Liam Dann 's Opinion

Liam Dann is the business editor of the NZ Herald

Liam Dann: China's pain will be New Zealand's gain

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Deliberate slowdown to rebalance economy focuses on middle class, with benefits for Kiwi business.

In a key speech Finance Minister Lou Jiwei announced the economic growth target will stay at 7.5 per cent this year. Photo / AP
In a key speech Finance Minister Lou Jiwei announced the economic growth target will stay at 7.5 per cent this year. Photo / AP

While the world has been focused on the historic events in central Europe, big changes in China, which will have a direct impact on our economic future, are continuing at great pace.

Speeches at the Chinese Parliament last week confirmed that the Government's resolve to rebalance its economy has never been stronger.

Perhaps the most remarkable sign of this was an admission that hitting an exact growth target is no longer crucial.

In a key speech Finance Minister Lou Jiwei announced the economic growth target will stay at 7.5 per cent this year, but he went on to suggest that it wasn't hitting the number that mattered, what mattered was creating good job growth. It might not be the message the West wants to hear but China is turning inwards to focus on the domestic economy.

"How the rest of the world's nation handles the pain may depend on the relationship those nations have with China.
There are some good reasons why this slowdown isn't all gloom for New Zealand."
Liam Dann

This shift in focus has been a long time coming and shouldn't really surprise. But now that it is under way the pace of the change is starting to cause concern in the West.

From a Chinese perspective it makes perfect sense. After more than 20 years of rapid export-led growth it is time to fine-tune the economy, to focus on quality over quantity and ultimately on the living standards of its people.

But with the fragile Western economy still relying on the Chinese to underpin global growth, it is going to put the acid on Europe and America to pick up the baton.

While market watchers assess the risk of Chinese property bubbles and banking sector crashes, the real story is the very deliberate slowdown that is going to reshape the global economy in the next few years.

On Saturday new figures showed the value of China's export earnings are falling faster than anyone had forecast.

The plunge, the biggest since the global financial crisis hit, saw exports down 18.1 per cent against the same period a year ago. Experts had been picking a fall of about 8 per cent - with the slow patch for Chinese New Year factored in.

"It is the new urban middle class who will consume processed dairy products like yoghurt and cheese, or pay for a premium wine or beer."
Liam Dann

Then yesterday afternoon there was more data showing China's inflation rate has dropped to just 2 per cent - down from 2.5 per cent in January.

The data immediately had economists and commentators questioning China's ability to reach its GDP growth target of 7.5 per cent this year. The reality is that it probably won't. But China is braced for a little pain, it has the bigger picture in mind.

How the rest of the world's nation handles the pain may depend on the relationship those nations have with China.

There are some good reasons why this slowdown isn't all gloom for New Zealand.

The inflation data shows producer prices continue to fall faster that consumer prices, particularly consumer prices for sensitive food groups.

Meanwhile, imports rose a stronger-than-expected 10.1 per cent in February. The good news for New Zealand is that the import growth remains strong for goods consumed by China's growing middle classes. That's as opposed to raw goods that Chinese factories have used to produce export products.

In other words the growth story remains positive for New Zealand dairy exports but not nearly so good for Australian mineral commodity exports. Or New Zealand commodity exports for that matter - don't expect to see coal prices bouncing back to save Solid Energy any time soon.

A big part of China's GDP growth strategy hinges on growing the middle class. Millions are shifting from rural lifestyles to urban centres every year.

Every urban Chinese citizen generates twice the GDP of a rural citizen so a big chunk of growth is guaranteed by demographics.

It is the new urban middle class who will consume processed dairy products like yoghurt and cheese, or pay for a premium wine or beer.

It is the urban middle class who will send their children to study in New Zealand universities and then come and visit them as tourists.

China's attempts to rebalance its economy will cause increasing concern in the West over the next few years but if it is successful in its long term goal, New Zealand is one of the world's nations best placed to benefit.

- NZ Herald

Liam Dann

Liam Dann is the business editor of the NZ Herald

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.

Read more by Liam Dann

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