Fran O’Sullivan: When China catches a cold… hold on

OPINION:

Brace yourselves — this latest “Shanghai flu” may have a much more serious impact on the New Zealand economy than the earlier Wuhan version.

That’s if Chinese authorities can’t stamp out the Omicron outbreak in quick measure and get a 28 million- strong city back to work.

Omicron has changed everything. This variant is significantly more virulent than the original strains.

Much of the focus (so far) has been on the disruption to global supply chains as a result of theShanghai lockdown.

But if the pandemic continues to bite hard in that city— and elsewhere — Chinese consumers might close their wallets tighter and not spend so much on more highly-pricedimported food, thus dampening the returns New Zealand exporters can expect to achieve.

This has happened before in China when its economy came under pressure. Food manufacturers like Wahaha simply substituted cheaper soy for New Zealand milk powder when making products like biscuits, ice cream and confectionery to retail at prices their consumers could afford.

In spite of the pandemic, New Zealand has still been achieving excellent prices for dairy commodities in China.

But they have now fallen over three consecutive Global Dairy Trade auctions in a row, following a record peak on March 1.

This week, a 3.6 per cent drop across the board was recorded, with the biggest slide coming from whole milk powder. Experts suggestit is the whole milk powder price that has the biggest influence on Fonterra’s farmgate milk price.

Go back a decade and the growth of the Chinese middle class — combined with a top-down suggestion that they should drink a glass of milk a day — helped drive up global dairy demand.

It’s worth noting here that New Zealand’s dairy industry has been the big winner as a result of this growth in demand for protein from China’s rapidly growing urban middle class.

In 2013, China’s dairy imports increased by 50 per cent with New Zealand supplying over 70 per cent of China’s total dairy imports.

But in 2016, the New Zealand dairy industry faced a crisis after China stockpiled milk powder, which had the impact of driving down prices and collapsing demand.

That crisis was overcome and New Zealand has enjoyed significant returns.

But the Chinese economy is now under pressure.

The International Monetary Fund this week slashed China’s economic growth forecast for 2022 to 4.4 per cent for this year, even though the nation’s economy beat expectations for the first quarter by growing 4.8 per cent year-on-year.

China had set a target of 5.5 per cent growth in 2022.

It is the second downgrade by the IMF this year and reflects the impact of the Covid-19 lockdowns, particularly in Shanghai, and pressures resulting from the Russian invasion of Ukraine.

The IMF has also advised China to run a higher fiscal deficit, which could allow theGovernment to cut taxes on businesses and redirect resources to households as opposed to more public investments.

It’s the same kind of conundrum that faces Finance Minister Grant Robertson, among competing calls from the National Party for him to cut public spending and demands from Labour’s political base for him to spend more to spark consumer demand.

The problem is, if China’s policymakers concentrate on supply-side measures to boost production rather than lifting consumer spending, that will in all likelihood cascade to affect the prices that Chinese are prepared to pay for New Zealand’s premium food exports.

Don’t think it can happen here?

Well it can, and has.

New Zealand food exporters — be they from the dairy, red meats, seafood or kiwifruit sectors — have created brands which sell at a premium in the Chinese consumer market.

The products are first-class. Safe. They also resonate with consumers who demand to know the provenance of their food.

But when times get tough, consumers tend to opt for less pricey products. They become more focused on volume rather than value.

There are other impacts of course.

The Herald’s Andrea Fox has comprehensively covered the effect of the Chinese lockdowns on NZ Inc’s supply chains,this week reporting a warning from Customs Brokers and Freight Forwarders Federation president Chris Edwards that they were starting to bite here.

This hurts not only our exporters, who have already put in place backup measures to get goods to the Chinese markets by diverting through secondary ports.

But it also affects importers who wait longer for goods to arrive —if sufficient containers can be sourced in time to meet orders (a factor which also hurts exporters) and face escalating delivery costs and more.

It could be worse.

In Europe, the International Energy Agency has urged citizens to take multiple actions to save money, reduce reliance on Russian energy supply and help the planet.

Among them: turn down heating and use less air-conditioning; adjust boiler settings; work from home; use cars more economically by reducing speed on highways and leaving your car at home on Sundays in large cities; walk or bike for short journeys instead of driving; use public transport; and skip the plane and take the train instead.

There’s an old maxim that when China sneezes, the world catches a cold.

New Zealand can withstand that, but if China’s sneeze results in economic flu, then that is another story.

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