[As published in Mar/Apr BayBuzz magazine.]

Being in close (ish!) proximity to many Asian countries led to a period of great economic growth for New Zealand, Australia, and other local exporters. The rest of the world has benefited too as Chinese exports have lowered costs through their giant manufacturing footprint. 

Most countries would name China as their number one trading partner for export and/or import. New Zealand is no exception – in fact, in a world first for a developed country, we entered a free trade agreement with China back in 2008. 

According to Statistics NZ, in the 2022 calendar year our exports to China were $21.23 billion, comprising $20.13 billion in goods such as dairy and meat products, and $1.1 billion in services including tourism and education.

On the other hand, our imports from China are $18.93 billion, comprising $18.17 billion in goods like electronics and machinery and $764.05 million in services.

Focusing on China’s importance to Hawke’s Bay, in FY23, 76% of bulk cargo through Napier Port went to China, led by logs, manufacturing/general cargo and fertiliser, in that order. And 25% of containerised exports went to China, led by wood pulp, lamb/beef and apples/pears.

Trade partners have benefited from Chinese demand for mineral and agricultural resources, as well as services including tourism and education. Consumers have benefited from a scaled manufacturing industry. However, a rising tide of pressure threatens China’s dominance. Are these cyclical or structural shifts?

Where it all started 

To understand today, it’s worth going back to the 1990s when China started developing economic growth policies under Deng Xiaoping. The economic policies were relaxed somewhat, and Special Economic Zones in Shenzhen, Zhuhai and Xiamen were established. These zones attracted foreign investment that was comparatively free from the bureaucratic regulation that had been a handbrake in the past. 

During this time of economic liberalisation, the world embraced Chinese manufacturing and happily outsourced heavy industrial processes. And while consumers initially saw Chinese goods as inferior quality, time and technology has seen progress in the quality, reliability and innovation of Chinese products – many of which are now better than their Western equivalents. Solar panels are one example of this. Quality has increased thanks to healthy domestic competition and prices have reduced at an astounding average of 20% plus each year since the 1970s. 

What’s interesting about that period of huge growth is there was an increase in three things: the number of people of working age, saving levels, and technology. And guess what? Those three things – changes in the population, savings/investment levels and technological progress – are the key flags people look for to understand how an economy is faring. 

China’s economy today

Today however, we are looking at those criteria with a different lens as the speculation is focussed on the maturity of China and the slowing of its economic growth. 

What people do with their savings and spending today has more to do with their sentiment and outlook. Chinese households are generally wealthier as a result of recent economic growth, however there are declining savings rates, while investment and borrowings are increasing over time. And while we note the declining savings rates, Chinese households still have some of the highest rates of savings in the world. 

Add to all that in the last 18-24 months of COVID-19 induced lockdowns, households have moved away from cheque accounts and have paid down debt and looked more to term deposits and property investments. 

However, the picture isn’t entirely rosy in property and the market in China is under scrutiny. Finance is flowing to developers through shadow banks and other poorly regulated financial intermediaries, which is worrying for the Chinese Communist Party – it has responded with more regulatory action and inquiries into the sector. Now might just be a good time for investors to observe from the sidelines especially given that Country Garden, China’s largest property developer, is on the brink of default, missing some key debt payments throughout October.

Add to that, households are still sceptical of the stock market after years of underperformance and crackdowns on industry champions. In the past we have seen good examples of investor crowding behaviour with Chinese investors favouring both Mainland and Hong Kong listed equities, which are our preferred avenue for Chinese equity exposure.

Along with threats in the local market, Chinese firms are having trouble competing and investing overseas. Their investments are drawing a mix of scrutiny and backlash as they’re seen as having directors tied to the Chinese Communist Party or having lax data controls which could be exploited by state officials. Some of this fear is likely unwarranted. 

Trade restrictions from the US will likely continue to draw Chinese backlash, and China is drawing closer to more extreme allies including Russia, North Korea, and non-western-aligned Arab oil states. The US and China are butting heads on a range of issues and are on opposing sides in a range of conflicts that are sprouting up. 

As allies and key trading partners, both the New Zealand and Australian governments must walk a fine line so as to not upset relations with China and traditional allies, and sometimes this means taking a neutral stance to maintain the status quo.

The US is trying to regain some of its manufacturing independence through subsidising large manufacturing operations in America or relocating manufacturing operations to ‘friendly’ geographies. This won’t replace the need for Chinese manufacturing, but should create some back-up supply, without the scale and efficiency that comes from the 30-year head start China has had and the centralised planning function of the Chinese Government. 

What this means for investors

It’s a fascinating time for what has been one of the strongest economies in the world and a substantial slow down will likely have knock on effects. Investors have factored the uncertainty which exists into the share prices of many companies exposed to the Chinese economy in some way – we’ve included a summary of those for those keen to keep an eye on this unfolding situation below. 

A selection of NZ companies exposed to China

Ben Stewart is a Global Equities Analyst at Jarden. The information and commentary in this article are provided for general information purposes only. It reflects views and research available at the time of publication, using external sources, systems and other data and information we believe to be accurate, complete and reliable at the time of preparation. We make no representation or warranty as to the accuracy, correctness and completeness of that information, and will not be liable or responsible for any error or omission. It is not to be relied upon as a basis for making any investment decision. Please seek specific investment advice before making any investment decision or taking any action. Jarden Securities Limited is an NZX Firm. A financial advice provider disclosure statement is available free of charge at https://www.jarden.co.nz/our-services/wealthmanagement/financial-advice-provider-disclosure-statement

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