The Chinese economy is showing all the signs of an incoming meltdown, but Kiwi businesses remain bullish about our largest trading partner.

After seeing increased activity following relaxation of its strict Covid policies, growth in the world’s second largest economy has stalled, with major investment banks downgrading growth forecasts for the country.

Bond defaults in China’s property sector, which accounts for a quarter of its economy, and missed debt payments from a major property lender and fund manager have spooked the Chinese market about further financial instability.

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Import and export figures released earlier this month showed that Chinese exports fell by 14.5 percent in July (compared with July 2022), and imports dropped 12.4 percent.

A fall on July 2022 import/export levels may not bode well considering the Chinese economy grew by just 3 percent last year – it’s weakest rate since the mid 1970s (excluding the pandemic).

The Chinese Communist Party (CCP) seems to have done little in the way of trying to stimulate the Chinese economy, other than cutting interest rates, perhaps out of fear of going into excess debt as it did during the Global Financial Crisis in 2007/8, while the rest of the world is busy raising them.

The Yuan fell to a 16-year low last week, prompting the CCP to begin taking some drastic steps to prop it up.

There are also some more structural headwinds playing on the economy, with a record low fertility rate (below that of Japan) and a shrinking population for the first time in six decades.

The country also stopped reporting youth unemployment figures after it hit 21.3 percent in June this year.

Bulls and bears

Hearing all of that, you might expect New Zealand businesses to be bearish on China, but not so according to the New Zealand Business Roundtable in China.

Its recent business outlook survey appears to show quite a bullish stance on doing business in China, its first three headers being ‘Cautious optimism’, ‘Long-term commitment to China’ and ‘Resilience in the face of challenges’.

Despite earlier headwinds, two-thirds of survey respondents expected to increase their China-related investment in the next three years, and more than half had seen an increase in China sales in the first half of 2023.

The vast majority of respondents were optimistic about the future market opportunities presented by China, with growth in second-tier cities and a post-pandemic boom identified as underpinning optimism.

The report’s central survey was carried out in May and June, but New Zealand Business Roundtable in China executive director Anna-May Isbey said businesses were taking a positive view.

“There is still an overall feeling of cautious optimism in the medium to long term. Tier one cities are still bubbling along in the restaurants and entertainment centres during the holidays, but consumers are simply more cautious about spending on big items like apartments and cars. Tier two to four cities are seeing some slower trickle through of a post-Covid retail bounce.”

Isbey said businesses were responding to economic risks through localisation, not just of branding and product development, but also in their operations and relationships by expanding into lesser-served cities and through e-commerce.

Though the birth rate was declining, Isbey said the number of people reaching middle-class status was expected to grow from about 400 million to 800 million by 2035, meaning a greater customer base for many businesses.

A different economy

The NZ business roundtable members aren’t alone in their stance on China.

Former trade negotiator and Saunders Unsworth consultant Charles Finny said despite the economic headwinds China still had potential, “I am still pretty bullish on China in the long term, but people shouldn’t expect the same sort of growth trajectory that we’ve experienced over the last 20 years.

“It’s going to be a different type of economy from here on in ,and it’s got some major issues it has to work through.”

More recent evidence of the bullish approach taken by some China-centric New Zealand businesses came courtesy of NZX-listed honey business Comvita’s annual results released yesterday.

Comvita’s revenue performance in China was up 13 percent to $109 million despite a soft start.

In an interview included in its annual report, Comvita chief executive David Banfield was asked whether he was concerned by the importance of China given the macroeconomic and geopolitical risks.

“While China is our biggest single market, we are only scratching the surface in terms of the potential,” Banfield said.

“Indeed, if we were to deliver the same household penetration as we have in Hong Kong in China, we would quadruple our current business. I remain extremely positive about China and our opportunities in the China market supported by the fact that Chinese consumers have used honey as a medicine for thousands of years.”

Another NZX-listed China-centric business that released its results this week was less optimistic.

A2 Milk, which grew its China and other Asia sales by 37.9 percent in the 12 months to June 30, has taken a more bearish approach to China.

The business said China market conditions were expected to become more challenging in 2024, with a forecast double-digit decline in market value anticipated because of the low birth rate.

“In addition, it is expected that average selling prices will remain under pressure due to an increase in competitive intensity driven by the market-wide transition to new GB (food safety standard) product, excess manufacturing capacity and challenging macroeconomic conditions.”

Andrew Bevin is an Auckland-based business reporter who covers major industries, markets, regulation, aged care and fisheries.

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