Doing business with China: Where New Zealand fits in China’s economic renaissance

The Chinese economy is slowing – no economist would disagree with that.

See: NBR Special Feature: Doing business with China

The Chinese economy is slowing – no economist would disagree with that.

Although the implications of the world’s second biggest economy moving down a gear are vast, China’s shift in focus from an exports driven economy to one based on consumption has been flagged many times.

In 1994 Nobel Prize winning economist Paul Krugman published an article titled the Myth of Asia’s Miracle, which forecasted a slowdown in the Chinese economy.

Although the essay was criticised at the time, Mr Krugman’s thesis proved prophetic.

China’s economic growth was 7% in 2014 – an enviable level of GDP growth for most countries – but for China It was down from double-digit figures.

The International Monetary Fund (IMF) forecasted in 2012 that China’s economic growth would continue at 8% until 2017.

But it quickly became clear the IMF’s forecast had overshot.

Earlier this week, Chinese third quarter GDP figures revealed the economy had edged down from 7% to 6.9% growth when annualised.

Although this figure beat many analysts’ expectations, various figures show over the next few years the economy will ease further.

Goldman Sachs slashed its Chinese growth forecasts in August, citing pessimism over its economic health.

Goldman marked down its 2016, 2017 and 2018 projections to 6.4%, 6.1 % and 5.8 % respectively. These figures were down from previous estimates of 6.7%, 6.5 % and 6.2%.

Figures from the OECD paint a similar picture, forecasting China’s GDP growth well into the 2050s (see graph) .

Although these figures reflect slowing growth, the world is witnessing a “measured slowdown” in China, rather than a dramatic collapse.

“[China’s measured slowdown] reflects the structural change in the economy,” ASB head of AgriCapital Kevin Cooney says.

The Chinese economy is having to make a transition from an investment-led GDP growth, to more of a consumer led GDP growth model, he says.

“I think that transition will also take some time. It does not happen overnight.”

But China’s new economic focus represents an opportunity for New Zealanders looking to do business with the People’s Republic.

University of Auckland Asian studies professor Paul Clark suggests that there is a desire to generate more economic growth from within China.

“Given there are 1.4 billion people in the country, it’s perfectly possible to do that.”

China’s exploding middle class

There are signs China’s new economic focus is good news for New Zealand but other countries have not been so fortunate.

Australia’s economy has taken a beating as China’s economy has been cooling. When many other developed countries plunged into recession following the 2008 global financial crisis, one of the reasons for Australia staying afloat was China’s investment into infrastructure.

With the explosion of new building, demand for hard commodities – such as metal – was high and countries, like Australia, which were able to fill this demand, reaped the benefits.

New Zealand was less fortunate, as demand for soft commodities – such as dairy and beef – fell.

But it would seem the tables have turned. The Australian government calls China’s slowdown “the new normal” but with China demanding fewer hard commodities, Australia’s terms of trade has widened.

“The fundamentals are China’s middle class continues to grow,” Mr Cooney says.

According to research by McKinsey & Company, by 2022 more than 75% of China’s urban consumers will be earning between $US9000 and $US34,000 a year – technically defined as the middle class in China.

McKinsey also suggests by the same year, 54% of urban households will be classed as “upper middle-class,” with incomes between roughly $US20,000 and $US34,000.

Mr Cooney says this represents a “whole rump of consumer spending power.

“The opportunity for New Zealand is to work out what those consumers are going to be most interested in spending their money on.”

He says at the moment, 40% of a Chinese person’s income is spent on food.

“Increasingly, consumers will demand higher quality food that’s safe and has high nutritional integrity,” he says.

“They will demand more proteins. They are already demanding product which is absolutely safe and which they can be assured it’s safe and has high nutritional integrity.”

He says New Zealand is well placed to capture more value from that trend.

China Construction Bank (CCB) executive general manager of corporate banking Lloyd Cartwright says the growth story for China’s middle class has “only just begun.

“The growth of the middle class is only really the tip of the iceberg at this point,” he says.

“In the move to a more consumer led economy, focusing on the social aspects of growth is very important for China.”

Mr Cartwright agrees New Zealand is well positioned when it comes to doing business with China.

“New Zealand is a surplus producer of products which have large demand [in China],” he says.

He says it’s important for New Zealand businesses to add value to their products when looking at doing business with China.

But it’s not just the traditional means of trade that Mr Cartwright is optimistic about.

He says China is becoming increasingly reliant on e-commerce and e-marketing – whereby business is conducted online.

In 2013, China surpassed the US as the world’s largest digital retail market. A report by Bain & Company suggests that, in any single day during November 2013, more people logged on to China’s most popular e-commerce site than the entire population of Brazil.

A study by eMarketer revealed similar results when looking at China’s e-commerce over the next few years.

“eMarketer estimates retail ecommerce sales, excluding travel and events tickets, will rise 42.1% in 2015 to US$672.01 billion, easily making China the world’s largest ecommerce market.

“In fact, China will account for more than 40% of the world’s retail e-commerce sales this year,” the study found.

Mr Cartwright says New Zealand businesses are building strong e-channels in China and say he has observed some “brick and mortar” businesses are closing due to online demand.

“Some foreign supermarkets are closing and going straight to e-channels, which is a potential advantage for New Zealand because some time we cannot meet the size of requirements for an importer from China.”

He says e-channels provide a good portal for New Zealand firms to do business in China.  

A taste for travel
As well as the increase in consumption, the Chinese are getting a taste for travel.

In 2013, China’s outbound travel exceeded 80 million trips and this number is projected to increase to 100 million this year.

It would seem that many Chinese travellers are looking at New Zealand with interest. 

Figures from New Zealand Tourism reveal a 21% increase in Chinese visitor arrivals for February year-on-year. 

The Ambition 2025: Insights, Trends and Opportunities in Asia report from Auckland Airport outlines in 2013, the Asia inbound market contributed more than $1.6 billion to the New Zealand economy.

It also states that, by 2025, this market has the potential to contribute more than $4.6 billion to New Zealand’s economy annually.

“China and other emerging Asian markets are truly the greatest source of opportunity.

“Their economies are industrialising, urbanising and rapidly growing the number of middle-class households in their countries,” the report says.

HSBC chief economist Paul Bloxham says the Chinese tourism market represents huge opportunity for New Zealand businesses.

“Chinese arrivals are up 180% over the past five years, or up from 100,000 arrivals five years ago to over 300,000 Chinese,” he says.

There is more good news on the horizon, as Mr Bloxham forecasts Chinese tourism numbers will double over the next decade.

“Just 4% of the Chinese population have a passport, so we think there is a lot more scope for increased travel by the Chinese,” he says. 

China’s shift from an investment-led export story, to more of a services consumer led story means they will consume more things people in developed economies consume, “tourism is one of those things,” he says. 

“Chinese tourists are playing a bigger role in global tourism flows. As middle class Chinese incomes rise, more and more people are travelling and that includes destinations like New Zealand.”

Looking to the future
Mr Cartwright says the China story has not yet run its course.

“We will see continual opening up of the Chinese economy and of the capital account,” he says.

He says one of the ways China is looking to promote itself on the world stage is through its pioneering of the Asian Infrastructure Investment Bank (AIIB).

The AIIB is a new, multilateral development bank that will provide finance and infrastructure for projects in Asia.

It has investment capital of $100 billion, with contributions from many countries, including India, Russia and Australia, and will address some of Asia’s infrastructure needs.   

Finance Minister Bill English tells the National Business Review the bank will provide capital for infrastructure and development across economies where New Zealand has a long-term interest.

Treasury secretary Gabriel Makhlouf says the AIIB is important for New Zealand.

The capital invested in the AIIB will help support investment into improving infrastructure in the Asia-Pacific region, benefiting New Zealand in the long run.

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