Superior know-how key to China

China needs the milk from New Zealand's genetically superior cows. Photo / Christine Cornege

What's the difference between a Kiwi cow and a Chinese one? About 100 per cent more milk, apparently.

Capitalising on superior agricultural technology, know-how and livestock genetics will be the key to expanding New Zealand's trade with China, says David Mahon.

The expatriate New Zealander has lived in China since 1984 and his merchant bank, Mahon China, numbers Fonterra among its clients.

"China has a 16th century agricultural system supplying a 21st century consumer market," he said.

Moving to mechanised, larger-scale farming was the only way China was going to get the greatest value out of its land and maintain a balanced relationship with the limited resources of its agricultural sector.

"Also, the genetics of Chinese livestock is pretty exhausted."

Put a New Zealand cow into an open feedlot system in China, as Fonterra is, and it can produce twice as much as its Chinese sisters, Mahon says.

Expanding New Zealand's trade with China can't just consist of shipping more wood and wool and whole milk powder. Our ability to increase production of those commodities is limited, and in any case the country needs to be careful of becoming overreliant on any single market.

"So to increase our trade we have to trade our technology and intellectual capital. In doing that it is a matter of creating businesses in China so that that technology and know-how are encompassed in entities that we have control and influence over."

The processes of urbanisation and industrialisation still have a long way to run, when at least two-thirds of the population is still rural.

"China is moving inland, it is moving west, in terms of its production base. Its coastal cities, one could say, are like developed countries and they are investing in China's interior, as the West used to invest in China's coastal provinces when it was all a developing country."

The Chinese economy is expected by the World Bank to grow 10 per cent this year, boosted by a swift recovery in net exports. Investment spending continues to outstrip consumption and its trade and current account surpluses are rising.

But Mahon believes we can take the Chinese leadership at their word when they talk of the need to rebalance the economy, in the opposite direction to the Anglo economies, towards one that relies more on domestic consumption.

"Despite the big numbers in exports and the historical appearance that China has been dependent on exports, it is not really what defines the economy.

"The amount of value that China derives from exports is small if you look at both exports and imports. It imports a lot of the inputs needed to create all the stuff they export to the West," Mahon said .

"China has recognised that the extent to which exports contributed to GDP growth each year was not actually healthy and that they had to create or allow a more dynamic economy and domestic consumption to evolve. It is happening. We are seeing measurable shifts towards domestic consumption. So the consumer revolution that is China has only just begun."

The process of rebalancing the Chinese economy to one more focused on domestic markets, with a greater appetite for imported goods, would be assisted by a stronger currency, but the Chinese authorities are taking a cautious and gradual approach to appreciation of the renminbi.

"The Chinese Government doesn't know what the value of the renminbi should be. Therefore it won't make any major move in respect of it," Mahon said.

"Unless it can to some extent forecast the ramifications of, let's say, an appreciation of 30 per cent, it is not going make that choice. It is gradually feeling its way forward with an incremental revaluation of something like 5 per cent a year."

When Premier Wen Jiabao on a recent trip to Europe was getting a hard time about an undervalued currency, his response was that many Chinese exporters "have profit margins of only 2 to 3 per cent, 5 per cent at most".

"Should the yuan appreciate by 20 to 40 per cent, as demanded by some people, a large number of Chinese export enterprises will go bankrupt, the workers will lose their jobs and the migrant workers will have to go back to the rural land, making it hard for society to remain stable."

With China having contributed half the growth in the global economy last year, a crisis there would be "disastrous for the world", Wen said.

Mahon agrees: "And what he could have added is that a large minority of exports are generated by foreign companies in China. American multinationals are very concerned that a sudden appreciation of the renminbi will hurt their international profits.

"In many cases the only profit centre for these companies worldwide is China."