What’s going on with China’s economy, and what should New Zealanders know? In this series, the Asia Media Centre speaks to experts about aspects of China’s diverse economy, from consumers to financial systems to investment.
Rodney Jones is a Principal of Wigram Capital Advisors, an Asia-based macro advisory firm that provides economic analysis and advice to global investment funds on developments in Asia.
What’s happening with China’s economy?
Rodney Jones: China is going through a difficult adjustment. It’s transitioning from very fast growth to growing more slowly, it’s facing shifts in population as its population starts to age, it’s got banking issues left over from the credit boom that was very profound from 2012 onwards, and it's grappling with these issues at a time when it’s facing unexpected shocks. There are three right now that really stand out.
One, of course, is the trade war, where the burden falls most heavily on the dynamic provinces on the coast. Those three provinces — Guangdong, Zhejiang, Jiangsu — generate China’s trade surplus, generate most of China’s exports, and provide the foundation for the Chinese economy. They will be under enormous pressure from this trade war.
The second aspect is the banking strains. In May, we saw a bank in the northwest, Baoshang Bank, fail. We’ve seen the government intervene in Bank of Jinzhou in the northeast, and then in Hengfeng Bank in Shandong Province, which used to be known as "Evergrowing Bank". So we’ve seen three bank interventions in the last three months. That’s a signal that the banking sector is now under strain and is struggling to adjust to the prolonged credit boom as non-performing loans rise and the economy slows.
The third shock is the most recent, which is the protests in Hong Kong. Hong Kong, while only a small part of the Chinese economy in terms of GDP, is a large part in terms of financing. 40 per cent of China’s financing flows come through Hong Kong. Hong Kong is critical to the Chinese economy and these protests bring with it significant financial risk and carry significant uncertainty for the Chinese financial sector.
With those risks, how exposed is New Zealand and what needs to happen to mitigate them?
New Zealand has over time become more exposed to China. Part of what’s happened for New Zealand is that our exports to the rest of the world have grown very slowly, important markets such as the UK and Europe have been struggling. The Australian economy has been growing at its slowest rate in 30 years, and China has become consequently more important. So we’ve seen a big upturn in the proportion of goods sold to China, with it representing about 30 per cent of New Zealand’s goods exports now. In addition, in sectors such as tourism and education, China has formed a critical importance.
Now as these strains emerge, we talked about the three shocks, these financing strains, and as China grows more slowly… our view is that China is growing closer to 4 per cent than to 6 per cent, that the official numbers still provide too optimistic a picture on Chinese growth. New Zealand is likely to experience its own shocks as it adjusts to this different path for China. Now, we have a central bank that can respond, we have lots of fiscal room, the currency can adjust, but China has been such an important source of demand over the last 20 years and in particular over the last 10, that a China that is growing more slowly, that a China that is grappling with these challenges, is not going to provide the level of support to the New Zealand economy to which we are accustomed.
What’s unique about China’s financial system? What’s different from other places?
It’s the speed with which China has built up debt. We haven’t really see this before — we haven’t seen year after year of very rapid credit growth. We saw economies such as Korea or Malaysia do it for a year or two, even in the US with the GFC its growth really happened within two or three years. China has had tremendous credit growth now for 10. And it's been particularly rapid since 2012. There is no precedent for this. So we’ve had an economy that in 2008 had less leverage, less debt than New Zealand, to now overtake it and have total debt around 300 per cent of GDP. There is no precedent for this.
What’s going on with debt, especially with consumer and private debt?
You have four components of the debt. You have the businesses, which we know about. You have the local governments, and you have the consumers. Now consumer debt has grown very fast. Consumer debt is about 55 per cent of GDP, having been not much 10 years ago. Within that credit cards are about 10 per cent of GDP. Now that’s higher than the United States, and is approaching the level that we saw in Korea before they had a credit card crisis in 2002. So having now been concerned about the households, there’s reason to be concerned about the debt load that households are now carrying. Every sector we look at in China has a lot of debt. And as with all debt booms like we had in New Zealand in the early 2000s with the finance companies, it’s a question of how you adjust and how government policy helps the economy get out from under the shadow of that debt.
Over the next five years, what’s the optimist’s take and what’s the pessimist’s take?
Well, I’m a "glass half empty" sort of guy. I think China faces significant challenges, I think it will grow more slowly.
The optimistic take is that it can avoid a crisis and adjust slowly. Maybe do some reforms, maybe get back to some opening up, make it easier for foreign businesses to operate, make it easier for foreigners to invest, and that we can be in a better position — that adjusting to a debt boom takes time, and China can do that smoothly.
The pessimistic take is that countries rarely adjust smoothly. Adjustments are normally accompanied by shocks, particularly when we have these other shocks going on, and that we end up with some form of China economic or financial crisis.
Between those two polar views, the truth is somewhere in between. It’s just a question of, is it skewed towards the optimistic side or skewed towards the pessimistic side?
- Asia Media Centre