China economic reform low on government priority list, WSJ commentator says

Thursday 12th February 2015

Economic reform in China, one of New Zealand’s largest trading partners accounting for 22 percent of exports, is a lower priority than trying to save the future of the Communist party, according to Wall Street Journal columnist Andy Browne.

Speaking at a WSJ organised event in Auckland on the future of New Zealand-China relations, Browne said the Chinese economy, the world’s second largest, is under stress with gross domestic product growth at the lowest in quarter of a century. Economic growth has slowed from 10 percent to 7 percent and the country is paying the price for the 2008 stimulus to get out of the Asian financial crisis, Browne said.

“The country is awash with empty buildings, so called ghost towns. In every significant sized Chinese city there are buildings empty, not being used and no jobs and an excess of industrial capacity in the heavy industries,” he said.

The Chinese growth model has relied on investment and exports and that has now unravelled, which has big implications for global growth, he said. But economic reform ranks below the top three priorities for Chinese Premier Li Keqiang with his main attention on trying to save the Communist Party once again due to civil unrest, Browne said.

The “absolutely ferocious” anti corruption campaign is one of the main thrusts of that effort to regain party control, with 50 high ranking ministerial officials and several hundred lower level officials arrested in the past few months. There’s also an ideological campaign underway to purify the party and regain control of the Internet because the party felt it had lost control of the message to the masses, he said.

Economic reform will take time and will be difficult to implement but there is “still real money to be made” by foreign owned companies in China, Apple and Qualcomm are two examples of that, Browne said.

Trade Minister Tim Groser told the conference that rebalancing of the China economy away from investment and consumption of hard commodities to soft commodities would benefit New Zealand and the inevitable drop off in economic growth to low single figures was still a long way off.

ANZ chief economist Cameron Bagrie said he was bullish on where China’s economy will be further down the track but over the next two years “things will be decidedly delicate”. He also said there needs to be a rebalancing between the amount New Zealand exports to China and low foreign direct investment into the country.

When it comes to the prospect of a falling dollar, Bagrie said though he expected some adjustment against the greenback, the kiwi dollar is likely to reach parity against the Australian dollar in the next year on the back of our relative economic strength. “We’re the cleanest of the dirty shirts,” he said.

Fonterra Cooperative Group chief financial officer Lukas Paravicini said while the economic environment may change in China, there will still be underlying demand for dairy products once the short term problem of current high inventory levels is overcome.

China remains a big market for the giant dairy cooperative and it today submitted to the Shenzhen Stock Exchange a partial tender offer to acquire up to 20 per cent of leading Chinese infant formula manufacturer, Beingmate Baby & Child Food Company. The $615 million offer remains open until March 13 and the result likely to be announced on March 18.

Fonterra and Beingmate announced the partnership last August to help meet China’s growing demand for infant formula and increase the volume and value of Fonterra ingredients and branded products exported to China. The partnership will create a fully integrated global supply chain from the farm gate direct to China’s consumers, using Fonterra’s milk pools and manufacturing sites in New Zealand, Australia, and Europe.

Paravicini said in the key markets Fonterra operates worldwide it looks for a local partner to work with.

“We have a lot of strength in dairy but in China you need a local partnership. That’s always the challenge, finding the right partner,” he said.

When questioned about increased Chinese investment in the New Zealand dairy industry, Paravicini said free trade agreements had to work both ways.

The launch of FarmSource and MyMilk by the cooperative and a pending equity fund were ways of trying to provide more value to New Zealand dairy farmers faced with increased competition for their raw milk, Paravicini said.

BusinessDesk.co.nz

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