Export risk and diversification

New Zealand's ambassador to China, Carl Worker.

Last year China became New Zealand's top importer, taking 20.18 per cent of our exports, overtaking Australia, which is now on 19.14 per cent and the United States, our third top importer on 8.53 per cent.

Others who rank high on our export list include Japan and Britain. New Zealand currently exports about 30 per cent of its output, and the Government has set a target for this number to reach 40 per cent by 2025.

While it is not surprising that our export composition is changing - China is now the world's second largest economy - there are two issues of concern.

First, China, unlike New Zealand's traditional export partners, has a very high political risk score - 54 out of 100 compared with Australia on 13, the US on 18 and New Zealand's 11. Russia had a score of 49 in 2006, and Egypt had a score of 50 as recently as 2009.

Political risk can mean restrictions on foreign ownership, restrictions on how much money you can transfer out of the country, or politically motivated exchange rate controls.

The other area of concern is how quickly our Chinese exports have grown. It was our number 27 export destination in 1990 and since 2008, exports have almost quadrupled from 5.93 per cent to more than 20 per cent now.

We are not the only country exposed - Australia currently exports more than 35 per cent of its output to China and Japan's share of Chinese exports is also higher than ours. But neither of these countries has experienced such a high rate of export growth to a single, politically-risky destination.

Our current level of export-related political risk is acceptable, but it is important we don't become too reliant on the continued growth of the Chinese economy, which has recently shown signs of slowing.

A downturn in China increases political risk if there are job losses, while also negatively impacting the economies of Australia and the United States - the second and third-largest importers of New Zealand goods.

Any risk, including export-related political risk, should be addressed through diversification - the old adage "don't put all your eggs in one basket". New Zealand is a small economy that can be adversely affected by external shocks so it's crucial we maintain a diversified base of export destinations.

• Sasha Molchanov, Associate Professor from Massey's School of Economics and Finance.