Finance Minister Bill English has returned from a full-on trip to China which went well beyond the usual Beijing-Shanghai itinerary convinced that the outlook for dairy there is good.
But he is tempering that view with a caution that though there will be growth it will be unlikely to be at the levels we have seen over the past five years.
Reading between his lines it is clear that he is sceptical that we will see a return to an $8 a kilo dairy pay-out anytime in the near or even medium future.
One reason for that is the rapid development of the Chinese dairy industry.
He told POLITIK that business people he spoke thought the economy was slowing faster than the official figures showed.
“But the concerns tend to be on the investment side, particularly property, rather than consumer demand side,” he said.
“I could see examples of over investment — roads and buildings that looked to be ahead of the demand.”
He said there was a reasonably positive view about the stock market issue and that it wouldn’t have much impact.
And he thought that the Beijing authorities were managing the massive local government debt overhang left over from the huge stimulation of the economy that took place in 2009.
“It seems to be being dealt with pretty effectively by the central government.”
NOT WORRIED ABOUT IMPACT OF STOCK MARKET BUBBLE
His meetings included China’s Finance Minister, Lou Jiwei, named by Forbes Magazine as the 30th most influential man in the world.
As a consequence of that meeting and other meetings with provincial officials Mr English said he was less concerned about the financial stability of the Chinese economy.
He also had a close look at consumer demand in China.
He visited the ANZ operations hub in Chengdu which has taken over a lot of IT development work previously done in India.
But Mr English said the bank was finding pressure on the wages it paid its staff and it needed to keep reorganising to deal with that.
He said there was wage pressure also in the hotel and dairy industries.
He obviously concluded that rising wages in China whilst not necessarily good for the ANZ bank were good for New Zealand because they meant rising consumer demand.
CHINA’S DAIRY INDUSTRY IS GROWING RAPIDLY
But currently in China there were a number of factors adding to supply pressure on prices.
And Mr English believes that the Chinese themselves now have the capacity to add to that supply.
“The dairy industry is a bit of a special case where you have got all these extra supply factors,” he said.
“I did get the sense that as consumer demand continues to grow there is capacity in the Chinese economy to grow that supply significantly.
“We happen to be a lower cost competitor.
“We’ve got our comparative advantages.
“But if the price got up to $8 again the Chinese would be banging up cowsheds all over the countryside.”
He said everyone realised the current dairy prices were too low now.
“They’re bad for the industry.
“They will rise but consumer demand is not so strong that it can outstrip the ability of either the Chinese or the global dairy industry to meet that demand.”
He said he went to “the bush’ to look at Chinese dairy farms.
He found one area which had started with a bunch of dairy farmers milking their two or three cows and selling raw milk.
They had gone to those same farmers had cutting maize to feed to the new dairy farm which had 1000 cows in sheds supplying a local factory which made yoghurt and pasteurised fresh milk.
“The guy said we’ve gone in two years from subsistence to factory production.
So the ability for them to have flexible supply is pretty strong.”
The conclusion that Mr English draws from this is that in some ways the New Zealand dairy industry has just had its Korean wool boom — that was the period in the early 50s when woo prices went through the roof as demand shot up to provide clothing for troops fighting the Korean War in frigid conditions on the Korean peninsula. Those prices slumped back after the boom.
What he says is that he thinks both prices and price changes will be more moderate from now on.
THE NEW SILK ROAD
This has been Mr English’s second trip to China within the past three weeks.
He was there on June 20 to sign up New Zealand’s membership of Asian Infrastructure Investment Bank.
He was one of only three foreign speakers and also stood alongside President Xi Jinping in the official photograph — a recognition of New Zealand’s leading role in the development of the Bank’s constitution.
But what impressed him was President Xi’s ad lib remarks about the “new Silk Road” project which aims to direct investment along the path of the old Silk Road stretching from China, through Pakistan and Central Asia to Europe.
Already there are six separate rail links which can carry cargo from China through to European centres like Hamburg in under a fortnight.
Mr English sees the project as good for New Zealand because as China winds down its investment in housing and infrastructure “they are laying out another horizon for investment and growth.”
“My sense is that it will a bit steadier and less spectacular growth than we have seen in the last 10 years.”
And he says there also particular aspects of it which work well for New Zealand such as the development of bonded entry ports at inland cities like ChongQing.
Interestingly he argues that because of New Zealand’s problems with food safety with milk products and meat and the work that had had to go into reassuring the Chinese after those incidents, there was now a much deeper relationship of trust between the two countries on import screening matters.
But the overall impression he has been left with is that though China is slowing down, and though its own dairy industry is rapidly growing capacity, the country is going to maintain a solid growth rate and that it will therefore remain of central importance to New Zealand.