Date posted: 09/02/2024 8 min read

Year of the dragon... or year of the mouse?

China is the world’s second largest economy, and Australia and New Zealand’s largest trading partner. Now, all eyes are on the ‘red dragon’ for the powerhouse’s next step.

Quick take

  • The Chinese economy is currently sending mixed messages about whether or not it is in recovery.
  • The fortunes of the Chinese economy have a powerful effect on many of Australia and New Zealand’s most important exports.
  • There is reason for optimism, as China continues to transform and other territories firm up their manufacturing capabilities.

What is going on with the Chinese economy, so often characterised by a rampant pace of growth that fuels the fortunes of numerous other nations? Is the pedal back to the metal, or is the handbrake on?

“That is an open question,” says Nathan Penny, senior agri economist at Westpac New Zealand. “If you go back a couple of weeks, there was some data showing China’s Q 3 wasn’t too bad. The Chinese economy looks like it’s on track to hit the government’s growth target. But even if it does, it’s not clear that the economy is out of the woods. There are still some structural challenges that will take time to resolve.”

Those structural challenges include a freefall in property market values and a related debt crisis, as the government cracks down on speculation. China’s home ownership rate is one of the highest in the world – 90% of households were owners in 2020. And, 70% of Chinese household wealth is held in property, so it’s no wonder the recent crash has dramatically damaged consumer confidence.

There is also high youth unemployment, further damaging confidence, as well as a population that is ageing faster than most other countries.

“By 2019, there were 254 million older people [in China] aged 60 and over, and 176 million older people aged 65 and over,” a World Health Organization (WHO) report found. “By 2040, an estimated 402 million people (28% of the total population) will be over the age of 60.”

A property crisis

But it’s the property crash that is causing most concern, with the global financial crisis (GFC) of 2008 still fresh in the memories of economists. A report from Fitch Ratings in November 2023 said “China’s persistent property crisis has emerged as a greater macro risk that could filter to other sectors and the wider region.”Prior to the property crisis, the most recent Fitch On: China report said, things were looking good. The nation’s economic recovery was “striking”. Infrastructure, property, exports and retail sales were all up. Domestic air travel had recovered to above pre-virus levels and the catering sector was back to growth.

However, the popping of the property bubble put an end to much of that as consumer confidence took a dive. That fall in confidence has been reflected around the globe among China’s many trading partners, including Australia and New Zealand.

Directors take note

In Australia, during the second half of 2023 the overall Director Sentiment Index fell from an already low -6.1 to -19.7. In a time that should be about recovery and rebuilding, that fall is significant. It adds to a broader negative sentiment across society, as cost of living continues to increase.

Most interesting about this finding, reported in the Director Sentiment Index Survey conducted by the Australian Institute of Company Directors (AICD) and Roy Morgan, was the heavy influence of the Chinese economy on the economic assessments reached by directors.

“Current and future [next 12 months] economic assessments of Australia and China have worsened, notably among directors,” the report found.

In fact, positive and rising sentiment scores were recorded for the health of the economies in Asia (excluding China), the US and Europe. But for China and Australia, those scores were negative and dropping.

Mark Thirlwell, chief economist at the AICD, agrees that there are both positive and negative messages coming from China.

“It really does depend on where you look,” Thirlwell says. “The most recent GDP reading, the third quarter, came in a bit better than expected, suggesting growth had picked up, and possibly meaning China is on track to come in around about the official growth forecast.

“Parallel with that was the sign of a bit more government intervention to prop up the flailing property sector. Those were positive signs.”

Against that, Thirlwell says, were some mixed readings from other data, including inflation figures that show China slipping back into technical deflation and weak consumer confidence in the domestic economy.

“Business data has been pretty weak and trade figures tell varying stories. On the one hand, Chinese exports fell again, telling us that the weak global environment is making Chinese exporters struggle. On the other hand, we saw a bit of a pick-up on imports, suggesting there’s some recovery in domestic demand. So, it really is a mixed picture.”

What does it mean for Australian and New Zealand economies?

What does it all mean more locally, for the economy and for local businesses? “None of it will make much difference to the average business owner in Auckland,” Penny says. “The average Auckland business is domestic focused. It’s in provincial New Zealand where it really matters.

“If we look at agriculture and forestry, the regions outside of Auckland and Wellington have exposure to one or both of those sectors. In some cases, they have large exposures. So, in your main streets of provincial New Zealand you will notice a slowdown, currently. A big part of that will be driven by lower Chinese demand for New Zealand’s agriculture and forestry exports.”

Consider that the Chinese property market is suddenly very weak, Penny says. Consider also that New Zealand’s forestry sector is highly dependent on China, with more than half of Kiwi log exports going to the Middle Kingdom. As China’s rate of building has slowed significantly, so has the nation’s appetite for timber.

Then there’s meat, with a distinction between sheep meat – lamb and mutton – and beef.

“China is our number-one market for mutton by a country mile,” Penny says. “It’s also our number-one market for lamb, albeit not as decisively as mutton. And so, when Chinese demand is soft, lamb and mutton prices can be very low. Their values, particularly mutton’s value, move on China’s fortunes.”

Beef markets are more diversified. The US and China are roughly equally important for the New Zealand beef market. So, while the beef price is still affected by China’s economic outlook, the effect is not as pronounced.

“Beef prices right now are not fantastic, but they’re not too bad,” he says. “Demand from the US is helping offset the soft Chinese market.”

There is also some diversification of product type. China mainly takes cheaper, frozen beef, whereas the US and other markets take chilled and frozen beef. Chilled beef goes into high-end retail, restaurants and catering, and frozen beef goes into burgers and lower-end meals.

Nathan Penny, Westpac New ZealandPictured: Nathan Penny, Westpac New Zealand

“[Changes in the Chinese economy] won’t make much difference to the average business owner in Auckland. The average Auckland business is domestic focused. It’s in provincial New Zealand where it really matters.”
Nathan Penny, Westpac New Zealand

COVID was good for exporters… mostly

The economies of both Australia and New Zealand benefited from Chinese demand during the COVID-19 years. Early in the pandemic, China paid a high price for New Zealand exports, while some other markets could not. From an export point of view, those years were good for the Kiwi economy. “Obviously, that has turned around over the last year or so,” Penny says.

Australia similarly benefited, even as political relations with China soured.

“If you look at the value of Australian exports to China, particularly iron ore, they were ratcheting up through 2020 and 2021,” Thirlwell says. “Iron ore prices were very high and terms of trade were great.

“One of the things that helped Australia’s fiscal adjustment as we came out of the COVID crisis was those commodity price windfalls.”

At the same time, of course, there was massive trade disruption in other areas, brought about when the relationship between China and Australia suffered.

“We had disruptions to coal, beef, barley, wheat, cotton, wine and more,” Thirlwell says. “So, when you looked at other Australian exports to China, their value dropped off pretty sharply in 2020 and 2021. But on the macro side, that didn’t really register.

“If you were an individual business selling lobsters into China, you potentially had a very tough time. But what did it mean for the value of Australian exports overall? What did it mean for our terms of trade? What did it mean for the government’s coffers? Actually, it was mostly pretty good through that period because the iron ore story held up so well.”

Have we diversified away from China?

With all of the ups and downs, the breaking up and the making up, have we diversified away from China?

The experience has reinforced the message that no business should have all its eggs in one basket, Thirlwell says. Of course, this is not exclusive to the China example.

So, have businesses paid attention to that message? Not exactly.

“There is the argument that we have to be more careful than we have been in the past,” Thirlwell says. “But that has to balance against the sheer gravitational pull of the Chinese market for exporters, its scale, the level of demand. Of course, some trade was diverted away from China out of necessity, but now relations are starting to ease again now that trade is snapping back.”

Mark Thirlwell, Australian Institute of Company DirectorsPictured: Mark Thirlwell, Australian Institute of Company Directors

“There is the argument that we have to be more careful than we have been in the past, but that has to balance against the sheer gravitational pull of the Chinese market for exporters, its scale, the level of demand.”
Mark Thirlwell, Australian Institute of Company Directors

Chris Coldrick, lead partner – Supply Chain and Procurement practice at Deloitte Australia, says supply chain managers have somewhat diversified away from China as a source of raw materials. This is less to do with politics and more to do with business wisdom.

“It’s not necessarily about trying to move away from China as much as it is about diversification of supply, finding alternate possible sources in case your current sources are not obtainable,” Coldrick says.

“Sometimes it’s also underpinned by raw economics. The increasing wealth of China drives an increasing cost of doing business there. Other parts of Asia have become more appealing. We’re seeing that with Vietnam and Cambodia, and that has actually been underway for quite some time. It predates COVID.”

What’s important to recognise is the general disruption experienced during COVID. Shortages due to supply chain issues were experienced globally, which led to the seeding of infrastructure so there is the capability to manufacture locally. It has driven the political need for nations to be more self-sufficient.

That has not produced major change in the short term, Coldrick says. But it is offering a credible, future opportunity where previously there was none.

“As everybody tries to develop local manufacturing capability, you create centres of gravity and economies of scale in other places that make them increasingly viable alternatives, and sometimes better alternatives,” Coldrick says.

In the short term, we should expect the firming up of other markets to continue as companies seek “meaningful hedging” on both the demand and supply sides.

“However, longer term, we have short memories and the economic realities will take hold,” Coldrick says. “Decisions will be driven by raw cost and service levels. If there are no credible alternatives to China, we’ll continue to buy from China. If China is paying the most money on the exports, that’s where they’ll go.

“Our export advantage in China is quality and provenance, and the demand for that seems only to be getting stronger.”

Powerful brands

Quality and provenance, Coldrick says, are what Australia has always traded on in China. New Zealand products are similarly respected, particularly higher-end meats, dairy products and baby formula.

“The Chinese market is confident that Australian food has been well treated, with no opportunity to gain any undesirable characteristics on the way through,” Coldrick says.

“And, if it’s a piece of equipment, there is confidence that it is made to high quality standards.”

In his previous job with Austrade, Thirlwell says he saw a premium placed on products from Australia and New Zealand, in China. That premium came from a perception of quality. And so, Australia and New Zealand have excellent brand perception in the Chinese market. These nations also have positive relationships with China – in Australia’s case a recently mended one, and in New Zealand’s case a long and productive association since the first free trade agreement with China in 2008.

Balancing act

Assuming a recovery in China’s economic fortunes, what else could get in the way of our trade success?

One issue to look out for is geopolitical relations, Thirlwell says. That includes the recently demonstrated fact that China is willing to use trade as an economic weapon, as many major trading nations have done for centuries. It also includes tensions between China and the US around Taiwan and the South China Sea.

Another is the structural side of the Chinese economy, as it grapples with the same environmental challenges affecting other nations – transitioning to renewable energy, improving air quality and so on.

“Those structural shifts in China will lead to changes in demand for Australia,” Thirlwell says.

“We also see the Chinese desire to move up the value chain. Just as Japan started with low tech and moved its way up, and Korea and Taiwan followed that route, China is also following that to some extent but in a very different way, because China’s scale is so different.”

Then, of course, there is the possibility of China’s economy heading into serious trouble, as America’s did with the GFC.

“I’m probably in the glass-half-full camp, on China,” Penny says. “There are those who feel we’re too dependent on China, and there has been a lot of doom and gloom. But there is still a lot of potential in China.”

As an illustration of that potential, Penny points to the fact that Starbucks has grand expansion plans for China.

“I have heard the average Chinese person drinks just 12 cups of coffee per year,” he says. “But the average Japanese person now drinks 280 cups of coffee per year.

“If China experiences that growth in coffee consumption, and even if just one in every five of those cups of coffee contains a splash of milk, that’s going to be very good for New Zealand.”

Year of the dragon... or year of the mouse?Image credit: Modify260 and Zoltan Szilvas


Key Chinese economic indicators

The National Australia Bank’s Group Economics, China’s economy at a glance reports a soft start to Q3, particularly as a result of “the real estate sector remaining a headwind, and demand for China’s goods in export markets continuing to soften”.

It could mean China might miss its 5% annual growth target in 2023. NAB’s current growth forecasts are:

  • 2023: 5.2%
  • 2024: 4.5%
  • 2025: 4.8%
  • Trade surplus (July 2023): US$80.6 billion, up from US$70.6 billion in June
  • Value of imports: -12.4% YOY
  • Value of exports: -14.5% YOY
  • Retail sales growth: +2.5% in July, down from 3.1% in June
  • Consumer prices: -0.3% YOY

Source: NAB Group Economics China’s economy at a glance August 2023.


Top exports to China

Australia  New Zealand
Total value of exports in 2022: US$102.35 billion
US$12.76 billion
 1. Ores, slag and ash  1. Dairy products, eggs, honey, edible products
 2. Salt, sulphur, earth, stone, plaster, lime and cement  2. Meat and edible offal
 3. Pearls, precious stones, metals and coins  3. Wood and articles of wood, wood charcoal
 4. Cereals  4. Cereal, flour, starch, milk preparations and products
 5. Meat and edible offal.  5. Edible fruits, nuts, peel of citrus fruit, melons.

Source: Trading Economics.