China Business: David Mahon: It's a case of misplaced anxiety

David Mahon, managing director of Mahon China Investment Management.

Opinion

As the Chinese Government tries to slow its economy to a manageable rate of growth, it is understandable trading partners such as New Zealand are becoming concerned China may stall or experience a "shadow-banking" crisis. But the underlying economic drivers of urbanisation and domestic consumption are too strong for China to stall. New Zealand should be more concerned with diversifying its own economy than reducing its dependence on China.

China's shadow-banking sector (the unofficial financial market) has its flaws, with some usurious interest rates and poorly structured bonds, but for private businesses it is also a source of much-needed capital the state-owned banks will not provide. It is unlikely to trigger a succession of defaults causing a financial crisis such as the United States suffered in 2008. In China's closed domestic financial system, within which well-funded state-owned banks dominate, shadow banks are not highly leveraged and the securitisation of debt is almost nonexistent.

As the Chinese middle class gets wealthier and hundreds of millions of peasant farmers move to work in industrial and service-sector jobs, growth will remain strong. In the coming two to three years China's GDP growth may slow to closer to 6 per cent, but over the next 10 years Chinese incomes are forecast to double.

The economy doubled in size over the past eight years when it was growing in excess of 10 per cent. While growth of 9.2 per cent in 2009 represented an increase of RMB 2.7 trillion in the economy, 2013's 7.7 per cent growth reflected a much larger absolute increase - some RMB 5 trillion. China will need lower growth rates as its economy becomes increasingly developed; it is rising incomes and living standards that New Zealand should be more concerned about.

New Zealand need not fear its current dependence on the Chinese economy. Reductions in infrastructure spending, restraints in the Chinese housing sector and higher interest rates will not reduce Chinese demand for quality food.

As long as New Zealand can maintain the quality and supply of its goods and services to China and continue to earn the trust of Chinese consumers, it may expect to enjoy at least a decade of strong growth. The damage to New Zealand's reputation from last year's C. botulinum false alarm has not been too severe, although our dairy industry still needs to assess how the disclosures were so poorly managed, and there is more work to be done to recover the trust of millions of Chinese parents and grandparents.

The risk to our reputation as a clean source of food would be extended beyond China to all its major trading partners in the event of another "scare". A genuine contamination crisis or an outbreak of foot and mouth disease could cripple the New Zealand economy. We will be vulnerable globally as long as we rely too much on an image of the absolute purity of food and beverage products while failing to diversify. It is our dependence on too few sectors of the economy, not on China, which needs to be addressed.

The developed parts of the global economy do not offer many obvious alternative growth markets for New Zealand exporters; some of the more accessible markets - such as Australia - are more dependent on China than we are. Due to the sheer scale of Chinese demand and the marginal growth of the US and Europe, New Zealand has increased trade with China by more than 460 per cent since 2000, rising 190 per cent since 2008 alone. China's meat consumption doubled between 1990 and 2010 and has continued to grow at over 10 per cent a year to more than 60 million tonnes in 2013.

New Zealand has reacted well to Chinese demand, but as a trader and price taker, not as an active strategic player.

Comparisons between our dependence on Britain in the 1970s - when Britain made the political decision to join the European market - and our current dependence on China are misleading. Our political relationship with China is excellent and there are no signs China will turn away from New Zealand or block access systematically to New Zealand goods for its own domestic purposes.

New Zealand is a flexible trading nation, quick to match domestic supply to meet shifts in global demand, but it lacks the capital resources to develop processing capacity at home or to invest in processing or distribution in its export markets.

Government-seeded, globally marketed funds could develop the necessary capital. The Government could also do more than back the stronger companies in traditional industries, but take a more entrepreneurial approach, supporting companies with potential that will not only bring more diversity to our core sectors, but develop new areas of growth in sectors such as technology and services. The conservative political principle that government must stay out of the market because market forces will always self-correct economic imbalances does not work in an economy as small, isolated and narrow as ours.

Emerging markets alternative to China are Indonesia and India. Both share China's strengths in that they are driven by large domestic economies and demand quality food, technology and services. They are less dependent on Chinese economic growth than New Zealand's other regional partners. Indonesia and India are perhaps even more difficult markets than China in which to operate but, like China, are keys to our economic future. Diversification in trading partners will allow New Zealand to continue to benefit from Chinese growth while negotiating best prices and long-term contracts from a position of strength.

New Zealand has shown in the past that it can adapt and innovate. If we can think beyond short-term trading gains measured over a few years, work through its propensity to commercial complacency and resist irrational anxiety in respect of its growing economic relationship with China, it will build a more enduring and dynamic economy.

• David Mahon is managing director Mahon China Investment Management.