Matt Roy and Margaret Joiner outline how Chinese demand has played a key role in helping New Zealand climb out of recession.
An export-led recovery is once again helping New Zealand climb out of a recession but this time around it is China and emerging Asia providing a leg up rather than our traditional trading partners in the Australia, the United States and Japan.
Signs that New Zealand is exiting recession became apparent in the final months of 2009, and in December the Reserve Bank’s Monetary Policy Statement forecast a broad-based but potentially still fragile recovery led by rising export volumes and commodity prices.
The report also highlighted that a dramatic increase in New Zealand’s 2009 exports to China played a significant role in our recovery - the value of our merchandise exports to China surged by 43 percent to NZ$3.62 billion in 2009. China edged out Japan to become our third largest export market and overtook the United States to become our leading partner in the dairy trade.
Dairy exports to China increased by as much as 72 percent to NZ$978 million from NZ$521 million in 2008. “The growth of the China’s dairy market is impressive,” says Mr James McVitty, Trade Strategy Manager at Fonterra, “Over the last eight years, the market has increased at an average annual growth rate or more than 15 percent and it still only consumes just over 10 percent of the United States’ per capita consumption. Imported dairy products only represent less than 10% of total demand."
Underneath it all, China’s appetite for Kiwi exports is being driven by the country’s strong secular growth combined with massive stimulus packages. China’s economy expanded by 8.5 percent in 2009 as a massive Rmb4 trillion (NZ$852 billion*) stimulus package announced in November 2008 cushioned the impact of the global economic downturn.
A substantial portion of the funds were still unspent by the end of 2009 and in mid-February this year the Chinese Government said that it would continue to spend public money in 2010 to drive growth. As a result, China’s growth could reach close to 10 percent this year say analysts, despite fears that rest of the global economy might not be in good shape.
China’s robust economy not only provided a shot in the arm for New Zealand but also helped our trading partners in emerging Asia. Several of these economies, which also have China as a major trading partner, bought more New Zealand exports in 2009. Exports to Singapore rose 27 from 2008 to NZ$1.1 billion, Hong Kong saw a 17 percent rise to NZ$794 million and Taiwan saw a 13% rise to $79 million.
While New Zealand’s economic recovery has been aided by China and emerging Asia, trade with our traditional partners has waned. Combined exports to Australia, the US and Japan, declined by 8.6 percent, largely driven by lower merchandise exports to all markets of 7.4 percent.
As well as a muted economic recovery in these markets our lower exports also represent a diversion of trade towards China and emerging Asia. The ouster of Japan as one of New Zealand’s top three trading partners, a position it has held since the early 1960s highlights the shift. Exports to Japan declined 22 percent to NZ$3.6 billion in 2009 –an abrupt further decline since the high water mark of NZ$4.1 billion in 2001 reflecting Japan’s prolonged recession and fluctuations in the value of the New Zealand dollar in the interceding years.
Although Japan is trying to return to the table – its government is looking to find a way out of the recession by boosting exports – the US and European economies are actively seeking to reduce imports in order to reduce debt levels. New Zealand exports to the US declined by 10 percent in 2009 compared with 2008. High US debt levels, continuing difficulty with accessing credit, concern about rising unemployment and low confidence among businesses and consumers all seem set to constrain consumer spending and imports in 2010.
As New Zealand’s exports are diverted towards China and countries that depend on it for trade, the health of Asia’s dragon economy seems likely to play an increasing key role in New Zealand’s economic wellbeing. Some commentators are sceptical about the longevity of China’s economic growth; for instance, David Mahon, business consultant and author of China Watch, quotes a Western fund manager in Shanghai who believes that China is moving towards an increasingly lopsided economy which focuses on demand for its goods overseas rather than local buying by its own citizens, and is merely delaying an inevitable crash.
China did experience an increase in consumer spending and consumer and business confidence in 2009 but nearly all of this was driven by government stimulus, say commentators. The stimulus has also caused worrying signs of inflation though growth in loans and the money supply which could lead to asset bubbles and risks of a future crash.
But on the positive side the stimulus has caused a gradual shift away from export-led growth over the past several months, towards growth driven by domestic demand. China’s trade surplus fell to US$8.25 billion in June 2009 from a peak of US$42.1 billion in January 2009 as exports declined at a greater rate than imports, reflecting both greater domestic consumption of imports and the impact of the global recession on China’s trade. Mr Mahon also observed that domestic consumption in China has contributed three to four percent to annual GDP growth over the past five years. Mr Mahon and others predict China’s domestic consumption will increase this year and trade will also make a stronger contribution from minus 2.5 percent in 2009 to a neutral if not positive level.
A shift in Chinese government policy to direct stimulus spending towards structural reform to increase domestic consumption is also a positive sign. The initial stages of the 2008 package involved government investment in infrastructure and state-owned industries, the Chinese government now says it wants its citizens to play a greater role in economic growth.
While we need to keep a close watch on the evolution of China’s economy, the re-alignment of our trade towards the world’s economic powerhouse suggest good times ahead for New Zealand in 2010.
Article uploaded: 26 February 2010