Demographics, debt and deflation in our biggest market

A109 Light Utility Helicopter flight with mayor Gisborne City from the air in November 2023.

Opinion

Aotearoa New Zealand’s first-ever security strategy document was unusually frank in its assessment of the geopolitical threats facing us. It went so far as to state that “an increasingly powerful China” was “pos(ing) challenges to existing rules and norms”.

Marcus Roberts,Maxim Institutedirector of research

Even if we don’t get embroiled in war in the Western Pacific, China is still problematic for our nation. This ironically stems from the success of our trade relationship. We are heavily reliant upon China as a buyer of our primary produce: it buys around 30 percent of all our exports.

Putting a large proportion of our eggs in one basket works when the Chinese economy is doing well and its large middle class has money to spend on our goods. (Leaving to one side the concern around economic coercion and blackmail, as Australia learnt the hard way in 2020.)

However, over-dependence on one market becomes a problem when that market’s economy is struggling.

Unfortunately for our exporters, China is struggling on many fronts. As an omen of ill tidings, the Chinese government has stopped releasing data on all sorts of measures, including its total fertility and youth unemployment rates.

This is a big story. There is a real possibility that we are not merely seeing a cyclical recalibration of the Chinese economy but something much worse. Economists at Zurich recently described the country as being in a “downward economic spiral”.

A large reason is because China is no longer replacing itself. Its fertility rate of 1.09 children per woman is one of the lowest in the world. Its workforce is shrinking; it has become old before becoming rich.

Furthermore, its property developers are in debt to the tune of $US5 trillion. Local government debt is roughly 100 percent of China’s GDP ($US16-17 trillion).

While the rest of the world is still trying to wrestle inflation back into the box, China is facing slowing growth rates and deflation.

Yet here in New Zealand, we seem mostly oblivious. In its recent Monetary Policy Statement, the Reserve Bank mentioned the Chinese slowdown as one of the economic headwinds buffeting our economy. But in an election season focusing on domestic issues, China has only been mentioned in the context of providing funding for our roading projects. There has been surprisingly little discussion about whether New Zealand should continue to be overexposed to one trading partner — especially given Italy’s recent decision to disentangle itself from China’s Belt and Road initiative.

Obviously, our leaders can’t do much to improve China’s economic position. But they can help reposition our trade so it is not so exposed to the Chinese market.

Last year’s EU free trade deal is good news, but it took 14 years to bake. That’s why it’s so important to reinvigorate with the most populous country in the world, India.

And we should definitely reconsider whether it’s wise to suggest China lend us money for our roads. The trillion-dollar question is whether they’ll have any.