KEY POINTS:
China's State Grid's bid for Vector's Wellington assets will provide a quick test of just where the Government's sympathies lie when it comes to allowing Chinese companies to buy major NZ infrastructure assets.
Foreign control of key infrastructures became a political hot potato earlier this year when Cabinet ministers made it clear they would not tolerate Dubai Aerospace as the majority owner of Auckland International Airport.
The Canada Pension Plan Investment Board is waiting on tenterhooks to see if two Cabinet ministers will approve their own bid for 40 per cent of the airport company which is being assessed against a tough new national interest clause.
With the capital city's power grid now on the block - and a Chinese mainland and Hong Kong company seen as the main bidders - international investors will be looking to see whether bids from Chinese companies for infrastructure assets are treated more favourably than those from other countries.
The mainland China power grid company and Hong Kong's Cheung Kong Infrastructure Holdings were due to file final bids for the capital city's power grid this week.
Hong Kong-sourced reports suggest the two Chinese companies may pay as much as US$1 billion ($1.25 billion) to acquire the Wellington network from Vector, which is New Zealand's largest electricity and gas distributor.
State Grid won 25-year rights to run the Philippines grid in a US$25 billion deal last year. Cheung Kong Infrastructure Holdings, indirectly controlled by tycoon Li Ka-shing, already owns 23 per cent in Australian firms Citipower and Powercorp Australia.
Infrastructure investment is a major driver of the Chinese economy.
The Economist Intelligence Unit's Mary Boyd yesterday told a New Zealand Trade & Enterprise seminar in Beijing that China's fixed asset boom began in the 1990s.
Fixed-asset investment was "now driving the economy" and proceeding at a furious rate with fixed asset investment (FAI) in the rural sector up 21 per cent last year; growth in urban FAI running at 26 per cent and real estate at 30 per cent. But concern was growing that too much FAI was going into the economy leading - in some cases - to overinvestment.
The major driver behind the Vector asset sale is the need to realise cash to reduce debt. And changes to the pricing regime as a result of the Commerce Commission's tougher regulatory environment.
The US sub-prime market crisis has raised the cost of international borrowing to many New Zealand companies. While Vector is understood to have bridging finance covering outstanding debt, the focus is on getting its interest burden down.
The China-New Zealand free-trade deal includes a significant investment chapter which conditions governments on both sides to treat investors and investments of the other country "as least as well as they treat their own investors" - subject to an exception for existing measures that are not in conformance with the obligations.
Investments between China and New Zealand are already subject to an Investment Protection and Promotion Agreement which came into force in the 1980s.
China has subsequently enacted a number of high quality bilateral agreements with other OECD countries.
Government analysis on the FTA outlines considerable investor protection disciplines and a provision for arbitration when disputes arrive.
In March 2006, Chinese investment in New Zealand totalled $1.66 billion. New Zealand had $333 million in China. But both sides expect the relationship to deepen.
Chief NZ-China negotiator David Walker said it "future proofs investments". If they can't be settled in six months, disputes would be referred to international arbitration.
Yesterday, it was made clear that Chinese investors would be treated no less favourably than domestic investors in like circumstances. There is protection against expropriation of assets - which is an important element in New Zealand's favour given China's communist history.
The bidding war for control of Auckland International Airport foundered earlier this year when Cabinet ministers made it clear they did not believe Dubai Aerospace was a suitable majority owner for our prime international gateway.
Now that major Chinese bids are in the frame for another key asset, the Government will need to tread carefully.
The key difficulty could come with Australia, particularly how the FTA with China will impact on New Zealand's existing economic relationship with Australia.
The South China Morning Post reports that Cheng Dawei - chief expert with the Beijing World Trade Centre (a Government-funded think-tank based in Hong Kong) said the most significant aspect of the NZ-China pact was that mainland companies could now use New Zealand as a springboard to explore energy and mineral resources in Australia. China was seeking investment opportunities in energy and mineral rich countries to fuel its rapid industrialisation.
Chinese investment in Australia has become highly sensitised.
Australian Prime Minister Kevin Rudd, who is visiting Beijing this week, will not want to have a confrontation on the issue. He is expected to make it clear that the Chinese Government needs to take on board Australian domestic concerns to a resource asset grab by China's companies.
Australian officials yesterday said they were studying the FTA to find out how the provisions intersected with negotiations to add an investment protocol to the Closer Economic Relations agreement between the two countries.
Walker indicated it would be difficult for Chinese companies to bypass Australia's investment rules by using New Zealand as a launching pad.
But the Sino-NZ deal - with its favourable treatment of Chinese investors - will put pressure on New Zealand's nearest neighbour. Expect negotiations on the CER investment protocol to get that much tougher.
