NZ-China macro-economy: value-adding

Jack Welch remade General Electric. From the time he became chairman in 1981, he dismantled inherited practices and changed the company’s direction, setting the staid industrial giant up for the global competition of the 1980s. 

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Unproductive plants were closed, layers of senior management culled. Within three years, his strategy had helped to double the share price of one of the most successful companies in corporate America.

"Based on the past, there is no reason to rule out success, despite the presence of undeniable challenges.”

In my view, China’s President Xi Jinping is like Welch. He is reengineering the nation in a similar way.

Xi’s “management” has recognised a number of structural issues limiting organic growth. Staff morale has soured, the environment has deteriorated and people are not comfortable. At the Annual General Meeting in 2017, the Chair, like Welch, called for major reform.

Massive reform

This corporate analogy works for China today. The ruling party believes in the combination of state authoritarianism and market economics, with the latter seen as a tool for regenerating efficiency gains.

After the country skirted disintegration in the Cultural Revolution of the late 70s, the reformist Deng Xiaoping called for an open door policy, resulting in four decades of economic growth. That era (like indeed Welch’s eventually) has passed.

Today Xi Jinping is once again implementing massive reform. And based on history, there is no reason to rule out success, despite the presence of undeniable challenges.

That is the background in which China’s State Council decided to adjust the nation’s growth target down to 6.0–6.5 per cent at the National People’s Congress (NPC) a few weeks ago.

The council stated a preference for GDP quality over quantity on the one hand, while acknowledging downside risks on the other. Cutting VAT (value-added tax), reducing banks’ reserve requirements and kicking off new urbanisation projects, like XiongAn, are critical to economic momentum. Premier Li Keqiang has restated an intention not to flood the system with liquidity: the government is clearly focused on nurturing real growth drivers rather than pushing another credit-fueled cycle.

Value-adding ratio

As President Xi pushes a quality-driven approach to developing the macro economy, the government is also transforming the agriculture and fisheries sector.

The Ministry of Agriculture last year released its Outlook of China’s Agriculture 2018–2027 report, which pointed out that to meet future consumption China needs to upgrade the supply side of its primary industries sector.

The Ministry is therefore adjusting the structure of food production through the primary industry sector, embracing a supply-chain approach.

The headline strategy is: “reducing corn, increasing soybean, expanding forage grass, fixing pigs, lifting dairy” (减玉米、增大豆、扩饲草、调生猪、提牛奶). The State Council aims to enhance agricultural processing to boost the value-add of the rural sector. The target is to raise the value-added ratio between processing and agricultural production to 2.4:1 by 2020, compared with 1.7:1 in 2015.

Dietary balance

When we look at this new era and China’s latest reforms, New Zealand is well placed to tap into the market.

According to the Chinese government, dairy consumption in China was 100g a day per person in 2017, lower than the Chinese Dietary Guidelines’ recommendation of 300g a day. Dairy production and dairy consumption in China are officially projected to rise by 19.8 per cent and 25.1 per cent respectively over 2018–27, suggesting the middle kingdom will have a persistent dairy deficit - an opportunity for New Zealand and other foreign producers over the next decade.

While the mega-trend for China’s rising dairy consumption is unequivocal, a more affluent China also points to changes in dietary balance.

A New Zealand Ministry of Primary Industries report in 2017 indicated 45.3 per cent of surveyed respondents regarded fish and seafood as their major source of protein; 26 per cent had eaten more fish and seafood than they did in the previous year. This finding is consistent with the statement from China’s Ministry of Agriculture noting the potential for Chinese seafood consumption to rise from 30g a day to the global average of 56g a day.

Another area affected by China’s changing economic strategy is investment flows. In March, the NPC approved a foreign investment law aimed at improving the rights of foreign investors and encouraging greater inflow.

China remains cautious about the risk an imbalance of capital flows poses to currency stability. So, ANZ Research believes authorities will continue to tighten any offshore investment by Chinese corporates and households deemed irrational in the near term.

Positive development

This area deserves attention from other countries, including New Zealand. In past decades, a popular fantasy prevailed that China would become an exporter of financial capital, like Japan in the 1990s.

The Belt and Road initiative and the like imply China’s appetite for international involvement is increasing.

Across the world, Chinese immigrants are still frequently seen at property auctions and Chinese companies have many offshore projects in the pipeline. However, as Chinese investors become more measured in their offshore investments, assets that were purchased based on valuation data of previously boom years may be at risk.

That said, the current shift in China’s development regime should be seen as positive.

As a major consumer, sustainable growth in China is the best stabiliser of the global economy. As China’s expansion becomes less resource intensive, the impact on the rest of the world will be more sustainable.

The more gradual and orderly outflows of Chinese money will take pressure off the property markets in cities popular with Chinese buyers.

Although many observers are worried about China’s slowdown, ANZ Research takes a more balanced view.

Jack Welch, when he restructured GE, was working in an uncertain world, and his decisions involved a certain ‘leap of faith’. When assessing China’s economic future, perhaps we need to hold a similar mindset, especially so when considering a country with a track record of 40 years of expansion.

Raymond Yeung is Chief Economist, Greater China at ANZ

This article was originally published by the New Zealand Herald.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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