Building bridges by telling stories

On the down side exports to China are now under pressure, exacerbated by the strong kiwi dollar and declining commodity prices. The kiwi dollar does however reduce the costs of our imports from China.  

We’re forecasting annual growth of 3.5%. A China slowdown would make this more of a challenge to achieve.  

China is targeting 7% annual growth, down from 7.4% last year. It is widely believed that 7% is a big stretch and subject to downside risk.  Here’s why. China grew at an annual average of 10% over the last 30 years, It’s harder adding that percentage to an accelerating GDP base (7% on 2014 GDP is equal to 14% on 2007 GDP).  

The risk factors include the topping out of investments, an aging population and declining workforce, excessive national debt (standing at 250% of GDP- a doubling since 2008), and an overheated real estate market from the loose monetary policy response to the GFC.  Not surprisingly, China’s President Xi Jinping has announced that the “new normal” for China is slower growth and steadier infrastructure build.

Investment spending and exports did the heavy lifting that saw the Chinese economy grow so spectacularly over the last 30 years. It is no secret that the line between government and business investment is blurry—given the prominence of SOE’s and the fact that government is the buyer of much business infrastructure investment.

A key challenge for China is to increase consumer spending, requiring an increase in both their incomes and marginal propensities to consume. In this context the low relative wealth of Chinese households and per capita incomes is both a plus and a minus.  

1. How will a worsening China performance affect us?

In work undertaken for EY, Oxford Economics have modelled the impact of a “China Crisis” on regional growth rates in GDP. They forecast that a rapid slowdown in the Chinese property sector could see Chinese GDP fall to 5.2% this year and 4.1% in 2016.  The model suggests this would reduce New Zealand’s GDP growth rate by 0.8 percentage points, being about NZ$1.4billion less output.

 

2. What is the likelihood of a China downturn?  

Opinions predictably differ on this. The Chinese government prefers slower, steadier and predictable growth reflected in this year’s target of 7%. Deliberately putting the brakes on isn’t likely.   China needs to switch investment growth to instead fuel consumer spending—a tough ask as this will require uplifting consumer incomes. Meanwhile, the Chinese economy is facing weak regional and global export markets, excessive debt levels and a potential bubble in its housing markets. A rapid fall in house prices will significantly dent household consumption.

3. What is China doing about it?  

China needs policies that increase consumer income and consumption.  

Experience shows that Chinese consumers are more risk averse if government services, like health and education, are weak. Similarly risk aversion underpins consumer preference for housing equity. In short, consumer confidence is a prerequisite to lifting their spending.  

The Chinese government is reforming banking regulations to better moderate credit expansion. It is maintaining its urbanisation programme. It also has to balance monetary and fiscal policies against its objectives for low inflation, less unemployment and steady growth. Clearly ‘interesting times’ lay ahead.

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