CHINA

ECONOMIC TRENDS

Gross Domestic Product (GDP) grew by about 10% a year from the start of market reforms in 1978 to the 2008 financial crisis. The headline figure has now, fallen to just over 7% as the government rebalances the economy to make growth less reliant on investment. The World Bank predicts the growth to continue to slow. Slowing growth has resulted in significant changes to China’s growth strategy. Predictably the media focused on the fact that growth was the slowest for 24 years. This is true but misses the point. Incremental GDP growth last year (2015) was nearly USD $1 trillion, around 5.77 times the size of the entire New Zealand economy. 

Consumption contributed more to 2015 growth than investment. The services sector is growing faster than manufacturing, keeping the labour market tight. Income growth remains high, supporting household consumption. These changes are driven primarily by powerful structural forces, including demography.

Richer provinces are rapidly converging with advanced economies in terms of income levels and economic structure. Poorer provinces remain highly dependent on investment-driven growth. The north-eastern provinces face especially daunting challenges: maintaining steady growth and pivoting away from heavy industry, their traditional comparative advantage but also major source of Northeast China’s chronic air pollution; and reform. Central provinces will benefit as migrant workers return home and manufacturers move inland to benefit from the lower labour and operational costs.

Rebalancing, regionalisation and reform will continue. The pace of reform is the most interesting variable. A mild acceleration in reform is likely, on the back of a better external environment, with stronger US growth and lower oil prices; and tighter budget constraints at the local level, focusing on improving efficiency, selling assets and identifying more sustainable new sources of revenue.

Provinces of opportunity

The Chinese economy is very diverse. Shanghai, is five times wealthier than China's poorest province, Gansu, which has a similar-sized population (see map). The diversity in the provinces should be considered by New Zealand organisations wanting to engage with China. While the central and western provinces are not as wealthy there tends to be less competition from international businesses and local businesses and government have a tendency to be more willing to deal with smaller businesses, such as those which make up more of New Zealand's economy. Use the interactive map below to explore the economies of China.

The Central Government has used a range of stratagies to support the central and western provinces to catch up with the eastern ones including the “Go West” plan involving the building of roads, railways, pipelines and other investment inland; Mr Xi’s signature “Belt and Road” policy aimed partly at boosting economic ties with Central Asia and South-East Asia and thereby stimulating the economies of provinces adjoining those areas; a twinning arrangement whereby provinces and cities in rich coastal areas dole out aid and advice to inland counterparts; and a project to beef up China’s rustbelt provinces in the north-east bordering Russia and North Korea. The central government also gives extra money to poorer provinces. Ten out of China’s 33 provinces get more than half their budgets from the centre’s coffers. Prosperous Guangdong on the coast gets only 10%.

Rebalancing

According to an IMF report which can be viewed HERE, China is transitioning to a greener, more inclusive, more consumer and service based, and less credit-driven economy. External rebalancing has advanced well, while progress on internal rebalancing has been mixed, with substantial progress on the supply side, moderate progress on the demand side, and limited progress on the credit side. Rebalancing on income equality and environment has also been mixed, with the energy intensity of growth falling and labor’s share of income rising, but income inequality and local air pollution remaining very high. Going forward, the high national saving is expected to fall owing to demographic change and a stronger social safety net, while the investment ratio is expected to fall similarly, with increasing competition and profit normalization as growth slows. The service sector will continue to gain importance, helping reduce the carbon intensity of output and increase labor’s share of national income and household consumption. Reducing the credit intensity of growth is likely to progress slowly unless decisive corporate restructuring and SOE reforms are implemented

DRIVING THE GLOBAL ECONOMIC RECOVERY

Traditionally, China provided low-cost manufacturing solutions for the global market, but exports declined sharply after the global downturn in 2008 and China’s manufacturing industry responded by quickly moving up the value chain. The Chinese economy has grown at just under 10% a year for 32 years, overtaking Japan in 2010 to become the world’s 2nd largest economy. According to the OECD’s International Comparison Programme (ICP), China is projected to overtake the US in 2016 in Purchasing Power Parity (PPP) terms.

While many of the world’s major economies are still struggling to recover from economic contraction, China’s economy grew by 9.2% in 2011 (down from 10.3% in 2010), and this economic slowdown continued in 2012 to around 8.2%, partly due to suppressed demand in China’s largest export markets (Europe, USA) but also to tightening of monetary policy in late 2011. The Chinese government has subsequently since been loosening monetary policy and has launched a major investment programme.

The Chinese Government is now pressing hard to improve infrastructure and social welfare as well as targeting resources to develop China’s vast rural and interior regions, unleashing domestic consumption among the wider population. Industrial structures are shifting inland with dozens of new cities emerging and coastal areas developing into sophisticated urban clusters.

CHINA'S MIDDLE CLASS

China’s middle income consumers and their changing lifestyles and behaviours will play a significant part in China’s shifting emphasis from investment and export-led growth towards consumption-led growth. There are around 725 million people living in Chinese cities and this number is increasing every year. Average incomes are rising but so is the cost of living. An average urban employee earns around RMB 50,000  a year and average urban households disposable income is RMB 27,000 a year  – a five-fold increase compared to 2000.

With growing purchasing power and more Western brand preferences, China’s middle income consumers are an obvious target market for New Zealand businesses. They have a stronger demand for imported household goods, clothing and food produce; they are increasingly pursuing car ownership; and are investing in overseas travel, international education and private healthcare. They are spending more money on leisure, entertainment and overseas travel; and they are gradually shifting from luxury brand-led purchases to choices based on product quality, unique designs, individualism, leisure experience and personal benefits.

Business Information

New Zealand has a free trade agreement with China. To benefit from the subsequent duty reductions, a specific FTA Certificate of Origin is required in China. To find out more go to: www.chiafta.govt.nz.

Because of the numerous ever-changing laws and regulations for imported food and beverage products, anything regarding regulatory, labelling and licensing processes should go through an in-market agent. Find out more about labelling of pre-packaged foods on the AQSIQ website.

China's new Food Safety Law became effective in 2009, and all imported food products are subject to these. See the USDA website for an overview.

China loses some US$9.25 billion of food products in transportation every year, because only 15 per cent of all perishable products are transported by refrigerated vehicles compared to 90 per cent in developed countries. There are no national laws of regulations governing food safety in storage, transportation, distribution and retail.