For 99% of the time, our worries about China revolve around the military and diplomatic threat that Beijing allegedly poses to New Zealand and to other nations in the Pacific. Stoking those fears is very much in the business interests of the military-industrial complex that sells us our very expensive military weapons. In reality though… When compared to the US and its allies, China is a third rate military power, with precious little ability to project military force beyond its borders.
The genuine threat we face from China is economic, and no, that’s not because China is fast becoming a global economic powerhouse. Quite the reverse. Currently, it is the weakness of China’s economy that is the big concern for the global economy in general, and for New Zealand in particular. Since China’s abrupt re-emergence from its Covid lockdown in January, this has happened:
(a) China’s economic growth has been below expectations;
(b) its domestic consumer demand remains weak;
(c) some of China’s regions and its national economy overall are facing serious debt problems, and
(d) there is a major and unresolved real estate bubble.
On top of all that, the longer term demographic outlook looks pretty bad. China’s working age population is declining, yet there is record high youth unemployment, with the true rate suspected to be considerably worse than the official 21% figure. Leading US economists are starting to compare China’s likely growth trajectory to the “lost decades” profile of Japan’s economy since 1990, but with one proviso – China’s outlook is even worse. As Paul Krugman recently put it:
There are some obvious similarities between China now and Japan in 1990. China has a wildly unbalanced economy, with too little consumer demand, kept afloat only by a hypertrophied real estate sector, and its working-age population is declining. Unlike Japan in 1990, most of the Chinese economy is still well behind the technological frontier, so it should have better prospects for rapid productivity growth, but there are growing concerns that China may have fallen into the “middle-income trap” that seems to afflict many emerging economies, which grow rapidly but only up to a point, then stall out.
….The interesting question is whether it can replicate Japan’s social cohesion — its ability to manage slower growth without mass suffering or social instability. I am very definitely not a China expert, but is there any indication that China, especially under an erratic authoritarian regime, is capable of pulling this off? Note that China already has much higher youth unemployment than Japan ever did. So, no, China isn’t likely to be the next Japan, economically speaking. It’s probably going to be worse.
India tomorrow?
All of this should be giving New Zealand exporters some sleepless nights. That’s because in 2021, China was reportedly the destination for 42 % of our dairy exports, 42% of our meat exports and a whopping 65% of our world exports. Overall, China accounts for about 30% of our total exports to the world. True, Australia has also been highly dependent on China, yet its valuable mineral exports are already finding another home, in India. Last year, Australia completed an extensive free trade pact with India that came into effect on December 29, 2022.
We have no FTA with India. Any trade advantage we have with India is shared by all the other member countries of the regional RCEP trade pact. Over recent years, India’s $3 trillion economy has grown to a point where it is on track to be the world’s third largest economy. Yet our trade with India has actually declined by half a billion dollars over the past five years, to only $2.3 billion. By comparison, our annual trade with China is – according to MFAT figures – worth $20 billion in goods, and an added $3.4 billi0n in services.
Arguably, weaning ourselves off our dependency on China is the most necessary shift in our trading patterns since Britain joined the Common Market in 1973. Our livelihood hinges on it. An MFAT Working Paper in 2018 estimated that the tradable sector produces 60 percent of our GDP, and employs 50% of New Zealand’s workforce. The jobs of one in four New Zealanders are dependent on exports. While we try to re-calibrate the destination and the content of that export trade, the pain from the slowdown in Chinese demand for our products is already being felt. This year’s extreme weather has been one factor in the deterioration in the export situation for wood, but so have events taking place inside China. And sure enough:
….A dive in demand from China – one of New Zealand’s biggest overseas markets – has left some contractors out of work. In Tai Rāwhiti, contractors are turning to other ways to make ends meet, like clearing debris and rebuilding roads, leaving skilled workers underpaid and undervalued.
The forestry workforce is highly skilled, and those skills may be lost, given the likelihood that the downturn in wood exports will endure. This already has social and psychological implications for the people and communities being affected, as Rā Whakapono Logging director Tania Gibb recently told RNZ:
“Yes, we can redistribute some of our employees elsewhere, but they’re not really paid for what they’re worth or the skill that they have, because everyone feels like they’re doing them a favour,” Gibb said.”That was hard on the workers’ families and on their pride.
“If we’re talking about primarily Māori men, which they are, it’s kind of a mana thing, a pride [thing], a way they support their whānau, and people have mortgages and rent based on what they typically earn.”
The social fallout
As we have learned the hard way over the past three decades, when good jobs get wiped out by free market forces, communities are left vulnerable to the inroads of gangs and drugs. (Our current law and order problems are a legacy of our previous neo-liberal economic policies, and the zealous advocates of those policies seem about to be re-elected into power. Yikes.) As forestry manager and Eastland Wood Council board member Warren Rance told RNZ:
“Because we are so dependent on that export market, as a result of us not really having enough domestic processing, and so when there are changes in the log price or the market in China, it does immediately have an impact on what volumes we can export. “We’ve got a lot of really passionate people in this industry, working really hard, that are under significant strain.”
As RNZ says, two major forestry-related firms, operating for more than 15 years, have had to shut down recently from a lack of work. The government’s remedial action plan for the forestry sector is due to be released this week. In May, the same pattern – a weakening demand curve in China –was evident in Fonterra’s dairy exports to China as well. The jaunty optimism about the China market previously preached by Sir John Key now seems badly misplaced.
You might have thought that these alarming short and long term trends would be playing a big part in this year’s election campaign. No sigh of that so far. We’re a trading nation, but China, the country that has become the home for nearly a third of our export trade, is no longer able to perform the same role it has played for the past two decades.
In the meantime, China’s economic pain is well on the way to becoming our pain as well.
Footnote: Surely, one constant factor in the outside world’s dealings with China has been the country’s apparent political stability. After all, one of the big stories of 2023 has been Chairman Xi Jinping’s accelerating consolidation of power, right? Xi’s appointment to an unprecedented third term (as party boss and president) earlier this year had seemed to be the last step in scrapping the collective power-sharing model faithfully followed by Xi’s two immediate predecessors as CCP chairman. In fact, no foreign observers have a clue about the opaque power dynamics and intra-party factionalism that dictate the course of events at the top of the Chinese Communist Party.
Case in point: Late in June, Xi’s hand-picked Foreign Minister Qin Gang – in power only since December- was abruptly ousted ad replaced by his “wolf warrior” predecessor Wang Yi, 69, who had held the job since 2013:
China’s foreign minister Qin Gang was dramatically ousted…after a prolonged absence from public view and replaced by his predecessor in a surprising and highly unusual shake-up of the country’s foreign policy leadership….Qin, 57, a career diplomat and trusted aide of Chinese leader Xi Jinping, had only been appointed foreign minister in December after serving as China’s ambassador to Washington.
Qin’s immediate task had been to repair ties with Washington – and with US tech firms – and thereby advance China’s long term economic interests. As a Xi favourite on the rise, Qin was already being talked of as a possible heir apparent. His sudden replacement by the generation of diplomatic hardliners he had just been promoted above, has to be also seen as a setback for Chairman Xi himself . As a thoughtful Al Jazeera analysis noted, “Qin Gang is gone, but Chairman Xi looks weaker, too:” After all, it was Xi himself who backed the wrong horse.
Qin’s demise has also given foreign investors – and trading partners– every good reason to feel spooked:
The Qin incident reveals the delicately wrapped life-or-death nature of Chinese politics, in which the political structure that supports Xi’s authority generates yes-men, yet seemingly disparate interests are always ready to come together to oust perceived threats.
The lack of transparency over Qin’s removal will also hurt foreign investors’ confidence in Beijing at a time the US and its allies in particular are trying to de-couple the West’s economies from China’s.
A “conscious uncoupling” from Beijing looks like an imperative for New Zealand, too. But how to do it?