It pays to study China

great wall
We live in a world dominated by western media which still revolves around the economic supremacy of the USA. However, little was said in early October 2014 when the International Monetary Fund (IMF) announced that China’s economy, when measured by purchasing power parity, surpassed that of the US to become the largest in the world. It is a significant milestone in China’s evolution into a global economic power as the USA has occupied the top slot since 1872.

China has expanded its share of world Gross Domestic Product (GDP) faster than any other rising state from 1870 to today. In 1982, then leader Deng Xiaoping commenced a series of sweeping economic reforms. At that time, China accounted for a mere 2.2% of global output. Just over thirty years later, China accounts for 14.6% of world GDP and this is increasing annually at a rapid rate.

Today, China is New Zealand’s largest trading partner and the level of exports to China is rising exponentially every year. In some respects this is positive, as China is a market with a rapidly developing middle income sector with an insatiable demand for western goods. On the downside, New Zealand is becoming increasingly dependent upon China. The massive Chinese demand can cause severe price distortions - a high profile case in point being the decline in milk prices due to China having stockpiled milk powder and then purchasing less in 2014, forcing down the price of milk products.

China’s influence on New Zealand is undeniable. There has been an increase in the number of high level trade delegations to China in recent years and the rising number of Chinese in the streets is clearly evident. We also hear of the occasional high profile Chinese land purchase where some sector of the economy is objecting. Perhaps what is less evident is the increasing number of well-known brands which all of us might interact with on a regular basis that are owned in some shape or form by the Chinese government, mega-wealthy Chinese businessmen or that Chinese family along the road.

There is no use in New Zealanders becoming xenophobic. China is an economic powerhouse which is likely to keep going from strength to strength but when it periodically takes a breath, New Zealand will feel it in big doses. What we need to do is learn more about what makes China tick, how it came to have this massive economic surge, where we as investors can ride the opportunities China creates; but also understand that economic booms do need to take a breather, and China will be no exception.

It’s time to start putting China on your travel and reading list and taking a keen interest in what makes up the Chinese personality. The world is rapidly changing and we need to understand that change.