China ready to fight for its pound of flesh

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Tim Groser is likely to open the door to co-investment by China rather than outright acquisitions. Photo / Greg Bowker

NZ Herald | Wednesday Aug 10, 2011

China ready to fight for its pound of flesh

Trade Minister will be under pressure in Beijing to live up to the terms of the FTA.

By Fran O’Sullivan

Trade Minister Tim Groser is expected to smooth some growing wrinkles in New Zealand’s relationship with China when he arrives in Beijing on Monday for talks with some of Beijing’s most powerful mandarins.

Groser’s office hasn’t publicly issued the agenda for next week’s talks.

But two issues that are bound to feature are New Zealand dairy giant Fonterra’s market power in the China domestic market and Chinese investment intentions within New Zealand.

Groser will be the first NZ Cabinet Minister to have face-time in Beijing since its Wellington-based political consul sent an unmistakable message on behalf of his masters that China expects New Zealand to open its doors to more Chinese investment.

"We do want the New Zealand side to have an objective approach when considering investments from China," Cheng Lei related after he gave an historic press conference.

"If the Chinese investments come from state-owned enterprises or from Pengxin group, which is a private group, they should be considered of equal footing."

The Overseas Investment Office is still considering Pengxin’s bid for ownership of the 16 Crafar dairy farms. But Cheng said the embassy expects the OIO to issue a decision before the election.

He added: "We signed a free trade agreement three years ago and the Chinese have learned from long time ago that we should honour our commitment."

At issue is Beijing’s perception that the investment protocols in the bilateral FTA really do open the doors for its SOEs and private companies to acquire New Zealand farms, processing companies and other key assets like mining companies.

And a request for "equal treatment" for its investors alongside the reception that investors from countries such as Australia or Japan.

Right now Chinese officials are highlighting Fonterra’s market share in the Chinese milk powder market - which Cheng claimed to journalists last week amounted to a "monopoly".

The local embassy has also noted news reports here spelling out how Fonterra intends to open more dairy farms in China which it sees as "entering the fresh milk market".

Cheng makes clear this should not be seen as a negative but an example of how China has opened its doors via the FTA provisions to Fonterra allowing the NZ company to be "very lucrative."

The big plus for Fonterra is that its milk powder is seen by Chinese as high quality and safe. Particularly, infant formula which is highly prized in China.

Cheng stressed that "New Zealand side should be expected to reciprocate China’s interactions ... they are two-way interactions."

Intriguingly, the political consul does not appear to have overtly pushed these issues in a formal sense. But he does reveal that after Thursday’s press conference, the NZ Ministry of Foreign Affairs and Trade asked if it could have some of its officials present at any future media forum.

"We are open minded ... we want our voice to be heard and transmitted in an objective way without any kind of contortion."

The press release announcing Groser’s visit was remarkably anodyne. It said that in Beijing he would meet Chinese ministers, officials and opinion leaders to discuss trade and economic matters including Asian economic regional integration and the implementation of the China New Zealand free trade agreement (FTA).

It went on to say that since the China NZ FTA came into effect in 2008, New Zealand exports to China have increased 144 per cent. "Which makes China New Zealand’s second largest export market."

Total bilateral trade was $12.8 billion in the year to June 2011 and "we’re firmly on trade to meet our goal of doubling trade from $10 billion to $20 billion by July 2015".

His press secretary was not able to enlighten on just who from China’s top tier would be on Groser’s calling card.

Climate discussions will also be on the table. The Trade Minister arrives in Beijing at an extraordinary time in geopolitics.

Of interest will be the degree to which Beijing power players try to extract a commitment from Groser for New Zealand to get behind China’s push for a new global reserve currency. This is a potentially thorny issue given New Zealand’s long-term ties with the United States which does not want its currency to lose it reserve power status.

But China is strenuously pushing its campaign on this score.

Beijing must surely have had enough by now of making all the "I told you so" warnings that have been pumping out of Xinhua (China’s official news agency) and the People’s Daily (the Chinese Communist party organ) since the United States lost its triple A rating.

China’s news agencies have had an interesting few days as they act as the vehicle for the China’s leadership to beat up the United States over its profligacy.

Arguably, China sits in the box seat. A series of editorials in Xinhua and the People’s Daily have rammed these messages home.

"The US needs to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.

"To cure its addiction to debts, the United States has to re-establish the common sense principle that one should live within its means."

But the stiff homilies to President Barack Obama and his Government would have more legitimacy if China hadn’t underwritten a good deal of the US Government’s debt spree in the first place as the United States prime banker.

It is clear that it is not in China’s interests to play too much hardball with the US given its exposure.

Where New Zealand will benefit is from China’s desire to further diversify its purchases of foreign debt - particularly debt which has sovereign risk status.

But that debt will not come without strings. To acquire - and keep on acquiring Chinese capital - New Zealand will have to learn how to do business with China here.

Groser is an adept international negotiator. It seems most likely that he will advocate a softly-softly approach which opens the door to co-investment rather than outright acquisitions as the best mechanism for a good long-term relationship.

source: NZ Herald