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Far quicker than anticipated, China is becoming a major net international investor just as overall foreign investment into New Zealand has seen a sizable drop. Siah Hwee Ang investigates

Far quicker than anticipated, China is becoming a major net international investor just as overall foreign investment into New Zealand has seen a sizable drop. Siah Hwee Ang investigates

By Siah Hwee Ang*

The latest United Nations report on global investment trends suggest that China is likely to become a net investor (more foreign direct investment flowing out of China than into China) in 2014.

I believe many of us have seen this coming, but probably did not guess it would happen this soon.

Chinese organizations have certainly been expanding abroad at an amazingly quick pace.

Back in 2007, China’s investment outflows stood at US$22.5 billion, about a quarter of its inflow of US$83.5 billion.

By 2013, its inflow has grown by about 40% to US$123.9 billion. Chinese investment outflows, on the other hand, has grown to US$101 billion, 4.5 times that in 2007.

Based on the rate of growth, the latest World Investment Report by the United Nations Conference on Trade and Development (UNCTAD) suggests Chinese investment outflows will surpass inflows this year.

Chinese investment portfolio abroad is a relatively diversified one.

The first wave of such movements were largely focused on natural resources and commodities, which covers a lot of ground in places like Africa, South America and Australia.

We also start to see more investments in the U.S. as part of a way to diversify away the risk of holding too many U.S. bonds and securities.

Recent adventures include the purchase of shipping ports in Greece and Sri Lanka that facilitate trade. At the same time, we also see increases in deals in agriculture, food, automobile, entertainment and services, real estate, technology, and other sectors that relate to consumers.

Chinese organizations are also growing in size.

In “Forbes 2000” listing of the largest publicly listed companies in the world, organizations from China have increased their share from 0.8 percent in 2004 to 8.5 percent in 2013 in terms of revenue.

In the same period, construction companies have increased share from 0 percent to 31.2 percent, financial services from 0.6 percent to 12.7 percent, and primary products from 2.6 percent to 11.5 percent.

While China is picking up more high-end manufacturing and services with high added value investment inflows, Chinese organizations are making adjustments to its foreign strategy by not only engaging in exporting, but also foreign direct investments.

It is China’s intention not to over-rely on exports alone.

Foreign direct investment provides an important platform for industrial upgrading and economic growth.

In 2013, the Chinese government has further facilitated this movement by relaxing its regulatory oversight for overseas investment of less than US$1 billion.

Lessons for New Zealand’s strategy

From a New Zealand perspective, the China strategy is one that we should keep in mind. The New Zealand government has put forth an ambitious exporting strategy in the next five years that will further push our strategy towards one of an exporting nation.

While we have yet to reach a stage that we are over relying on exporting yet, there is a sense that the exporting of our merchandises alone will not service our growth intentions.

Of course we should always grow our export services to cover this gap.

More of an issue however, is that our foreign direct investment inflows and outflows have been dipping.

Foreign direct investment into New Zealand has dropped from US$4.1 billion in 2011 to US$2.20 billion in 2012 to US$987 million in 2013. That is a sizable drop.

New Zealand foreign direct investment outflows have also gone from US$2.5 billion in 2011 to US$691 million in 2013. Maybe The New Zealand Initiative’s concerns of over-regulating investments is warranted. But clearly, we should not aim for more exporting and yet at the same time lose our attention on foreign direct investments, both inflows and outflows.

Of course there are always concerns when Chinese organizations go abroad, such as the forays of Huawei and ZTE into the U.S. being labelled as national security risks and the purchase of the world’s largest pork producer Smithfield Foods by Shuanghui International as food supply and safety concerns.

Many of these concerns were found to be unwarranted.

Last month, one of the world’s largest sugar refiners from China has also been paved the way from New Zealand regulators for the purchase of a Marlborough vineyard.

Making sense of foreign direct investments as merely a case of making money for the foreign parties will ensure that we are not always too uptight when a foreign company seeks foreign direct investment here in New Zealand. Foreign direct investment has more often than not been found to benefit a host country.

Having more ventures abroad is also needed to complete this picture.

Exporting is the most transactional mode of foreign strategy, which comes with the most limited learning about a foreign country and its consumers. So our knowledge of markets out there does not increase in line with more exporting sales - clearly not a good strategy over time.

Likewise, foreign markets and organisations do not have the luxury to know New Zealand better by our organisations being located there.

Being out there with New Zealand foreign direct investments abroad will certainly address many of these potentials.

---------------------------------------------

Professor Siah Hwee Ang holds the BNZ Chair in Business in Asia at Victoria University. He will be writing a regular column here focused on understanding the challenges and opportunities for New Zealand in our trade with China. You can contact him here

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20 Comments

I have noticed that there are NOT many replies to Professors Ang's series on China.
 
I would like to know why.
 
Two suggestions that may revert the situation:
 
1. Tell us something that we do not know
 
2. Tell us something controversial than can stir up a discussion
 
Cheers

Maybe not many comments, but thousands of readers in this relatively new series. It has been a big success for interest.co.nz. We are proud to publish this content. Across the whole site comment levels have almost zero relation to readership interest.

These articles are far more interesting and relevant to me than the ones on Auckland property prices.   When it comes to comments sometimes 'less is very much more'. ;-)

Based on the following article China wants to change NZ's dominant dairy trading position. 
What will this mean for NZ's dairy industry? Lower prices?
Prices are lower at the moment. Will this be a long term trend?
Song noted that China imports around 80 percent of its dairy products from New Zealand at present, but in the future, "it must be diversified, in a bid to guarantee supply and stabilize the prices."

Fonterra announced last week increases in prices for buttermilk and protein, which has prompted speculation that prices for dairy ingredients will be bumped up in the global market, given the company's leading position. 

When asked by the Global Times at the press conference whether the company will further bump up prices, John Wilson, chairman of Fonterra, said that the global dairy market is "volatile" but "very transparent."

"For a very long time we have relied too much on New Zealand and Australia for dairy products, and neglected other places, such as Europe and America, which could also be important sources," Song said.
 
http://www.globaltimes.cn/content/849570.shtml
 

hardly news to the smaller farmer suppliers - we told them at the TAF meetings that this would happen, we repeated it every time they song songs of Golden Age of China.

Again the only ones who are surprised are the experts and the media.

And, FYI, don't read "diversified" read "competing supply to reduce price".

Goes hand in hand with the Chinese, buy the market, then dump the product.
Thye've been doing it for years, just ask Taiwan and Korea.

I think the reasons given by Fonterra for TAF where just for public consumption.
I think there were other reasons why TAF was implemented, ie Financial vultures were going to go after Fonterra if TAF didn't go ahead.
Fonterra must have gotten itself into too much debt and become too vulnerable to their bankers.  Outside investors wanted in on the fonterra cash cow.
Norgate warned that scrutiny of the voting result from the June 25 special meeting was beyond New Zealand shores.
"All of the financial institutions I have been dealing with offshore are watching the situation with a keen interest. A number would like to invest in Fonterra but won't under the current proposal given the protections for farmers. Equally they will be like vultures if the proposal doesn't go ahead."
 
http://www.stuff.co.nz/business/farming/7066752/TAF-scheme-essential-Norgate

TAF was implimented because the whole idea (from government point of view) was to break the farmers powerbase and stranglehood on the market.

While Fonterra (and coops) had been told to reduce debt they were very operating very safely (the excessive debt was making production expensive, and much of it was from a "throw money at it" approach to problem solving  ... back from my IT contracting days).  It was safe because the market was a solid cash-cow commodity, which the cost structure -could- be knocked right back if needed.   Not so much now since they're chasing the corporate dream.

However such a solid position is great for consumers and multigenerational businesses, it's not good for government, corporations and parasites.  Croporations and traders can't just wait out their market, or for a failed product to drop the share price to open cracks.  But, by declaring that they have too much debt, Fonterra can be forced by regulation to take on more equity (in the form of shareholders).... which means eithr the farmers have to pay up (from their primary income source... why was the company setup again?? to _return_ money to shareholders suppliers, not for them to constantly borrow for the company!)... or this paves the way for NZX and other share traders to get some product to toss around.   There has never been a sane reason why Fonterra would publicly list (for it's or it's suppliers benefit).

It sounds like the higher up the political power structures one goes the more evil one sees.
Some unknown person with power gives their orders and everyone has to obey. 

I don't know about evil.
Evil is pretty much trying to get what you want and not caring about those who you take it from.

It's more like each level is playing a different game, with different players.  You know you hit the level when the players start showing - as they are with TAF.  On the basic level it's about "stopping funds washing in and out of Fonterra".

But as you go up levels, you start to see suppliers & shareholders, corporates, fundholders, marketing and international corporate games (eg the current Danone one), commodity mountains and backselling, government meetings and law playing...

I don't believe the reasons Fonterra gave for TAF.
In a post on Xcheque, agribusiness expert Dr Jon Hauser and Kai Tanter argue TAF does not remove the redemption risk as Fonterra says it will and that it is possible the market valuation of Fonterra shares will drop, potentially destroying the wealth of many Kiwi dairy farmers.
.........
However, Xcheque suggests because TAF promotes trading among farmers instead of with Fonterra, the redemption risk is merely transferred (not eliminated), from a collective risk to the whole co-op, to a risk to the individual farmer.
It says Fonterra doesn't even need permanent capital for capital security because other measures are sufficient.
These include allowing farmers to own up to 200% of their capital requirement, up from 120% now, which would be calculated on a three-year rolling average.
"These changes alone, plus the ability to pay farmers out at their discretion and/or at the same price they bought in, would likely be enough for Fonterra to mitigate redemption risk," says Xcheque.
....
"If Fonterra don't get it right they are gambling away the future of their co-operative as a co-operative. It doesn't seem like a risk worth taking."
http://www.nbr.co.nz/article/fonterras-taf-scheme-risk-not-worth-taking-aussies-ca-121805
 

It actually makes the redemption risk worse.  With a co-op, exiting partners can be expected to have 3 to 5 year staggered exits, the price of entrance and exit can be controlled.

With TAF, an exiting farm has 3 yrs maximum to cash out, they can cash out immediately if they wish, which affects all sharehodling values (and thus Fonterra's capital:Debt ratio)

the rules for cashing out and holding levels were put in place by Fonterra, at the boards insistance, not the suppliers.  The caps and 120% ownership cause redemption risk to suppliers more than to Fonterra!   

If enough suppliers cashed out to create redemption issues did so under TAF they would completely tank the share and fund prices.  Including Fonterra capital debt ratio, and shares used as loan security by suppliers, and farm values securing mortgages... by TAF was important...right?

The only two things achieved (and predicted by suppliers) was that it allows corporations and big names to buy in without dairy farm risks,   and it allows government interference.  the latter is the most important to note because the powers behind government faces are caught up in the myth that High Productive must be good, and low productive (low cost, low consumption) is bad.  Thus High Productivity must be achieved as KPI, and all else will magically work out better.  As any competent business person knows, that's utter bollocks.

what I find daft is other coutnries spend billions protecting their technology and companies IP.  NZ gives it away and sends people at our own cost to teach it

Henry "Say hasn't a step/stepping stone been missed?
It is de rigeur to be in the BVI, it seems, as one British tax lawyer says:
Our [Chinese] clients say that you haven’t really arrived if you don’t have at least one BVI company to your name.
http://treasureislands.org/why-chinese-companies-flock-to-the-bvi/ [dated]
http://www.zerohedge.com/news/2014-01-21/chinas-epic-offshore-wealth-revealed-how-chinese-oligarchs-quietly-parked-4-trillion
If any could help?
1. We have trouble recalling and large "FDI type investment" here not coming via BVI
2. From memory most such PR notes refer to the funds flow being a combination debt and equity"
or, should/is FDI just be done this way (NZ listed coy as well) and we get on with it?"

Isn't that divesification of Risk, and opportunity seizing just good business sense?

déjà vu
 

I kept getting some kind of timeout that wouldn't let me reply so I had to use your whole post from my clipboard. apologies.

Not at all, its I that should be apologising, and do. (fortunate you did, as the first had vamoosed). Maybe just a bug in wordpress.
Our issue was, try getting sense out of a BVI vehicle when seeking to right a wrong.
In a similar vein looking at the island property BH mentions today, see how easy property can move round bais debt arrangements, that make or may not be arms length. Pity the OIO getting to the bottom of whos on first.....
 

This is interesting.
"We also start to see more investments in the U.S. as part of a way to diversify away the risk of holding too many U.S. bonds and securities."
Is this a polite way of saying :-
1) That America may decide not to pay its debts?
2) That America may decide to inflate away its debts via inflation?
3) That China thinks Reserve Banks don't know what they are doing, the US dollar may crash and the only way for China to retain the value of its investments is to buy physical assets?
 

Maybe we should let the NZD revalue upwards and buy a US asset too :)

we should sell all our NZD and buy a property in Memphis?  (must be crap property for 17% yield)

Wouldn't the USD/Yuan peg get mainted irrespective of whether bonds or assets are purchased? US dollars have to purchased whether bonds or assets are purchased.