INSIGHTS

The rapid rise of the Chinese economy over the past 40 years has lifted hundreds of millions of people out of poverty and positioned China as a world superpower. What happens in China now has a huge influence on the global economy including, of course, New Zealand.

From economic backwater to global superpower

With a series of flashy parades (along with some protests), China recently marked the 70th anniversary of Communist Party rule, with the People’s Republic of China having been founded by Mao Zedong in 1949. This makes it the longest lasting communist regime in the world, eclipsing the 69 years of the Soviet Union (1922-1991).

However, while not forgetting the powerful grip the state maintains on Chinese society to this day, the latter half of this period of rule is best characterised by a programme of market-based reforms. These reforms have opened up China, dramatically transforming the country and the lives of those who live in it.

These reforms included the ‘decollectivisation’ of the agricultural sector, the introduction of market prices and the emergence of private enterprise. China also opened itself up to foreign direct investment, privatised some state owned enterprises and created a number of Special Economic Zones (such as the city of Shenzhen) in which regulations were relaxed and tax incentives put into place to encourage growth and development.

The impact of these ongoing reforms was remarkable. Industry and services superseded agriculture in terms of importance, and exports to the rest of the world skyrocketed. China became the factory of the world. It is estimated that 800 million people have been lifted out of poverty as a result of the reforms, while China has emerged as a world superpower challenging the United States’ global influence.

Periods of weaker economic growth in China in recent years have correlated to weaker economic activity in a number of other countries, especially emerging markets and those that trade heavily with the country.

Consumption to be China’s growth engine as economy adjusts

China’s growth to date has largely been built on investment in infrastructure and boosting its manufacturing capacity. This has required the importation of vast amounts of resources from the rest of the world, for example, iron ore (which is used to make steel) from Australia.

However, this form of growth has a shelf life and China is facing overcapacity in its industrial and infrastructure sectors, as well as falling productivity, resulting in a slowing economy. This, along with a growing and pressing pollution problem in its major cities, has seen China move to change its growth model.

China’s economic policies are now geared towards moving to a more modern economy led by its services sector and higher levels of consumer spending.

What does this transition mean for New Zealand and Australia?

The transition of China’s economy has important implications for New Zealand and Australia.

For New Zealand, while a slowing China will impact on economic growth here, an emerging Chinese middle class should see demand for our primary produce, such as dairy, continue to expand. This will provide a level of support for the economy as a whole and open up opportunities for companies to sell a greater volume of high-value primary produce into China. Although as the recent outbreak of coronavirus has shown, this isn't without its risks.

For Australia, the story is a bit different. With such a sizeable share of Australia’s exports being comprised of iron ore and other minerals used in the infrastructure and property sectors, the slowdown in China’s economy, pollution concerns, and its pivot to consumer-led growth is a clear headwind.

This is an excerpt of an article first published in the December 2019 edition of News & Views. Craigs Investment Partners clients can view the latest edition of News & Views, which includes the full version of this article, by logging in to Client Portal.