President Xi Jinping is implementing massive reform, and there is no reason for us to rule out success.
As a major consumer, sustainable growth in China is the best stabiliser of the global economy.
When Jack Welch was appointed chairman of General Electric (GE) in 1981, he embarked on a major restructure.
He dismantled inherited practices and changed the company's direction, consistent with the globally competitive environment of the 1980s. He closed unproductive plants and reduced the layers of senior management. Within three years, his strategy had helped to double the share price of one of the most successful companies in corporate America.
China's President Xi Jinping is like Welch. He is re-engineering the nation in a similar way.
The management has recognised a number of structural issues limiting organic growth.
Staff morale has soured, the environment has deteriorated and people are not comfortable. At the AGM in 2017, the chair called for major reform.
This corporate analogy works for China today. The ruling party believes in the combination of state authoritarianism and market economics, with the latter seen as a tool for regenerating efficiency gains.
After the country skirted disintegration in the Cultural Revolution of the late 70s, the reformist Deng Xiaoping called for an open door policy, resulting in four decades of economic growth. President Xi Jinping is similarly implementing massive reform today.
Based on the past, there is no reason for us to rule out success, despite the presence of undeniable challenges.
That is the background in which China's State Council decided to adjust the nation's growth target down to 6.0-6.5 per cent at the National People's Congress (NPC) a few weeks ago. They have stated a preference for GDP quality over quantity on the one hand, while acknowledging downside risks on the other. Cutting VAT, reducing banks' reserve requirement and kicking off new urbanisation projects, like XiongAn, are critical to economic momentum.
Premier Li Keqiang has restated an intention not to flood the system with liquidity: the Government is clearly focused on nurturing real growth drivers rather than pushing another credit-fuelled cycle.
As Xi Jinping pushes a quality-driven approach to developing the macro economy, the Government is also transforming the agriculture and fisheries sector. The Ministry of Agriculture last year released its China Agricultural Outlook 2018-2027 report, which pointed out that to meet future consumption, China needs to upgrade the supply side of its primary industries sector.
The Ministry is therefore adjusting the structure of food production through the primary industry sector, embracing a supply-chain approach. The headline strategy is: "reducing corn, increasing soybean, expanding forage grass, fixing pigs, lifting dairy". The State Council aims to enhance agricultural processing to boost the value-add of the rural sector. The target is to raise the value-added ratio between processing and agricultural production to 2.4:1 by 2020, compared with 1.7:1 in 2015.
New Zealand is well-placed to tap into that market. According to the Chinese Government, dairy consumption in China was 100g a day per person in 2017, lower than the Chinese Dietary Guidelines' recommendation of 300g a day. Dairy production and dairy consumption in China are officially projected to rise by 19.8 per cent and 25.1 per cent respectively over 2018-2027, suggesting that the Middle Kingdom will have a persistent dairy deficit, an opportunity for New Zealand and other foreign producers over the next decade.
Though the mega-trend that is China's rising dairy consumption is unequivocal, a more affluent China also points to changes in dietary balance. A New Zealand Ministry of Primary Industries report in 2017 indicated that 45.3 per cent of surveyed respondents regarded fish and seafood as their major source of protein, and 26 per cent had eaten more fish and seafood than they did in the previous year. This finding is consistent with the statement from China's Ministry of Agriculture last month, which noted the potential for the seafood consumption of the Chinese to rise from 30g a day to the global average of 56g a day.
Another area affected by China's changing economic strategy is investment flows. In March, the NPC approved the foreign investment law aimed at improving the rights of foreign investors and encouraging greater inflow. China remains cautious about the risk that an imbalance of capital flows poses to currency stability. So we believe authorities will continue to tighten any offshore investment by Chinese corporates and households that are deemed irrational in the near-term.
This area deserves attention from other countries, including New Zealand. In past decades, a popular fantasy prevailed that China would become an exporter of financial capital, like Japan in the 1990s.
The Belt and Road Initiative and the like imply China's appetite for international involvement is increasing. Across the world, Chinese immigrants are still frequently seen at property auctions and Chinese companies have many offshore projects in the pipeline. However, as Chinese investors become more measured in their offshore investments, assets that were purchased based on valuation data of previous boom years may be at risk.
That said, the current shift in China's development regime should be seen as positive. As a major consumer, sustainable growth in China is the best stabiliser of the global economy. As China's expansion becomes less resource-intensive, the impact on the rest of the world will be more sustainable. The more gradual and orderly outflows of Chinese money will take pressure off the property markets in cities popular with Chinese buyers.
Although many observers are worried about China's slowdown, we take a more balanced view. Welch, when he restructured GE, was working in an uncertain world, and his decisions involved a certain "leap of faith". When assessing China's economic future, perhaps we need to hold a similar mindset, especially so when considering a country with a track record of 40 years of expansion.
● Raymond Yeung is chief economist, Greater China, ANZ.
Why our exports to China are so valuable to New Zealand
● Primary products continue to dominate NZ goods exports to China.
● Dairy is the largest component growing by 7 per cent in 2018 to total $4.6b, accounting for 33 per cent of our China exports. Of this, milk powder grew 4 per cent to $2.6b. China is our largest dairy export market, receiving 30 per cent of our total dairy exports. Our other dairy exports to China averaged growth of 12 per cent.
Butter exports grew 24 per cent to $797m; Liquid milk exports grew 5 per cent to $523m; However, cheese exports fell 2 per cent to $341m.
The value of infant formula exports reached a new high, up 16 per cent to $465m.
China's statistics suggest total trade could be far higher. In 2018, China recorded $1.3b in infant formula imports from New Zealand. This $800m discrepancy could be due to product being re-exported through a third country.
● Forestry exports surged to $3.3b, up 16 per cent. China is our top forestry market, receiving 49 per cent of our exports. This trade is dominated by untreated logs which grew 19 per cent to $2.8b. Wood pulp ($284m) and sawn timber ($147m) exports were stable.
● Meat and meat products are NZ's third largest export to China, at $2.1b, up 39 per cent since 2017. Lamb and mutton drove much of this growth increasing 38 per cent to $1.2b.
Beef has experienced dramatic growth since 2012 (from $51m to $782m). In 2018, China became our largest market for meat exports for the first time. China receives 25 per cent of New Zealand meat exports.
● Fruit exports grew to $606m; up 33 per cent. Golden kiwifruit remains the largest fruit export; $399m, 38 per cent growth — almost three times as valuable as three years ago ($140m at 2015). Green kiwifruit exports grew 24 per cent to $112m. China ($511m) is NZ's largest country-specific export market for kiwifruit.
● Seafood grew 11 per cent to $585m. Crayfish, prawns and shrimp are our largest seafood export ($333m) with China receiving 95 per cent of such exports.
● Wool exports rebounded up 25 per cent to $295m but remain $164m less than at a 2015 peak.
● Honey exports dropped 40 per cent in value terms ($54m) but continued to moderately grow (8 per cent) on volume. China remains our largest honey market.
● Wine exports stabilised at $38m making China our sixth most valuable wine market.
● Health and cosmetic exports saw further growth up 26 per cent to $73m, having grown rapidly since 2003.
● Services exports account for 20 per cent of New Zealand's overall exports to China at $3.4b. Within this, tourism (personal travel) and education make up the majority (83 per cent) of services exports.
● Tourism expenditure grew 13 per cent to $1.6b and visitor arrivals grew 7 per cent to 448,189. There have been important changes in the preferred style of travel from China, including a continued move to more free independent travellers.
● Education services exports continued to grow steadily, up 11 per cent to $1.3b. China is New Zealand's largest source of international enrolments - 33 per cent in 2017 (the latest available data).
Source: Ministry of Foreign Affairs and Trade.