Rise of the dragon: Hungry China's risk for NZ exports

How much do we really know about China?

This was a major theme of visiting Russell Investments’ fund manager Phil Hoffman.

“It’s not as if the Chinese central bank has monthly meetings where they tell you what they’re going to be doing; knowing exactly what the policymakers are intending is challenging,” he said in an interview in NBR print’s June 28 edition.

“Even with the data that we do see, there are some questions about how reliable it really is.

“They’re facing quite a few challenges in China aren’t they – clearly, growth has slowed down.

“It’s possibly slowed to the point where the government should be taking action but its hands, to some extent, are tied by some of the problems it has in the financial sector.”

This problem of “low visibility”, as he calls it, is important as China grapples with lower-than-expected export growth and other disappointing numbers raising fears its economy is losing momentum.

Big brother
China’s bank “cash crunch” made it on to the front pages some of the world’s most esteemed financial papers in recent weeks and late last month China’s central bank acted by injecting funds into some financial institutions to boost liquidity.

Another way to address the problem is censorship.

The Financial Times reported local propaganda departments of the Communist Party instructed reporters to stop “hyping the so-called cash crunch”. The change in tone was immediate.

This is just the sort of reality check New Zealand needs.

When China overtook Australia as New Zealand’s biggest export market in April we celebrated, rightly.

It has been the result of sustained efforts (including a free trade agreement and several high level delegations) from business and government, often working together, to grow New Zealand out of recession through an export-led recovery.

But recent volatility in global equity markets and China’s slowdown and credit crunch should make us realise that trade demand is uncertain and be aware of the rising reliance our exporters have on China.

For all our parochial pride, New Zealand isn't immune to making trade-disrupting mistakes – including the DCD scare, the meat on the docks fiasco and, most recently, a Chinese state investigation into suspected price collusion.

Blindfolded
Mr Hoffman’s comments about low visibility and attempts by the state censors to tone down the coverage of the credit crunch should be ringing in our ears at this stage.

If bad news is being stifled – albeit this time it was reported globally – how are investors meant to properly assess the risks and take evasive action when a crash is coming?

After all, markets can’t go up all the time. Hungry China is gobbling up our exports almost as quickly as we can produce them, but what happens if the tap suddenly turns off, especially for our meat, dairy and log exports?

A quick NBR examination of our export numbers reveals some worrying trends.

We compared the 2009 export figures with 2012.

In 2009, New Zealand’s exports totalled $39.672 billion, with our top 10 countries being, in order: Australia, US, China, Japan, United Kingdom, South Korea, Germany, Singapore, Indonesia, Hong Kong and France.

By 2012, exports had risen more than 16% to $46.064 billion but the geographic spread had narrowed. The top 10 was: Australia, China, US, Japan, Korea, United Kingdom, Malaysia, Hong Kong, Singapore and Indonesia.

Exports to China rose 89% in those three years, compared with Australia (+8.5%), US (+7%), Japan (+13.8%) and Korea (+25%). Contrast that with the United Kingdom, which dropped 17.7%, Germany (-3.4%) and France (-27%).

Exports to the top 10 countries in 2009 were $26.092 billion, or 66% of the total, while 2012’s top 10 totalled $30.599 billion, also 66%.

Pure export values can be affected by the exchange rate but it’s notable that China’s proportion over that time rose from 9.1% of New Zealand’s exports to 14.9%.

Total primary exports to China in 2009 were valued at $3.184 billion and by 2012 that had almost doubled to $6.246 billion, with processed food exports doubling to $2.84 billion and food and live animal exports up 175% to $1 billion.

In particular, milk powder leaped from $781.4 million in 2009 to $2.089 billion in 2012, while log exports jumped from $531.8 million to $1.048 billion over the same period.

In three years, China’s proportion of our milk powders exports has lifted from 18% to 30%, and for log exports from 30% to 39%.

If China’s demand for those two commodities alone fell back to 2009 levels, for some reason, that would leave a yawning gap worth more than $1.8 billion.

Geographic spread
Don’t get me wrong, China’s rise should be well received and the political and business drive to increase exports is admirable. But there’s a point where rapid growth becomes reliance, and we should be aware of that.

There are different schools of thought about diversity in business.

Some asset portfolio managers might advise spreading risk, while others chase higher risks to get higher returns.

Mark Twain's character Pudd'nhead Wilson said: "Put all your eggs in the one basket and – WATCH THAT BASKET."

Trade Minister Tim Groser, who last month said the rapid growth of infant formula exports was out of control, talks of a "goldrush mentality" with China.

Having lived in Central Otago, where many holes were dug in the search for gold, including by Chinese miners, I'm concerned by the proportion of New Zealand exports going to China.

New Zealand's economy is dependent on agricultural exports and we have a previous history of relying on a single market to take them.

The laudible efforts to expand exports to China must be accompanied, with equal vigour, by efforts to sell more to other countries and other regions – otherwise our export-led recovery risks becoming a house of cards built solely on Chinese sands.

Other countries might not have the capacity of China but they present a lower risk.

Some people might argue that’s what’s being done through negotiating the Trans Pacific Partnership.

But given the negotiating group has widened to include some of the world's most protectionst countries, in terms of agriculture, I’m not holding my breath for any significant access to the agricultural markets of Canada, Japan and the United States for decades.

dwilliams@nbr.co.nz