United States decline reinforces the importance of the Chinese trade relationship

New Zealand’s relationship with China will continue to be one of the most important and far-reaching while Covid-19 accelerates the relative decline of United States as the world’s economic engine, said a leading bank executive.

Antonia Watson, chief executive of ANZ Bank New Zealand, told delegates at the 2020 China Business Summit in Auckland that “we are thankful China’s economy is expected to outperform most other parts of the world and is expected to be one of the few economies to expand in 2020.

“Our economists believe the relative importance of the United States to the global economy will decline further as Chinese output will be more resilient – and bounce back faster – in the wave of Covid.”

ANZ Research forecasts the Chinese economy will grow rapidly in proportion to the United States, from 67 per cent of US gross domestic product at the end of 2019 to 75 per cent at the end of 2021.

Watson said the combined effects of the US-China trade war, the global downturn by because of the pandemic and the rapid growth of China’s neighbours have reduced the importance of United States consumer market for Asian economies.

In the first quarter of 2020, ASEAN countries surpassed United States as China’s largest customers for the first time, buying 16 per cent of Chinese merchandise exports. Only 14 per cent was absorbed by the US market.

“The trend is likely to continue in the wake of the pandemic as trade and supply chains become more regionally concentrated and ASEAN recovers more quickly than United States. The US dollar and US monetary institutions will still remain central to the global financial cycle,” Watson said.

The driver of the recovery from the 2008 Global Financial Crisis was US dollar liquidity supplied by the US Federal Reserve, and Chinese growth. The same may well prove to be true of the current crisis, particularly as China has emerged first from the pandemic and is likely to help lead a global recovery.

ANZ Bank expects China’s growth will be 1.8 per cent in 2020 and if it remains successful at controlling Covid, then it will continue to be an export-dependent economy.

“That’s great but we can’t take the New Zealand-China relationship for granted,” said Watson.

She suggested a five-pronged approach:

  • Continue the strong government to government relationship.
  • Simplify cross border access.
  • New Zealand businesses and banks need to continue having strong on-the-ground connections in China.
  • Brand New Zealand is stronger than ever post-Covid and we should take advantage of that.
  • New Zealand produces enough food every year to feed 30 million people – that’s still tiny by global standards and we still have to add value to as much of that food as possible to extract the most dollars.

Watson said New Zealand’s strong trade relationship with China helped to reduce the disruption to Kiwi goods entering the country during the Covid crisis, but some problems were inevitable. There was a challenge for perishable goods such as fresh meat, seafood and fruit which have limited shelf lives.

She said the seafood market in China has started to recover but was not able to make up for the lost ground that businesses experienced at the beginning of the pandemic. “While China is not an especially large market for New Zealand seafood, demand for our fish exports continues to grow.”

New Zealand cherries grown specifically for the Chinese New Year were severely impacted but demand for other fruit, especially those high Vitamin C that have a long storage life and protective skin, remained strong.

By the time of the harvest for the major fruit exports, kiwifruit and apples, access into China was virtually back to normal. And kiwifruit demand benefitted from consumer perception that it is a healthy product.

China is by far the largest buyer of New Zealand logs and supply was cut because of the New Zealand Covid lockdown. In-market logs in China were worked through, resulting in a sharp lift in prices which coincided with the resumption of log supply from New Zealand in May.

Log prices have eased slightly but still remain well above normal levels, said Watson.

China is now the largest market for New Zealand beef and lamb, overtaking United States. At the start of the year it was difficult to get meat into China and was diverted to United States. But as Covid struck in America and China recovered, more meat was diverted back to China.

Although meat processing has slowed in many of the large producing countries – such as Brazil, Argentina and United States because of the pandemic – end user demand is also weaker. “So, exporters are now starting to see prices ease back as supply has caught up with demand.”

China buys about 33 per cent of New Zealand’s dairy exports and the exporters managed to get product to the Chinese market without significant disruption, partially due to the strong relationship between Fonterra and Maersk Line through the Kotahi partnership.

Watson said there’s been particularly strong demand for pharmaceutical dairy products such as lactoferrin, which has anti-viral properties.

Demand for infant formula and ingredients remain very strong, while the volume of milk powder shipped from New Zealand to China remains on par with last season, she said.

– Graham Skellern, © NZ INC.

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