Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: China's slowdown may be good for NZ

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Rising incomes in China have got to be advantageous for New Zealand which is an efficient producer of the foods of affluence. Photo / AP
Rising incomes in China have got to be advantageous for New Zealand which is an efficient producer of the foods of affluence. Photo / AP

Should we be worried that China's economic growth has slowed to three-quarters of the pace it has averaged over the past 30 years?

Not really, no, would be the take-away message from some recently released work by Treasury economists Scott Bowman and Patrick Conway on the outlook for the Chinese economy and its implications for ours.

It is not that what happens to the Chinese economy doesn't matter for us.

It is our second largest export market, and leading source of imports, to say nothing of the indirect effects arising from its importance to the global and Australian economies.

In the year to June 2013 China took one-sixth of our goods exports, up from just over 3 per cent in 2000, and provided one-sixth of our imports.

The trade is in balance at $7.7 billion each way, and that does not count exports of services such as tourism and education.

Chinese demand for dairy and forest products has enabled those two sectors to contribute half of the economy's growth since 2008, Bowman and Conway say.

By 2012 foreign direct investment from China into New Zealand stood at $1.9 billion, twice the level the other way. The 2:1 ratio matches the imbalance in New Zealand's international investment position generally.

China's ravenous demand for commodities helped push New Zealand's terms of trade - export prices relative to import prices - to a 37-year high two years ago, and while it has eased since then it remains at historically high levels, boosting national income.

Cheap imported goods from what has become the workshop of the world has helped keep inflation, and therefore interest rates, low.

The flipside of that has been a stiff competitive challenge to the manufacturing sector.

In 2000 for every $100 of (non-food) manufactured goods New Zealand imported, it exported $44 of such goods; by last year it had fallen to $37.

Bowman and Conway found the growth in exports to China since 2000 has been driven by higher volumes rather than prices. "There have been spikes in export prices to China, boosting incomes, but there is not the same upward trend as for volumes."

Rising dairy exports to China have generally not been at the expense of other markets, most of which have continued to grow slightly in both value and volume terms.

But it has driven a wave of dairy conversions, and ultimately there are physical limits to the extent to which agricultural volumes can be increased.

Clearly, then, we have a big vested interest in the Chinese economy continuing to do well.

While an annual growth rate of 7.5 per cent is soft by the standards of its past since liberalisation began 30 years ago, it still looks good against the backdrop of a global economy struggling to grow at much more than 3 per cent.

And if the slowdown represents a move towards economic growth that is more balanced and sustainable - not so top-heavy in investment spending and exports, but driven more by domestic private consumption - then that is likely to be positive for us.

The structural challenges China faces are well known.

It has a rapidly ageing population which will result is a steep increase in the dependency ratio - the young, plus the old divided by the working-age population. The United Nations estimates its working age population will peak at just under a billion in 2015 and shrink by a fifth by mid-century.

But the other big demographic trend, migration from the countryside to the cities, still has some way to go.

Citigroup estimates another 150 million rural workers will move to the cities by 2030, boosting output and incomes.

Income growth should be further boosted as China reforms its "hukou" system, under which an estimated 15 per cent of the population who live and work in the cities are still officially registered as country-dwellers and are second-class citizens in the cities they now inhabit.

Bowman and Conway say labour productivity growth in China has averaged around 10 per cent per annum over the past 10 years, but nominal wage growth has been nearly 15 per cent per annum. As a result unit labour costs have been rising by 5 per cent a year, eroding China's international competitiveness.

But that effect should not be overstated, offset as it is by the quality (skill levels) of the Chinese workforce, by the agglomeration effects of having a lot of factories close together, providing shorter and more reliable supply chains, and by the quality of its infrastructure.

On the other hand faster wage growth is a trend which should assist the rebalancing of the Chinese economy towards growth that is less reliant on investment spending on infrastructure, housing and manufacturing plant and relies more on domestic consumption.

Rising incomes, especially if accompanied by a moderation in Chinese households' famously high savings rates, have got to be good for a country like New Zealand which is an efficient producer of the foods of affluence.

China's per capita consumption of dairy products is well below the world average, even allowing for its relatively low income level, Bowman and Conway say.

They cite research which estimates that for low-income countries a 1 per cent rise in income leads to a 0.8 per cent increase in spending on dairy products.

As incomes grow this elasticity declines, but less than for other food products, and meat has the second highest income elasticity of the food products studied.

Another study, by the UN Food and Agriculture Organisation in conjunction with the OECD, concluded that rising per capita consumption, outstripping domestic production, along with concerns about the quality of the latter would see Chinese imports of whole milk powder grow 14 per cent, skim milk powder 47 per cent, butter 13 per cent and cheese 135 per cent over the next decade.

At the same time continued urbanisation and the associated demand for housing are expected to expand demand for timber even as New Zealand's wall of wood approaches.

And rising Chinese incomes should be positive for tourism and education exports.

There is an obvious complementarity between the two countries.

China has an unrivalled (except potentially by India) endowment of human capital and potential for economies of scale and scope.

Our small population and low population density mean a high per capita endowment of natural capital including fertile farmland, forests, fisheries, renewable energy resources and, perhaps most important, water.

Linking the two through trade should mean our disadvantages matter less, and our advantages count for more in the next 30 years than they have over the past 30.

- NZ Herald

Brian Fallow

The Economics Editor of the NZ Herald

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