China's ability to absorb more short-term economic pain than the US is one of its big advantages in the current trade war, says Pulitzer Prize-winning journalist Andrew Browne. Photo / 123RF
As our major trading partner, New Zealand’s economic fortunes are tightly linked to China’s.
Almost 20% of our total trade is with China; it’s our number one export destination, but also the leading source of our imports.
However, making sense of the Chinese economy and understanding its outlook are never simple.
The international headlines tell us China’s economy is in the doldrums and the country is increasingly embattled in a damaging trade war with the US.
Yet demand for our food commodity exports, dairy, beef and kiwifruit has remained strong, keeping global prices elevated.
Tourism has been a bigger problem. Chinese visitors to New Zealand remain well down on pre-Covid numbers, and it’s not clear that this will be easy to turn around.
Then, as we look forward, China will play an increasing role in driving the technology in our lives: think electric vehicles.
Two leading international experts on China’s economic outlook – Pulitzer Prize-winning journalist Andrew Browne and ANZ China chief economist Raymond Yeung – attended Auckland’s China Business Summit this month to unpick what’s going on.
Their conclusions offered some real hope for New Zealand businesses in the years ahead.
There’s no question Chinese consumer sentiment is low and there is slowing economic growth.
“The number one issue dragging the Chinese sentiment down is the property market,” says ANZ’s Yeung.
“We definitely need to see a recovery of the property market in order to see a sustainable recovery in sentiment and consumer spending because of the wealth effect.”
The latest numbers show the property market is still dropping month on month, he says.
A report from Goldman Sachs last month estimated prices have fallen 20% over the past four years and could decline another 10% before bottoming out in 2027.
That matches ANZ’s estimates.
“I believe it will be another 18 to 24 months of contraction of the property market,” Yeung says.
“That sounds bad. But that is a national strategy to turn the country from a property-led economy to a tech and renewable energy-led economy.
“There is a view from the top that China simply has to go through this transition,” he says.
It’s one of the features of the Chinese system that its leadership can look through often painful periods of transition and focus on bigger, longer-term goals.
As Chinese Ambassador to New Zealand, Wang Xiaolong (also speaking at the summit) put it: “No matter how turbulent the global landscape is, or will be, China remains unremittingly committed to development to deliver better lives for the Chinese people, in the historic process of the great rejuvenation of the Chinese nation.
“There is a firm, unshakeable national consensus that has not changed and will not change.”
The ability to absorb more short-term economic pain is one of the big advantages China has in its current trade war showdown with the US, says Browne.
“I think it is important to know that Xi Jinping thinks he is winning! And he may not be wrong,” Browne says.
“Obviously, China has problems in its economy. We’re in the third year of a real estate meltdown. Youth unemployment is high, it is crushing the dreams of an entire generation of college graduates and their families.
“Xi Jinping is enormously concerned about all of this but he is focused on a different prize,” Browne says.
That prize is technology. China is laser-focused on developing a high-tech manufacturing industry to enable China to escape the American choke hold, he says.
“[Xi] sees what he says are changes ‘unseen in a century’ ... meaning the rise of China and relative decline of the USA.
“This, from Xi’s perspective, is China’s moment to seize.”
When it comes to tariffs and the trade war, both Yeung and Browne see China having the upper hand.
Yeung believes it’s likely the present US/China tariffs (currently sitting at 30%) will fade into insignificance in the coming years.
“I expect this tariff will be gone very soon,” he says.
“There is too much stakeholder interest.”
Basically, the US needs China’s rare earth metals, and China needs access to US semiconductor chip technology.
Vietnam is the most highly vulnerable to US tariffs, with 8.3% of its GDP exposed to the US, Yeung says.
“For China it is just 3%. They can give it up, just let it go.”
He notes that China is also currently suffering from deflation – something that helps mitigate any inflationary impact from tariffs.
Browne isn’t so convinced Trump will back down further on tariffs.
However, he does believe the US got outplayed by China in the showdown this year.
“Nobody knows how this is going to play out. We haven’t seen this since the 1930s. So I still wouldn’t rule out an inflationary surge.”
We can’t even exclude the “possibility that Trump isn’t stark raving mad”, he says.
We may see some positive outcomes emerge from the tariff policies.
“We’ve already seen a few. It has galvanised Germany, and it has galvanised Europe. It is possible Europe might get its act together and launch a unified capital market and start issuing bonds, and compete with the US and China.
“It’s equally possible that the US could convince China to shift its economic model further to consumption.”
Or, it could all end up relatively benign for the US economy. Trump might continue to reduce tariffs, and a combination with “cutting taxes, slimming the government and cutting red tape may usher in a golden era for the US ... we don’t know.”
Another possible outcome is that the world economy “bifurcates” around the US and China, and countries like New Zealand are caught in the middle, he warns.
But regardless of what happens next, Trump has made the fundamental cardinal mistake in his second term of underestimating China, Browne says.
“[Former US President Joe] Biden, whether you like him or not, had the measure of China, so when he wanted to put export controls on chip-making materials, his team worked very hard with governments in the Netherlands and Japan.
“At one point in the Biden administration, he decided to get rid of all of the cranes in all of the ports in the US because there were fears they’d be counting things like military equipment going in and out.
“Unfortunately for the US they don’t make cranes anymore. The Japanese do so he put in place a technology transfer agreement with Japan. Biden understood the challenge.”
The US is the world’s financial superpower but China is the world’s manufacturing superpower, Browne says.
“It now has an industrial base that is equal to the US, plus Germany, plus Japan, plus South Korea, and then some.”
That gives China a critical advantage in all the technologies that are coming of age at the same time.
That came to the fore during the recent trade negotiations, where Browne says US Treasury Secretary Scott Bessant also underestimated China.
“He said, ‘When China exports five times as much to the US as we export to them, we have all the cards’.
“He said the Chinese were ‘playing with a pair of twos ... It turned out that when he turned the cards over that China had a couple of aces.”
One of those aces was rare earths.
“China threatened to choke off the supply of rare earths to the US and in doing so would have closed down vast swathes of the manufacturing industry, the defence industry, the entire car industry.”
The US attempted to retaliate, denying China exports for jet engines and threatening to close down China’s civilian airline project.
The tariff war morphed into a supply chain war that was far more serious, Browne says.
“It turns out the Chinese had played the US, and they completely caved.
“Trump brought the tariffs down from 145% to 30%. Still high but no longer prohibitive. That’s where we are now. We have a truce.”
Browne says he doesn’t see Trump completely abandoning tariffs.
“We were warned about recession and inflation and we haven’t seen that yet,” he says.
“Tariffs are raking record amounts of revenue for the US Government. In Trump’s mind, this is a substitute for taxation.”
It may be that the lack of negative consequences actually emboldens Trump.
“I would not count out that possibility, that he really does come through with the big tariffs he’s promised on August 1.”
Technology is at the heart of US-China competition now, Browne says.
“A lot of people got the socialist market economy wrong,” he says.
“There was this idea that it would collapse under its own contradictions and an enormous amount of waste.
“And look, the waste in the Chinese system is spectacular but it is also spectacularly well co-ordinated.”
It’s a whole-of-nation approach, he says.
“Private/public partnerships, centralised R&D, centralised marketing and bottomless supplies of capital and this incredible winnowing process through dog-eat-dog capitalism in the marketplace. What emerges are these apex predators.”
There’s the rapid rise of car manufacturers like BYD and the big advances China is making in battery technology.
But even in the media space, in the most highly censored economy in the world, China produced TikTok, which now has greater insight into the minds of young Americans than Meta, he says.
“They have a system for producing world-beating companies in sector after sector.”
Tariffs are mostly a bad thing, Browne says.
If they are well-targeted, however, they can sometimes do some good by protecting the industries that a country seeks to develop.
“The Biden administration identified semiconductors, clean tech, batteries and so on,” he says.
“When I talked to investors and asked, ‘what are you interested in?’ number one was the US. They were attracted by all of the money going into these sectors.”
All of that is now being dismantled.
“The big beautiful tax bill doesn’t just eliminate the subsidies and incentives in these areas, it actually penalises companies operating in these areas,” Browne says.
The US is essentially handing the entire landscape over to China, he says.
“If you want to do your green transition now, whether you’re in Africa or Latin America, you want Chinese technologies. And the United States will never catch up.”
Can the US and China be friends?
Browne says he’s very sceptical that there is such a thing as a US-China grand bargain.
“I think the relationship is defined by a core tension. At a high level, there is an almost complete absence of trust,” he says.
The idea China is a threat and must be treated as competition is one of the few areas of bipartisan political consensus in the US, he says.
“But these two economies are deeply enmeshed; they are joined at the hip. It creates all kinds of mind-bending paradoxes.
“The Chinese hypersonic Carrier Killer missile cannot find its target without high-end chips manufactured by TSMC in Taiwan, using US tech,” Browne says.
“By the same token, the American Patriot missile cannot defend against Chinese rockets without magnets that come from Chinese rare earth materials.”
This is a relationship that is best described as “weaponised interdependency”, he says.
Yeung and Browne agree on a lot. But Browne still sees China as an exporting nation – as evidenced by its US$114 billion ($188.3b) trade surplus with the world.
Yeung believes focusing on this can lead to a misunderstanding of what’s really driving China’s economic policy.
He sees China as an importing nation, based on the fact 88% of its total GDP is domestic now.
“It’s domestic growth that will drive China’s development,” he says.
Here in New Zealand we shouldn’t pay too much attention to whether China hits 5.3% GDP or 5.1%, he says.
“If China is going to transition, it’s not about how many percentage points of GDP, it is about the changes in lifestyle, the quality of life.”
In order for New Zealand to make the most of the Chinese market we need to speed up our ability to adapt, he says.
“You really need to think about the Chinese speed. Maybe we talk about annual planning but even within one year the Chinese business cycle changes a lot.”
New Zealand needs to be ready and to position itself for when Chinese consumer confidence eventually rebounds, he says.
“This tariff issue is not the core issue.
“I don’t need to reiterate, this is a US$18 trillion economy. There is also US$36 trillion in household deposits sitting in bank accounts in China, ready to unlock and unleash.
“Once consumer sentiment comes back, that will be a massive wave of consumption power waiting for you guys to tap.
“Consumption is the future of China, supported by technological change. And China is going through this with or without the US.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Heraldin 2003.