Clearly no New Zealand companies are receiving cheap loans from the New Zealand government to acquire land in China or elsewhere for that matter. In fact New Zealand businesses cannot purchase land in China at all.
The difficulty in trying to find information pertaining to Pengxin's financial backing is that they do not make their financial records available to the public. Likewise, the Chinese government keeps its books very secret. The people of China don't even know what their government is spending their money on.
Despite this secretiveness, there is good evidence to show Pengxin Group does receive financial assistance from the Chinese government.
Shanghai Pengxin Group Co., Ltd., is an industrial conglomerate, engaging in real estate development, agribusiness, chemical manufacturing, mining, infrastructure construction, and investments to name but a few of their diverse enterprises. It was founded in 1997 and is based in Shanghai, China.
By 2009, Pengxin Group's meteoric rise saw them with total assets of US13.0 billion, and an asset-liability ratio of 76%. This is before we even look at operational liabilities, such as accounts and taxes payable. Why is this important I hear you say? Well the debt ratio compares a company's total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company.
Pengxin's asset-liability ratio is considered to be high, which means they are more susceptible to market changes. They also need to generate larger returns above the cost of capital. Basically Pengxin Group has to make a large profit on its investments in order to be able to service their debts.
Pengxin is unlikely to have such a large asset-liability ratio unless they have stable and low interest loans ie those available from the Chinese government through the foreign direct investment (FDI) fund.
The financial crisis has given Chinese companies a shortcut for making more acquisitions overseas. Don't believe me? Well that's what the Chinese government says. There's no doubt that China has an agressive policy of using the financial advantage the recession gave them to secure resources and assets from other countries.
According to China's Ministry of Commerce:
China Investment Corp (CIC), the country's $300 billion sovereign wealth fund (SWF), is considering setting up a mechanism for continued new capital, as the country accumulates foreign exchange reserves, said a senior executive on Thursday.
[...]
CIC will soon receive $100 to $200 billion in new funds, as the government seeks to reduce its exposure to US government debt, according to a report in the Financial Times on April 25.
However the outbound FDI is likely to be higher. In may last year, the NZ Herald reported:
China's enormous sovereign wealth fund, the China Investment Corporation, may have set aside up to 1.5 per cent or about $6 billion of its massive foreign exchange reserves to invest in New Zealand assets, including government bonds, companies and potentially dairy farms.
[...]
Set up in 2007 to invest some of China's now more than US$3 trillion in foreign exchange reserves accumulated through trade surpluses, the China Investment Corporation is thought to have been shifting some of its vast resources away from US dollar assets while the US Federal Reserve undertakes its quantitative easing policy, driving the greenback down, and America's economy struggles to recover from the global financial crisis.
The China Investment Corporation is among the world's biggest sovereign wealth funds with about US$332 billion in assets.
The China (government) Investment Corporation (CIC) was founded in 2007 specifically to earn a higher return for government investments. At the time, Zhou Xiaochuan, the governor of the central bank, said that China's $3 trillion foreign exchange reserves had exceeded a "reasonable" level and there needed to be diversification of the portfolio.
With the economic crisis depressing asset prices worldwide, Chinese firms jumped at the opportunity to bid for distressed foreign businesses, and the Chinese government heavily promoted outbound investment by easing and decentralizing regulatory procedures and broadening financing channels for firms with overseas ambitions.
The National party has been all too happy to help China's expansion into New Zealand, promoting the Trans-Pacific Partnership Agreement (TPPA) with reckless abandon.
China is also notorious for using tax havens to hide FDI flows from regulators, all of which is alarming many governments from around the world, especially the Americans. According to this Congressional Research (PDF), China's advantage was mostly due to implementing an economic stimulus package in 2008.
The global economic crisis that began in 2008 significantly affected China’s economy, especially its external sector. China’s trade (both exports and imports) and inflows of FDI diminished sharply, and millions of workers reportedly lost their jobs. The Chinese government responded by implementing a $586 billion economic stimulus package (largely aimed at infrastructure projects), loosening monetary policies to increase bank lending, and providing various incentives to boost domestic consumption. Such policies enabled China to effectively weather the effects of the sharp global fall in demand for Chinese products. While several of the world’s leading economies, including the United States, experienced negative or stagnant gross domestic product (GDP) growth in 2008 and 2009, China achieved real GDP growth rates of 9.6% and 9.2%, respectively. In 2010, China’s exports recovered to pre-crisis levels, and real GDP grew 10.3%.
So that cover's where the money is coming from. The other point that should be made in context to the Crafar farms is that China recently developed policy to increase their food security. This involves increasing distribution channels within China, purchasing worldwide supply chains and reducing tariff's through trade agreements like the one with New Zealand.
In December last year, China's Ministry of Commerce reported:
The government said on Tuesday it would abolish restrictions on the sale of baby milk, a move that will lower its price by a fifth and help some families cope with plunging incomes and recession.
From January 1 consumers will be able to buy all forms of baby formula at the supermarket, ending a pharmacy monopoly over the sale of power for 1-6 month-old babies, Development Minister Michalis Chrysochoidis told a news conference.
"Prices will go down by 20 percent," he said.
There is no doubt that this will dramatically increase demand for milk products in China.
Considering the Chinese government's requirement to boost regional and bilateral trade because local production does not meet consumption rates and that China would forfill two of it's policy directives with the acquisition of Crafar farms as well as the huge amounts of funds available, there is overwhelming circumstantial evidence that Pengxin Group has financial backing from the Chinese government through its outbound FDI policy administered by the CIC.
According to the same NZ Herald article:
Elsewhere, high profile completed Chinese purchases in New Zealand in recent times include Agria Corporation buying a controlling stake in PGG Wrightson, and Haier helping rescue an ailing Fisher & Paykel Appliances by taking a 20 per cent cornerstone stake. China's partly state-owned Bright Dairy also bought Canterbury's Synlait dairy processing operation last year for $82 million.
Tenants in our own land indeed. It is no wonder then that at least one of the Crafar farms is going to be occupied. Today, Radio New Zealand reports:
Members of a King Country iwi are setting up camp on one of the Crafar farms near Benneydale, demanding that their ancestral whenua, or land, is returned.
[...]
The occupiers from Ngati Rereahu began setting up camp on Monday afternoon, using shipping containers as a base.
They say they are prepared to stay for the long haul.
Let's hope this will all be a unifying factor to mend Maori and Pakeha relations.
