese investment in New Zealand is represented by a $950 million investment from Beijing Capital into Waste Management that enabled the formerly Australian-owned company to expand, modernise and invest in critical waste processing facilities. On a smaller scale, significant benefits have also been generated by Allied Faxi Food Company which invested $30 million into an ice-cream manufacturing business in a rural area which had not seen a large scale investment for decades. Fu Wah has so far invested more than $300 million into a hotel under construction at Auckland Viaduct - the first of a number of planned investments and a world class facility that will be critical for upcoming events in the city, including the Americas Cup and APEC in 2021. Super Organic has partnered with local Iwi in T aupo to invest $40 million in genetics and processing technology to develop a new local sheep milking industry. Shanghai Pengxin through Milk New Zealand has invested more than $500 million into 29 farms to become one of the largest milk producers in New Zealand, and has increased staff from 80 to more than 400. Other significant players in the Chinese dairy industry are expanding their milk processing footprint in New Zealand: Y ashili with a new investment in Pokeno, south of Auckland, and Yili, with a plant in Gleneavy in the South Island has entered into a scheme of arrangement to acquire the New Zealand dairy co- operative and processor Westland Milk. In terms of ODI, few New Zealand companies appear to have made significant investments into China. Fonterra and Methven are exceptions. One approach where it seems that New Zealand investors have met with success in China is to invest in less tangible assets such as brands and distribution. Zespri has had a significant market turnaround in its business in China in the last five years to the point where it is now the importer of record and marketer of Zespri branded products in China, with record China sales to June 2018 of $505 million. F it is about how partners transfer technologies and expertise, provide access and distribution to develop global markets, improve management skills and develop the new business opportunities that go with investment. According to a report referenced by the Organisation for Economic Co-operation and Development (OECD) in its annual survey of New Zealand (Doan 2014), labour productivity of foreign owned companies in New Zealand was almost twice that of local companies 3 . FDI Profile and Performance FDI measures the value of foreign-owned companies operating in New Zealand. According to Statistics NZ 4 , FDI in New Zealand was $107 .7 billion at 31 December 2017 . The OECD has found that FDI stocks in New Zealand are relatively low for a small, open economy 5 . Statistics NZ data indicates that the main source of FDI into New Zealand is Australia with stock of $55.97 billion at December 2017 - not surprising given the proximity, bilateral trade and economic and people-to-people ties. T raditional investor countries - the United States and United Kingdom - are still in the top five, but according to this data set, which will be further explained in Chapter 5, China including Hong Kong at $8.25 billion is at second place at 7 .67%. This is well ahead of the 2014 data published by the Council when China was ranked fourth 6 . For the year ended December 2017 , the value of foreign direct investment rose for most countries, including Australia, China including Hong Kong and the US, UK and Canada, with Singapore being the (surprising) exception. As shown in Figure 1, Australia is still New Zealands largest source of FDI by a considerable margin, but, according to figures supplied directly by Statistics NZ, in the year to June 2018, approximately 54.6% (or $31 billion) of Australian investment is in the banking, finance and insurance sector. This is up from 2014, when it was at 43% (or $23.2 billion) 7 . 3. OECD: 2017 New Zealand Economic Survey OECD, page 95-97 /read.oecd-ilibrary/economics/oecd- economic-surveys-new-zealand-2017_eco_surveys-nzl-2017-en#page98 4. It should be noted that the value for each country is based on the country of the immediate investor, rather than the country where the ultimate investor resides (see note on Statistics New Zealand FDI Data in the Glossary of T erms). 5. /data.oecd/fdi/fdi-stocks.htm#indicator-chart 6. Statistics NZ Data FDI stock to year end December 2017 page 11: /stats.govt.nz/reports/global-new- zealand-year-ended-december-2017 7. Email communication with Statistics NZ, November 2018