A law change to further restrict foreign purchases of New Zealand farmland would be a knee-jerk reaction to the sale of the Crafar farms, and is not needed now, Prime Minister John Key says.

Key has been quick to defend the Overseas Investment Office's decision to grant Chinese conglomerate Shanghai Pengxin the right to purchase the 16 Crafar farms, which was rubber stamped by government Ministers on Friday.

Key's defense came as the Labour Party attacked the decision over the weekend, saying the farms should have been sold to a local consortium led by investment banker Michael Fay, whose bid for the farms is estimated to be about NZ$40 million lower than Pengxin's. Key responded on Monday morning by saying the government did not have the legal right to turn down the sale, and he questioned whether Labour was changing its policy to being opposed to all sales of land to foreigners.

However, Key has said that if the government were to see a wholesale buy-up of New Zealand farmland, overseas investment rules may need to be tightened. The Crafar farms sale, although a large individual sale, did not fit into this category, he said.

During the weekend, Shearer said Labour's opposition to the sale of the farms to Pengxin was not xenophobic or racist.

“Both John Key and Land Information Minister Maurice Williamson have said that Labour is anti-Chinese and racist because of our opposition to the Crafar farms being sold to a Chinese company,” he said.

“I have been called much worse. What concerns me is that, by implication National is labelling every New Zealander opposed to the sale as anti-Chinese and possibly racist simply because they oppose the sale of profitable New Zealand-owned assets to foreign interests. Surveys show up to 85 percent of New Zealanders oppose selling our land to overseas owners. John Key and Williamson should retract their statements," Shearer said.

“In 2010 John Key himself said he would hate to see New Zealanders as tenants in their own country. He may have changed his mind. But Labour hasn’t. We have always said we are not opposed to foreign investment," he said.

"However we also believe no overseas purchaser has an automatic right to buy New Zealand land. That is a privilege, and any purchase must provide some added value. In this case, local farmers can add more value than a foreign company with no farming expertise."

'Rules ok for now'

Speaking on RadioLive this morning, Key said he did not think overseas investment rules needed to be changed again, after the government did so in September 2010, making it harder for for foreigners to buy land.

Putting foreign sales in perspective, the amount was relatively small compared to the number of farms supplying Fonterra - 72 farms sales to foreigners in the last 18 months before the sale of the 16 Crafar farms, while over 10,000 farmers supplied the dairy co-operative alone.

Meanwhile, it was getting tricky on who was deemed to be a New Zealander, he said.

“If you are a New Zealander who’s lived in the UK for the last 40 years, are you a New Zealander? Well, yes you are: you hold a New Zealand passport, you were born here. So it does get a little bit tricky," Key said.

The government would watch out for wholesale interest from foreigners for New Zealand land.

"If the flow of sales starts to accelerate and people really become very concerned, then we can always change the law," Key said.

"But when someone like –[Labour Party leader] David Shearer gets up and says, ‘if I was Prime Minister I would stop it,’ I’m sorry, I just don’t believe that. Because you’ll have to say to your Ministers, ‘say no, but by the way you’ve got no reason to do that because they comply with the law well.’ You actually don’t have the legal right to do that. You’ll be judicially reviewed and you’d lose," he said.

"Or [Shearer is] saying they’re going to change their policy to no foreign sales. Well they didn’t campaign on that. Or he’s just making it up as he goes along.

"We can change the law, but at this point I would have thought that’s a bit of a knee-jerk reaction," Key said.