Growing appetites

The Chinese economy is changing as Beijing attempts to lessen the worst effects of the crisis. It is using the stimulus package to spur domestic demand and also as a catalyst to change how its economy expands in the long run. In recent months, China’s GDP growth has weakened but domestic consumption has not. New Zealand exporters are gaining from increased spending by Chinese consumers coupled with favourable trading conditions.

Forecast

China will be New Zealand’s second largest export market by 2018, if the trends over the last nine years continue. Since the start of the century, New Zealand exports to China have grown by around 15 percent a year, while exports to the United States and Japan have stayed relatively flat.

New Zealand exports to China have surpassed those to Japan in the first three months of 2009. In effect, China is now New Zealand’s third largest export market and may continue to be for the rest of the year if not longer. Going by this year’s trends, China may be our country’s second largest export market well in advance of the forecast given above.

Financial crisis

A new world in which New Zealand and China’s trade relationship is thriving has been created by the financial crisis. Exports to China have grown substantially since November 2008 and further growth looks likely, while imports from the Asian nation continue to increase. The low value of the Kiwi dollar, low freight costs, and increased spending by Chinese consumers are helping New Zealand exporters. It is reasonable to say that these conditions are, to some degree, outcomes of the crisis.

Chinese demand for New Zealand dairy produce is up and is likely to continue to rise. It has been widely reported in New Zealand that the melamine milk contamination scandal is driving Chinese companies to buy foreign product since they lack confidence in local suppliers. That Chinese consumer spending has remained comparatively strong is another salient factor which deserves more attention.

Pinus radiate (pine) log exports to China went up dramatically in March 2009. Subsidies for building low-rent housing, part of the stimulus package, and this year’s high furniture sales, appear to be having an impact. The earthquake reconstruction effort in Sichuan and other affected areas is also likely to be influencing demand. The reconstruction is a central part of the stimulus plan (some have commented, though, that including it is a way of making the stimulus look bigger than it really is). Industry insiders may also link the increased demand to factors largely unrelated to the crisis, such as Russia’s growing reputation as an unreliable supplier of unprocessed logs. They would, however, not refute that the crisis has helped New Zealand’s log trade with China. The question they will be asking is how long the present conditions will last.

Domestic consumption

Chinese consumers have not cut back spending because of the global recession and are not likely to in the near future either. Retail sales grew by 15.9 percent in real terms for the first quarter according to China’s National Bureau of Statistics. New Zealand exports to China rose dramatically in March by 119 percent compared to the same month last year - mainly due to increased milk powder, milk based nutritional powder and roughly squared pinus radiata log sales (source: Statistics New Zealand). China’s active domestic market and the growth of New Zealand exports would seem to have some sort of correlation. Another reason would be the lack of demand in other parts of the world. Domestic consumption in the US and Europe still remains weak.

An example of the comparative strength of China’s domestic economy is its vehicle sales. For the past few months sales have been greater than those in the US. Reuters recently reported that automakers anticipated sales in China to increase by about 10 percent this year. However, vehicle sales in most other parts of the world will probably show little sign of any growth until 2010. As part of the stimulus package, Beijing has helped push sales with a tax incentive for buying cars with engines smaller than 1.6 litres and a subsidy for farmers buying vehicles smaller than 1.3 litres.

Economic transformation

China’s strategy for stimulating domestic demand is two-fold. Essentially, it must keep the economy growing at a steady rate. China needs, and to some degree seems to be creating, significant domestic demand for many products that previously were sold abroad. Subsidies introduced to help farmers buy home appliances, such as colour TVs, air conditioners, personal computers and so forth, are targeted at doing just this. China faces many immediate challenges, significantly unemployment. China’s economic and social stability are at risk if the stimulus does not dilute the most negative effects of the crisis.

Apart from short-term survival, it is hoped that the stimulus will trigger a massive economic transformation ensuring China’s future economic growth. After the 1997-98 Asian financial crisis, China, like many other developing countries, invested in overseas securities to hedge against a repeat of a similar crisis. Many analysts now say the Chinese should have invested more in their own economy. China may be able to sustain a reasonable level of growth this year, but it will struggle if international demand for its products does not improve next year. No one is saying the transformation can be achieved in a matter of years and thus China, like so many other countries, eagerly awaits the end of the recession.

Opportunity in risk

David Mahon – a New Zealander who runs a private equity funds management and advisory firm based in Beijing – recently wrote in his New Zealand and China report that, “China is not just somewhere to sell products; it is a platform upon which New Zealand’s economic future may be built.” New Zealand has the chance to now engage with China at a new level which may have commercial spin-offs. China’s premier, Wen Jiabao, has asked New Zealand to help his country develop food safety standards. To be sure, dealing with China on such an issue will not be easy. Yet, help has been requested so now the relevant New Zealand and Chinese government agencies will likely be focused on how the idea can be put into practice and used to benefit both sides.

The Free Trade Agreement between New Zealand and China provides a framework for officials to cooperate on matters such as food safety regulatory standards. The New Zealand Food Safety Authority is due to meet with its regulatory counterparts in the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) to discuss areas of possible interest in June and again in September. It is viewed that the New Zealand dairy industry’s expertise in integrated supply chain management is likely to be of high interest to Chinese officials. This kind of information is linked to food safety and may be easier to supply initially than that regarding standards as it sits in the commercial field in New Zealand.

At a time when trade with China is flourishing, there is hope that something more than just short-term financial gains can result. The opportunity is for New Zealand to forge a reputation for providing valuable information in helping China develop its food industry. New Zealand, in particularly through its businesses, has the chance to help China transform. This may be an exciting prospect, but it is still very necessary for government and business alike to take a step-by-step approach to reduce the risks and maintain a stable relationship with China. New Zealand needs to keep pushing forward in a collaborative way and remember those words so often voiced by Sir Edmund Hillary, “Nothing ventured, nothing gained.”

Henry Acland, director of The Width Network, currently lives and works in Beijing. He has a Master's degree in Political Studies from the University of Auckland, with a focus on East and Southeast Asia. Previously he worked as a policy advisor for the New Zealand government.