13 August, 2012
Speech to the New Zealand Contemporary China Research Centre
Good morning, it is a pleasure to open this conference.
The Chinese and New Zealand Governments enjoy a warm and constructive relationship, and the New Zealand political leadership has had the opportunity of frequent and open access to China’s most senior leaders. We are delighted to host China’s leaders on their frequent visits to New Zealand.
This year marks 40 years since the establishment of diplomatic and trade relations between China and New Zealand.
And in 2008 our relationship took another step when our Free Trade Agreement was signed, the first between China and a member of the OECD. Since then, trade between our countries has increased substantially.
Foreign direct investment, however, has remained small.
Today I’ll discuss the importance to New Zealand of trade and foreign investment with China.
New Zealand’s future growth depends on access to capital, knowledge and skills, and China’s size and its enormous growth potential means it will be the largest - and likely the fastest growing - market for New Zealand exports.
International trade is not “zero sum” – our living standards depend in part on the increasing prosperity of our trading partners. As China continues to develop, our trade and investment relationship will play a central role in New Zealand’s growth story.
The Chinese economy
China is not traditionally counted among the “Asian tigers” but it is deserving of the term.
In the 34 years since liberalisation, China’s economy has doubled in size every seven years, an average annual growth rate of 10 per cent.
Its share of world output has increased from 2 per cent in 1980 to 10 per cent in 2011.
China is now the second largest economy in the world after the United States, having overtaken Japan in 2010, and it is projected to become the world’s largest economy by 2025.
Although China’s per capita incomes are currently only 11 per cent of US per capita incomes at market exchange rates, they are 18 per cent of US levels when adjusted for cost of living differentials. They are projected by the IMF to increase to 25 per cent of US levels by 2017.
China’s development has been built on exports and investment.
At the start of liberalisation in 1978, investment accounted for slightly less than 30 per cent of nominal GDP. Just over 30 years later, investment’s share of output reached 48 per cent in the period 2009 - 2011.
This high proportion of economic activity devoted to savings and capital formation reflects China’s stage of development, the positive growth prospects for the economy, the ready availability of funds due to the high saving rate, as well as a relative lack of other opportunities such as investing offshore or in securitised investment products.
The recent increase also reflects the boost to infrastructure investment as part of the fiscal stimulus initiated by the Chinese Government in late 2008 in the aftermath of the global financial crisis, and the rebuild following the destructive earthquake in Sichuan Province earlier that year.
Exports account for a quarter of China’s GDP, which is large for an economy that size. This share is similar to New Zealand, a small open economy, but much higher than in other large developed economies such as Japan and the United States where exports comprise 13 to 15 per cent of GDP.
Following the global financial crisis, China’s authorities have signalled comfort with lower growth, setting targets of less than 8 per cent for the 12th five-year period which started this year.
China’s Government is also aiming to cool the housing market, which became overheated following rapid credit growth in 2009 and 2010 as part of the post-GFC stimulus package.
The Government has already started to loosen both monetary and fiscal policy to support domestic growth. It also wants to avoid fuelling further inflation in house prices.
The Chinese Government aims to rebalance growth away from investment and exports, and towards private consumption. This will lower growth overall as private consumption will not be able to fully replace investment in the short term.
In addition, growth in the working-age population is expected to peak in the next few years, limiting economic growth apart from gains in labour participation and productivity.
In spite of these short term growth fluctuations, China is well on its way to becoming a middle-income economy. It is likely to be the largest and fastest growing market for New Zealand exports.
China and New Zealand interaction: Trade and FDI
China is now New Zealand’s second largest trading partner after Australia, as rapidly rising living standards, increasing urbanisation and a shift to higher-protein diets have supported demand for New Zealand products.
Dairy and wood products are the largest export commodities, followed by meat and wool. China is New Zealand’s largest source of imports by value, ahead of Australia.
China is also Australia’s top trading partner, accounting for more than a quarter of merchandise exports, chiefly mineral resources, providing further indirect benefits for New Zealand, given that Australia is our top trading partner.
Our investment relationship with China is much smaller than trade.
Despite our strong trading relationship, China is not a major investor in New Zealand, being New Zealand’s 11th largest investor totalling $1.8 billion in 2011.
Foreign direct investment, or FDI, is less than half this amount.
By comparison, New Zealand has NZ$52 billion of FDI from Australia and NZ$11 billion from the US. China has made investments in New Zealand forestry, manufacturing and agriculture.
China is also investing in New Zealand government bonds, contributing to the record low borrowing rates New Zealand currently enjoys. New Zealand is seen as a relatively safe haven in these difficult times and Chinese authorities want to diversify their international bond holdings.
New Zealand’s investment into China is similarly small, totalling $789 million in 2011, making China our 13th largest investment destination.
These investment figures reflect broader trends.
While New Zealand is a recipient of foreign investment in line with the OECD average, New Zealanders invest overseas at well below OECD average rates.
The Government is doing its bit by investing overseas through the Super Fund and Kiwisaver, and we would like to see more New Zealand businesses follow this lead.
Despite this low level of investment, we’ve seen some encouraging recent examples of New Zealand firms investing in China.
Fonterra has significant plans to increase the number of farms in China, a roughly NZ$50 million investment per farm. High-tech firm Rakon opened a US$35 million factory in Chengdu last year.
Real estate firm Richina has substantial holdings in both the commercial and residential sectors in China, with operations in both New Zealand and China. It also has plans to distribute a wide range of branded consumer products from different Kiwi suppliers.
I’d like to take a moment to discuss the role of foreign direct investment in supplementing domestic savings, sharing technology, and driving growth in wages, employment and economic output.
The historic role of FDI in New Zealand
Foreign investment has played a key role alongside public investment in building the New Zealand economy.
In the 19th Century, foreign investment was instrumental in establishing our extractive industries, agricultural and banking and finance sectors, and in building our roads, railways, ports and other infrastructure essential to the movement of our products.
Very early in New Zealand’s economic history, commercially successful sealing was undertaken with American capital and China as the first significant end-use market.
New South Wales investors worked with missionaries and Maori in the establishment of early flax and timber trades.
In the late 1800s and early 1900s, British investment played a prominent role in the development of our refrigerated meat industry.
Since the 1980s, Australian investment supported the emergence of New Zealand’s wine industry, bringing with it know-how, technology and international market access. Australia has also made major investments in the banking and finance industry in New Zealand.
In the 1990s, Japanese investment helped to introduce more value-added production and efficiency in our forestry industry, as well as access to Asian markets.
The central role for foreign investment in the New Zealand growth story is unsurprising.
As a small country, we naturally rely on FDI to help us achieve economies of scale, and for access to ideas and consumer markets. We do not have the large stock of capital which older and wealthier countries have.
Foreign direct investment has benefits for New Zealand in three broad areas:
• First, as a source of capital to supplement New Zealand’s domestic savings.
• Second, as a driver of growth in wages, employment and output.
• And third, for the transmission of technology, skills and know-how to New Zealand and for improving our connections to valuable international markets.
New Zealand simply does not save enough to cover our investment needs.
Between 2002 and 2011, New Zealand saved just over $4 billion a year, leaving a shortfall of $9 billion a year to fund our investment. Foreign direct investment is a type of international trade in savings and helps bridge this funding gap.
Foreign investment can bring benefits that foreign borrowing does not. These benefits can be of particular value to a small economy, and include:
• FDI provides a stronger buffer against economic shock because investment comes without the fixed interest payments of debt.
• FDI produces transfers of technology and know-how, and provides access to international markets.
Recent research shows that New Zealanders working for firms with foreign investors tend to be paid more, and that firms receiving foreign investment increase employment and output.
In 2008, Treasury concluded that foreign capital flows into New Zealand lifted incomes by around $3800 per worker between 1996 and 2006 in today’s prices, and lifted wealth by $16,000 per person.
Foreign investors in New Zealand do take out some profits, but between 2006 and 2011 they have also reinvested about 25 per cent of their returns on equity back into New Zealand.
New Zealanders interact with foreign-owned businesses every day. Over half of the companies larger than $100 million in New Zealand have majority foreign ownership.
Many of these companies are a familiar part of our national landscape, and provide Kiwis with a huge range of products and services. They are also among our largest employers. A recent study showed about a quarter of Aucklanders work for foreign owned companies.
FDI, inward or outward, does not necessarily mean acquisition of full ownership by foreigners. In many cases it can take the form of a joint venture or partnership between New Zealand and foreign owners.
And FDI is not a one shot deal. Businesses built up under foreign ownership can move or return to New Zealand ownership.
For example, Shell petrol stations were recently acquired by New Zealand-owned Z Energy.
Opus – the former consulting arm of the Ministry of Works – was bought by Malaysian investors, but there is now a significant New Zealand shareholding once more.
The meat processing sector used to be largely foreign owned, but, with the exception of ANZCO, is now mostly New Zealand-owned.
What would happen if New Zealand could not access foreign investment?
One outcome is that the cost of capital would increase. This would constrain businesses’ ability to grow, and would reduce employment opportunities and household incomes.
Treasury has estimated that a permanent one percentage point change in interest rates (say, from 5 per cent to 6 per cent) would lower the level of GDP by about 2 per cent over a period of time. New Zealand’s standard of living would be lower without access to foreign investment.
FDI can have its costs. The quality of foreign investment matters, and New Zealanders care that investment goes to productive capital, and that it supports jobs and higher incomes.
But fears of foreign ownership are frequently overstated. While it is true that the returns from foreign financing contribute to New Zealand’s current account deficit, it’s also important to consider the bigger picture.
The outcome for the economy is positive overall when foreign capital raises worker productivity and national income increases by more than the return on the investment.
FDI is profitable precisely because it introduces ideas and brings new capital to countries.
Foreign investment is a vote of confidence in the quality of New Zealand’s institutions and the quality of its workforce.
Technology, skills and know-how
New Zealand welcomes foreign investment.
Firms that are successful enough to be international investors tend to have developed the skills and deep specialisation New Zealand needs.
These skills produce higher wages for New Zealanders working in those firms, and skills tend to spill over.
As employees come and go from foreign owned firms, they take what they learn and apply it to new ventures. Foreign investment helps bring these advantages to New Zealand.
FDI has other benefits. It helps link New Zealand into opportunities for export and to tap in to international supply chains.
Foreign investors bring knowledge of international markets and access to established networks that are hard to develop from this far away.
FDI has been instrumental in the global shift towards international production networks in which steps on the production process occur across borders. Economies that have experienced the largest FDI inflows have on average also seen the largest expansion in merchandise exports.
Of course, there should be checks and balances, the public expects this.
A recent OECD study has rated New Zealand among the most restrictive overseas investment regimes in the OECD. The study focuses on our regulations rather than how many foreign investments we turn away.
But there can be no serious suggestion that New Zealand lacks appropriate controls.
Our constraint on growth is not the size of the opportunity. It is our ability to access capital, knowledge, and people, and we get to decide this in part through policy.
New Zealand has not moved rapidly to reach out overseas to find new ideas and access new capital. This is something we must learn to do.
We sit on the doorstep of the fastest growing economies in the world.
There will be many more people in the Asia Pacific region with growing incomes who want more of New Zealand’s products.
Our trading partners, led by China, have opened the door for us.
Our challenge is to assemble enough capital, people and market knowledge to take advantage of this opportunity. How we go about that will define our economic success in the next generation.