Xiaoming Huang: The shape of things to come

One of the issues the new Chinese leadership will look at is income distribution reform. Photo / AP

The news from China over the years has never failed to capture our imagination that a continually growing and expanding Chinese economy will have a profound impact on the world economy. It will shape how products, capital and people flow and where they move globally. This in turn will shape the environment for the New Zealand economy, and, more importantly, the opportunities and conditions for New Zealand business in China and those for Chinese business in New Zealand. And yes, the latter aspect is increasingly eye-catching.

Yet it is not all that straightforward. The Chinese economy faces significant challenges. How these challenges are met will determine the direction and structure of its economic activities domestically and internationally.

Key dynamics and forces are shaping the future development of the Chinese economy. The first is the macroeconomic forces that shape input and output, and demand and supply. Exports, investment and consumption are the three primary contributors to the Chinese economy. There are signs that consumption is catching up to become a greater contributor than the other two while export contributions have been in decline. This trend will certainly shape the directions and movement of growth activities in each area.

The changing structure of the Chinese economy is also related to the high-speed growth of the past decades, and to the Government's proactive efforts to "restructure and reorient" the economy. The growth model in the past focused on exports as the engine of the economy.

Increasingly, however, international markets are not certain, or secure, and no longer sufficient to accommodate China's ever-expanding manufacturing capacity.

In China, there has been great capital accumulation over the decades with domestic consumption relatively less developed. The Government's programme of "restructuring and reorientation" aims at new sources of economic growth, particularly from domestic consumption, and a more balanced economy in supply and demand, and across different sectors.

Decades of high-speed growth and development have transformed China into a rich country with a strong, dynamic economy. There is a dominant political view that the fundamental economic ideas, policy and institutions underlying the growth and development so far will continue.

However, there is also a widely held view in China that the benefits of such growth and development have not been broadly shared. Without wealth broadly distributed, the mass population has limited capability to provide a broad consumption base for sustainable growth. The few with out-of-proportion amounts of wealth often concentrate their spending in investment, and in areas such as real estate and capital markets that can significantly distort the real economy.

The new leadership may take these two, "right" and "left" lines of thinking on board and add more of the element of social fairness to the efficiency driven and GDP-centred approach to economic growth and social development.

The urbanisation programme seems to have become a major undertaking by the new Government. It is estimated that if the current urbanisation rate, around 50 per cent, increases to 60 per cent in the next 10 years, it would double the total private consumption China has today, enough to absorb the worst decline in contributions from exports.

Income distribution reform is expected to significantly raise the consumption capacity of the mass population.

A third programme is the national programme supporting science and technology. This involves huge public investment in key areas of leading science and technology. Not only will these be an important part of public consumption, they will also generate and direct growth activities in key industries and sectors, and assist Chinese enterprises to move up to the high end of the global value chains and develop those of their own.

What do these have to do with us - to the world economy, to our China business, to the New Zealand economy and society?

We might see more foreign direct investment and a slower growth of exports from China. The first two months of this year has seen outbound direct investment (ODI) out of China exceed foreign direct investment (FDI) into China for the first time. These activities in trade, investment and people movement will move more towards countries and areas that fit the evolving structure of the Chinese economy.

If investment comes to New Zealand, it can concentrate on certain sectors/industries such as primary industries and real estate. This affects the industrial structure of the New Zealand economy, in terms of capital, resources, markets and employment, and the macroeconomic performance of the economy.

On the flip side, New Zealand business in China is also seen as expanding, from exports from New Zealand to investment in China. The new direction of economic policy and activities in China sees opportunities and challenges for New Zealand business in China.

These issues have been an important part of the programmes and projects of research and analysis of the New Zealand Contemporary China Centre. We have run international conferences on Chinese economic reform and transformation, comparative studies of China and Japan, China and India models of economic growth and development, and that of the Chinese model itself, and China and the international system. In August we'll hold a conference in Wellington on China's global course and its impact on the world economy.

We also run an annual China Business Symposium, with the NZ-China Trade Association and University of Auckland's Asia Institute, on issues around doing business with China. This year we'll look at market entry.

Professor Xiaoming Huang is director of the NZ Contemporary China Research Centre.