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China promises much for New Zealand exporters

China General Interest

Financial crises are times of rapid change. The 1997 – 1998 Asian financial crisis and the policies that ensued transformed many countries in East and Southeast Asia. Analysts feared at the time that China would be forced to devalue its currency and thus deepen the crisis. Even though China’s economy did suffer somewhat, the yuan was not devalued. As a result, China gained international respect and confirmed itself as the region’s dominant power.

Again in the midst of a financial crisis, people are talking about the yuan depreciating. This is a sensitive topic here in Beijing. A successful Beijing based expatriate businessman, Chris Devonshire-Ellis, recently made a serious error of judgment. In his private media company’s China Briefing News, he quoted Chinese officials as saying the yuan could weaken to about 6.9 to 7 against the US dollar. The Wall Street Journal Online reported that this news briefly created volatility in the currency market. The market quickly returned to normal after the Chinese government released a statement saying the news was “totally fabricated”. Days later Devonshire-Ellis resigned from his company.

It is generally viewed that China will keep its currency relatively stable to ensure its economy grows steadily during the global economic downturn. China unpegged the yuan in July 2005 and allowed it to fluctuate against a basket of currencies. Even though free market forces can push the yuan up or down, Beijing still by-in-large controls the exchange rate. One safeguard against any sudden and unexpected movement of the yuan against the USD is China’s large store of US securities. China held the value of 696.2 billion USD in US treasury securities in December last year. No other country has so much invested.

Some of Beijing’s long-term expatriates are saying 2009 will be particularly tough for China as the financial crisis, which has created a large unemployment problem in China’s south, coincides with a year of anniversaries. Going back a decade to March 1999, the then editor-in-chief of Le Monde Diplomatique wrote “in a year that will see, in June, the 10th anniversary of the Tiananmen Square massacre and, in October, the 50th anniversary of the founding of the communist regime, it is quite likely that we shall also see the devaluation of the yuan”. Not only would China’s economy experience difficulties but so would the governing regime. These predictions never eventuated though. China weathered the storm and its economy’s resilience has acted as a stablising force in the region since.

Some Chinese locals complain that the yuan is now too strong. The kiwi, for instance, has depreciated by about one third against it since July last year. Beijing now sometimes feels more expensive than Auckland. There is a view that long-term the yuan will only rise and China’s export orientated industries have no choice but to adapt. Chinese manufactures must become more efficient and produce better quality goods. But the transformation being talked about will not change the entire country to resemble South Korea, Taiwan or even Japan. Only in the richest parts can such a change occur. When this happens, China’s more undeveloped provinces will have the chance to become production hubs of cheap goods. Parts of Southeast Asia could as well benefit from such a shift.

Large economic transformations typically cause a lot of suffering as well as bring hope. According to China’s Ministry of Human Resources and Social Security, more than 10 million migrant workers lost their jobs in the third quarter of 2008 as a consequence of 670,000 factories closing. Being very concerned with economic and social stability, the Chinese government announced on 9 November 2008 a 4 trillion yuan (USD 586 billion) stimulus to help keep the economy moving at a steady pace.* According to Forbes.com the package amounts to nearly 15 percent of annual economic output. China implemented a package worth only 1.2 percent of GDP during the Asian financial crisis. The package announced last year is to be spent on upgrading China’s infrastructure.

How quickly China will transform itself is of course difficult to forecast especially given the world’s current state of flux, but the global financial crisis will probably not slow China’s rise relatively speaking - actually it may well quicken it. With this in mind and with the prospect of China’s increasing prosperity driving its currency up, New Zealand exporters should move to get a bigger foothold over here. At present New Zealand lags behind Australia in this regard. China is Australia’s second largest export partner while we are its fourth. Perhaps though, change is already at hand with the feasibility of selling high quality New Zealand lamb in China being currently looked into by the meat industry collectively. Meat and Wool New Zealand along with Alliance Group, ANZCO Foods and Silver Fern Farms are to do an audit of the China market. New Zealand Trade and Enterprise will partly fund it.

Most New Zealanders are more than aware that China is no ordinary market after Fonterra’s role in the contaminated milk disaster became daily news in New Zealand recently. Such a disaster would have ruined many smaller commercial operations, but Fonterra is large and thus strong enough to withstand the blow and continue to do business here. And because Fonterra’s reputation has not been tarnished, it may yet be able to really succeed in China. The co-operative must have learnt a lot of valuable lessons over the last year.

Inevitably when doing business in China, something unimaginable will probably go wrong. There are ways to prevent losses but because of China’s lack of transparency, problems will suddenly arise that cannot be solved quickly or easily. A collective and conservative approach seems entirely sensible. Moving too fast without real force will probably lead to failure. In the past, New Zealand’s export education sector has too often acted compulsively and in a rather haphazard fashion with respect to educating Chinese students. In the coming years if our dollar remains low, New Zealand may once again host a great number of Chinese students in our schools, polytechnics and universities – bringing back memories of the way things were in the early years of this decade. Will the sector now be able to act together to ensure Chinese students are well looked after and that New Zealand’s reputation does not suffer in China?

In this time of crisis there are many opportunities for New Zealand companies in exporting to China. Moving quickly is not necessarily a wise step, however. China does indeed look like it will emerge from the current crisis relatively stronger than before. The time it will take though to transform its economy is yet to be known. In the meantime, New Zealand exporters should expand their understanding of China with the hope of increasing sales long-term. Even though China may look enticing to some exporters now, the long-term gains will outweigh short-term ones for those willing to take a conservative step-by-step approach.

End note:

* In February of this year, China’s Ministry of Agriculture released results of a survey showing that 20 million migrant workers, 15.3 percent of the total, had lost their jobs because of the crisis. According to some sources the actual figure could be twice that.

About the author

Henry Acland, director of The Width Network, currently lives and works in Beijing. He has a Masters degree in Political Studies, University of Auckland, with a focus on East and Southeast Asia. Previously he worked as a Policy Advisor for the New Zealand government.