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Key at bay as NZ seeks wider China trade deal

WELLINGTON -- When New Zealand Prime Minister John Key returned from a trip to China in April to celebrate the success of an eight-year-old trade agreement between the two countries, he was quickly reminded that the pact has not come without domestic political costs.

The agreement, the first between China and a member of the Organization for Economic Cooperation and Development, the club of mainly advanced economies, has led to a massive increase in bilateral trade and flows of Chinese investment and tourists to New Zealand. But the rapid pace of change in the economic relationship since the deal came into force in 2008 has caused unease among some of New Zealand's 4.5 million population.

The focus during Key's six-day visit was on celebrating the growth in economic links and discussing ways to deepen them further in talks with President Xi Jinping and other Chinese leaders. Key sought an "upgrade" of the trade agreement. While he received no firm response, the two countries' trade ministers will discuss the issue at the Asia-Pacific Economic Cooperation group meeting in Peru in mid-May.

On his return home, however, Key faced questions about the role of Chinese investors in driving up prices in Auckland's booming real estate market, amid growing concerns about the impact on New Zealand of its close relationship with China.

In many respects, the trade agreement has been an undoubted success. New Zealand exports to China grew from 2.1 billion New Zealand dollars ($1.5 billion) in 2008 to a high of NZ$11.6 billion in 2014 (although the value has declined recently, falling to NZ$8.7 billion in the year to March 2016 because of a slump in international prices for dairy products, New Zealand's biggest commodity export). Imports from China were NZ$10.5 billion in the latest year to March, compared with NZ$5.8 billion in 2008.

The number of Chinese visitors to New Zealand has nearly tripled in the last five years, reaching 377,000 in the year to March, and total Chinese direct investment grew from just over NZ$1 billion to nearly NZ$6.6 billion between 2010 and the middle of 2015.

But in the New Zealand media, far more attention has been paid to the galloping Auckland real estate market, which has seen home prices nearly double since early 2009, shutting out many hopeful buyers.

In the search for causes for the long property boom, the spotlight has fallen largely on the growth in Chinese-based investors. There are important other factors, though, such as inadequate new housing stock coming onto the market and high levels of immigration.

Key floated the possibility of a land tax being applied to foreign buyers if tax data now being collected shows high levels of foreign investment, although he said he believed most buyers were New Zealand residents.

Unfair focus

Patrick English, executive director of the New Zealand China Council, which promotes economic and social links between the two countries, said it was unfair to focus on Chinese-based investors. "I still believe there are a lot of other issues besides foreign investors as far as the Auckland market goes; it's not just one thing," English said.

There is no register of foreign buyers in New Zealand, although from October last year such purchasers have had to provide information to New Zealand tax authorities. A report in April by Juwai, a website for Chinese real estate investors in international markets, said New Zealand was the fourth most popular country for Chinese investors in the fourth quarter of 2015.

Tony Alexander, chief economist of BNZ bank, a New Zealand subsidiary of Australia's National Australia Bank, said the high level of Chinese real estate purchases was probably due to expectations that restrictions on capital outflows from China will be eased this year. He added that a recent tightening of rules on foreigners buying real estate in Australia could also spur more Chinese buying in New Zealand.

The opposition Labour Party has called for restrictions that would allow foreign investors to buy only new homes, similar to a rule in Australia.

Chinese buying of farmland has also been sensitive. Last year the government blocked the purchase by the Shanghai-based conglomerate Shanghai Pengxin Group of Lochinver Station, a 138 square kilometer sheep and beef farm in the central North Island of New Zealand. Shanghai Pengxin is one of the largest dairy producers in New Zealand, owning 29 farms and milking 30,000 cows.

Similar concerns about large-scale farm land purchases in Australia prompted the federal government in Canberra to announce a preliminary decision on April 29 to block Shanghai Pengxin's planned purchase of the Kidman cattle stations, whose land area is equivalent to 1.3% of the country's land mass.

The long slump in the New Zealand dairy industry has raised concerns that some farmers could be forced off the land, further opening the way for foreign investors.

Andrew Hoggard, chairman of the dairy industry group of Federated Farmers, a farming organization, said he did not oppose foreign investment in farming as long as it was of benefit to New Zealand. In the absence of a register of foreign owners, it was unclear how much land had been bought by foreigners.

"If overseas interests want to have a stake, rather than trying to buy up truckloads of farm land, they could partner with young farmers here and provide some equity," he said.

A deal announced last year for another Chinese company, Shanghai Maling, a unit of Bright Food, to buy 50% of New Zealand's largest meat company, Silver Fern Farms, is currently before the government's foreign investment agency, the Overseas Investment Office.

Although the deal does not involve large areas of land, meat is one of New Zealand's most important exports. A decision is expected by mid-year, but even if the OIO approves the deal, the government has the option of overruling the agency, as it did with the Lochinver Station deal.

Key defended New Zealand's liberal foreign investment policies in a speech on May 3, saying the country benefited immensely from foreign investment and that there were adequate safeguards.

"Foreign buyers of sensitive land must go through a rigorous application process and prove they offer greater benefits to New Zealand than would be obtained through a domestic sale," he said.

"I believe we have the right balance between encouraging investment and ensuring that investment benefits New Zealand."

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