Fran O'Sullivan: China talks a balancing act for Key

Prime Minister John Key has some tricky diplomacy in front of him when he meets China's top leaders in Beijing next week.

President Hu Jintao and Premier Wen Jiabao are leveraging the international financial crisis to try and rebalance global power away from the United States.

On the bilateral front, concerns are also emerging over New Zealand dairy giant Fonterra's position after a claim was filed against its former Chinese joint venture for compensation for victims of the tainted milk scandal.

The food safety scandal ultimately exposed a raft of Chinese officials as complicit in a major cover-up on the eve of the historic Beijing Olympics.

These are difficult issues at the best of times. But the international financial crisis is testing loyalties on both the global and bilateral fronts.

Already, China is using a raft of forums to build international support for a new international reserve currency to take the place of the greenback and ultimately form the new currency for international finance and trade.

Chinese banking officials initially floated the idea at a meeting of the Apec Business Advisory Group in Wellington in February. Since then, the Governor of China's central bank has stated the goal would be to create a reserve currency that is "disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies".

In a barely disguised poke at America, Zhou Xiaochuan noted: "The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system."

Key's own background in the international forex business will position him well to discuss the intricacies of the proposal. But when push comes to shove, the question confronting New Zealand will be both economic and political.

Does our Government fall into line with the Chinese proposal, or continue to support the US position despite the potential instability of the greenback if the Obama Administration simply prints money to stimulate America out of the crisis?

New Zealand has not (so far) declared a position on the matter. But it will become increasingly difficult to straddle two stools as the case for a new currency to replace America's debased greenback gathers strength the longer the crisis continues.

The issue may not feature directly in Key's separate meetings with Hu and Wen. But it is expected to surface during discussions on the global crisis at the East Asia Summit in Thailand which the PM will attend on his way to Beijing.

Key is being courted by Beijing in much the same fashion that it drew the Clark Government within its net, persuading New Zealand to validate China's "market economy status" as a precursor to negotiations on a free trade deal.

Not only will the New Zealand PM meet the top leaders, he has also accepted an invitation to speak at the prestigious Boao Forum on Hainan Island which is Asia's equivalent of the World Economic Forum's Davos meeting.

This will be the first top-level visit to China by a New Zealand politician since former Prime Minister Helen Clark ordered our Beijing officials to blow the whistle on the scandal involving melamine contamination at Fonterra's now bankrupt Chinese joint-venture.

Key - who will be accompanied on his Chinese visit by Fonterra chairman Henry van der Heyden - will no doubt seek some clarity over the position of New Zealand's dairy giant after reports that the State Council has tacitly given its consent to a Shijioazhuang court to hear a compensation claim against Sanlu from one of the many affected families.

Chinese reports state that at least six babies died and nearly 300,000 were made seriously ill with kidney disease after milk powder contaminated by the industrial chemical was added to products to give the appearance of a higher protein content.The highest contamination levels were uncovered at Sanlu, the Chinese company in which Fonterra held a 43 per cent stake.

Fonterra was forced to face up to the fact that Sanlu had continued to manufacture products containing melamine even after the contamination was reported to the joint venture board last August.

The good news is that former Sanlu chairman Tian Wenhua's effort to directly embroil Fonterra in the fallout from her own criminal case has failed.

Tian's lawyer based her appeal against a life sentence on the claim that Sanlu been handed documents by Fonterra's Patrick Kwok, stating the European Union's permitted level of melamine was a maximum of 20mg for every kilogram of milk ... documents she claimed to have trusted as the basis for continuing to manufacture melamine-tainted products.

But the People's High Court in Hebei rejected Tian's appeal. This should provide a platform for Fonterra to take a fresh look at reinvesting in China.

But the company will be relying on the Prime Minister's visit to flush out any lingering issues at the Chinese end.