NZ Herald business editor at large

Liam Dann: Keeping in step with China's rebalancing


NZ needs to hone its understanding as one of the greatest economic experiments of the modern era unfolds.

Managing China's economic shift has been likened to a cyclist searching for the optimum speed. Photo / Getty Images
Managing China's economic shift has been likened to a cyclist searching for the optimum speed. Photo / Getty Images

I've spent the past week in Shanghai and Beijing immersed in the economy we devote so much space to dissecting in the business pages.

On a media tour, arranged by the New Zealand China Friendship Society and hosted by its Chinese counterpart, I've had access to high-ranking Government officials, media executives, economists, academics and even political activists.

Much of it has been off the record - as it is on similar media programmes to the United States. But the discussions have been in-depth and surprisingly frank.

Every day the newspapers seemed to throw the spotlight on some issue relevant to our next meeting: agriculture, environment, bird flu and of course the economy.

My focus has been economic. I'm trying to understand what's going on at a policy level and get a sense of how much real power the state has to implement that policy.

Clearly, something is up.

With Europe and the US still floundering, every fresh piece of Chinese economic data warrants a reaction on international finance markets.

Last week China's manufacturing stats showed a contraction and markets plunged - Japan's stock market shed 3 per cent in an afternoon.

We saw last year how swiftly the threat of a slowing Chinese economy flowed through to hard commodity prices. Australia's economy felt the fall in the price of minerals. In New Zealand we've been lucky that food prices stayed strong, but the slump in coal prices played a direct role in the collapse of Solid Energy.

We need to take a step back from the daily fluctuations and hone our understanding of what's driving the change in China and what the direction of that change is.

We are about to watch one of the greatest economic experiments of the modern era unfold.

Everywhere you go in China you'll hear about the new policy. The Chinese Government is selling it hard and most of the public, at least those with any interest in politics, can articulate its goals.

It is the great rebalancing. China is changing down a gear, to target quality, not quantity, in its economic growth.

Its success or failure will have a huge impact on the rest of the world.

We've seen the economic miracle. From New Zealand we've watched and benefited as China's GDP has grown at annual rates of 10 per cent or more.

In 1978 China's GDP was roughly NZ$73 billion. By last year it was 142 times that figure - about $10.3 trillion.

Now there's a new GDP target of 7.5 per cent, but there is much more to this shift than the reduction of the top-line figure.

It involves a shift from export-led growth to the domestic economy, from manufacturing and heavy industry to services and technology. It will mean an appreciating RMB and a further opening of Chinese markets to foreign capital.

Even as China's GDP slows, this new-look economy will provide growing opportunities for New Zealand business, but we'll need to target the right sectors.

We are going to have to get more literate in the finer details of China's data and its policy settings or we will see more Solid Energy-style failures.

It is difficult to put an exact date on the shift in policy. Even researchers at the Chinese Academy of International Trade and Economic Co-operation struggled to pinpoint a first policy announcement.

One tied it to the July 2005 statement on the plan for the market reform of China's currency. The research institute's vice-president, Ren Hongbin, says it is safe to say it has been developed and accelerated as a response to the global financial crisis in the West.

China's 12th Five-Year Plan states that domestic consumption will be the key driver in the future.

It already accounts for 48 per cent of China's GDP but expect to see that rise. Growth will be achieved by urbanisation, improved social welfare and wage growth and policy settings that stimulate local spending.

Urbanisation alone guarantees the trend. Just by moving to the city people increase their contribution to GDP by an average 10,000 RMB - that's before they achieve any personal progress towards new wealth.

With 10 million people moving from the country to the city each year that guarantees an additional 100 billion RMB of GDP growth just for starters.

China is still only about 50 per cent urban and this will accelerate in the coming years. This process is dubbed the "the next huge dividend for the Chinese economy".

China is making progress in shifting the quality of growth. Domestic consumption accounts for about 48 per cent of China's growth and will soon surpass exports. Already the tertiary, or service-based, end of the economy has surpassed industry.

Hard industries and export-focused business are more likely to bear the brunt of contractionary policy.

But don't expect capital markets to face much restriction. Several key officials expressed confidence that there is no bubble in Chinese capital markets. There is still potential for growth and innovation.

Property is another story. It is overheated in the cities and worries everyone, from the top of the People's Bank to the 20-something professionals saving for a deposit on their first apartment. It's a familiar story for New Zealanders.

Strict credit controls have been introduced to curb speculation. Nobody believes they are working.

One senior official compared the economy to a cyclist searching for the optimum speed - too fast and he'll crash into something, too slow and he'll fall.

Watching the cyclists brave the chaotic intersections in Shanghai, it seems an appropriate analogy.

In the coming years we'll see Chinese policy-makers swerve left and right between regulation and stimulus with little warning as they try to stay on course.

As it does on the city streets, pragmatism dominates. The only rule seems to be: don't crash.

When you raise the risks the Chinese smile and openly acknowledge that the challenges are huge. But they remain steadfast in their optimism.

When you consider the scale and success of the economic reformation in the past 30 years it's not hard to see why they are feeling bullish.

But this new goal is more complex, it is new territory and there are no guarantees.

China may slow too fast and gets the wobbles - then the world will wobble too. Or it might find the limits of its state power are greater than expected. The economy might keep speeding and crash.

Successful or not, the shape of the Chinese economy will change dramatically and the China we'll be doing business with in five years will be very different to the one we signed our free trade agreement with in 2008.

Liam Dann travelled to China as a guest of the New Zealand China Friendship Society.

- NZ Herald

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NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. 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. He hosts The Economy Hub video show every Thursday.

Read more by Liam Dann

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