China and the World Economy: Challenges and Opportunities for

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China and the World Economy
Challenges and Opportunities for New Zealand
Xiaoming Huang, Jason Young
China Research Centre Discussion Paper 13/01
August 2013
China and the World Economy
Challenges and Opportunities for New Zealand
Xiaoming Huang, Jason Young
Published by the New Zealand Contemporary China Research Centre
Victoria University of Wellington
Wellington, New Zealand
2013 © New Zealand Contemporary China Research Centre
Print: 978-0-473-24100-1
PDF: 978-0-473-24101-8
Printed by Milne Print
Executive Summary
Chinese economic development has reached a turning point
after 30 years of high-speed economic growth. The pace, scope
and quality of future growth will be determined by how
sources of economic growth—exports, investment and
consumption—strengthen, expand and reprioritize under the
evolving institutional, policy and operational environment. Our
assessment is that while institutional reform, major policy
shifts and profound changes in the conditions of the market
economy may take time to be realised and will likely only come
in a piecemeal, compromising fashion, the dynamism and
energy of the economy, the infrastructure investments, and the
interests and value chains built into Chinese economic
activities, will continue to keep the economy growing.
Consumption’s share of contribution to GDP will increase over
exports and investment, but not to the extent as hoped for in
the broad programme of rebalancing and restructuring of the
economy. Internationalization of the economy, urbanization,
private investment, reform in primary and secondary
distribution of income, and R&D, technology, and education
will be key drivers of Chinese economic growth.
A key feature of Chinese economic growth is its
internationalization. Our analysis shows Chinese international
economic activities have evolved, developed and expanded,
from trade concentration to investment expansion, from
pursuit of bilateral economic relations to participation in
global and regional economic governance and integration, and
from movements of products, materials and capital to
expansion of business, enterprise, ownership, management
and production networks and chains in the world. The
internationalization of the Chinese economy affects the global
structure of markets, resources, capital and finance, prices and
consumer demand, supply and values chains and production
networks, and economic governance and organization.
China’s emergence as a significant mover and shaper of the
conditions and dynamics of the world economic system creates
a historical moment for New Zealand to consider how it
positions itself strategically in the world economic structure
for long-term economic prosperity and social wellbeing. Our
analysis shows that the New Zealand economy has limited
impact on overall Chinese economic growth and its global
interests and activities. On the other hand, a dynamic,
competitive, continuously expanding Chinese economy not
only provides markets for New Zealand exports, it becomes a
principal platform for New Zealand international economic
activities. More importantly, through its internationalization,
Chinese economic forces come to New Zealand, and have
significant impact on the structure and performance of the
New Zealand economy and its broad economic and social
The paper identifies three key areas for consideration in New
Zealand’s response to China’s economic rise in the world
economy: (1) to think of the greater purpose and value of New
Zealand international economic activities in China and develop
a coordinated policy to promote and support them; (2) to
nurture a more balanced structure of incentives and interests
of both New Zealand and China in their bilateral economic
relations; and (3) to incorporate the effects of growing Chinese
economic activities in New Zealand into the overall
development of the New Zealand economy and consider them
in economic policy.
The authors are grateful for the advice and insights of members of the advisory
group for this project: Professor David Robb, University of Auckland; Professor
Gary Hawke, New Zealand Institute of Economic Research; Eaqub Shamubeel,
New Zealand Institute of Economic Research; John McKinnon, Asia New
Zealand Foundation; Lee McCauley, The Treasury; Andrew Butcher, Asia New
Zealand Foundation; Guang Yang, BERL; Fran O'Sullivan, The New Zealand
Herald; Kefeng Chu, New Zealand Trade and Enterprise; Tony Alexander, Bank
of New Zealand. Needless to say, all the views and errors are those of the
Table of Contents
Executive Summary
Table of Contents
Figures and Tables
1. Introduction
2. Structure and Dynamics of Chinese Economic Growth
a. Chinese Economic Growth and Development: 30 Years On
b. Growth Pattern and Sources of Growth
c. Structure and Shift in Exports, Consumption and Investment
(1). Investment
(2). Consumption
(3). Exports
d. Key Forces Shaping Economic Growth
(1). General Policy Environment
(2). Urban-Rural Integration
(3). Rebalancing of Industrial Structure
(4). Capital and Enterprise Internationalisation
(5). Income Distribution and Social Gaps
(6). Research, Innovation, Technology and Education
e. Prospects of Chinese Economic Growth
3. China and the World Economy
a. Trade in Goods and Services
b. Investment Flows and Chinese Enterprises Abroad
c. People Flows
d. China in Regional Economic Integration and Cooperation
e. Global Economic Governance and Management
f. China, in and of the World Economy
4. China, The World Economy and New Zealand
a. The Growth of China in the New Zealand Economy
b. Deepening Economic Relations
c. China, the World Economy and New Zealand
Figures and Tables
Table 1 Research and Development, Science and Technology (2007-11) .......................................................... 32
Table 2 China‘s Merchandise Trade with Major Partners (2011).......................................................................... 41
Table 3 Chinese Overseas Direct Investment Stock by Sector (2011) ................................................................ 52
Table 4 Chinese Migrant Stock by Destination and Origin (1990 and 2010) ..................................................... 55
Table 5 China's FTAs, Economic Cooperation Agreements and Negotiations (as of 2013) .......................... 58
Table 6 Goals of the New Zealand China Strategy ................................................................................................. 68
Table 7 New Zealand-China Investment Stock (2007-12)..................................................................................... 73
Table 8 Arrivals in New Zealand by Top 5 Countries of Permanent Residence (2011-2013) ........................ 77
Table 9 New Zealand Balance of Payments (2008-2012)....................................................................................... 81
Figure 1 GDP Growth (1980-2012)............................................................................................................................. 4
Figure 2 GNI Per Capita (1980-2012) ......................................................................................................................... 5
Figure 3 Structure and Shift in Sources of Growth (1980-2012) ............................................................................ 6
Figure 4 GDP by Expenditure (1980-2011) ............................................................................................................. 11
Figure 5 Total Investment in Fixed Assets (2002-2012)......................................................................................... 12
Figure 6 Share of Total Investment in Fixed Assets in Rural and Urban Areas (1995-2011) ......................... 12
Figure 7 Investment in Fixed Assets by Source of Funds (2002-2011) ............................................................... 13
Figure 8 Share of Investment in Fixed Assets by Source of Funds (1981-2011)............................................... 13
Figure 9 Breakdown of Final Consumption Expenditure (2000-2012) ............................................................... 14
Figure 10 Contribution Share of Exports to GDP (2001-2011) ........................................................................... 15
Figure 11 Projected Ratio of Investment and Consumption to GDP (2010-30)............................................... 16
Figure 12 Rural-to-Urban Transition and Population Stabilisation (1950-2050) ............................................... 19
Figure 13 Share of Agriculture, Industry and Services in GDP (1980-2030) ..................................................... 21
Figure 14 Share of Employment in Agriculture, Industry and Services (1980-2030)........................................ 22
Figure 15: Annual Graduates of Higher Institutions and Technical Schools (2000-11)................................... 29
Figure 16 Number of Postgraduates and Students Studying Abroad (2000-11) ................................................ 30
Figure 17 Education Funding (2000-10) ................................................................................................................... 30
Figure 18 R&D Expenditure by Selected Countries (1996-2012)......................................................................... 31
Figure 19 GDP Share of World Total (1980-2012)................................................................................................. 36
Figure 20 Share of Exports in World Total (1980-2012) ....................................................................................... 38
Figure 21 Share of Imports in World Total (1980-2012) ....................................................................................... 38
Figure 22 Share of Export Value by Category of Commodity (1990-2012) ...................................................... 39
Figure 23 Share of Chinese Exports (left) and Imports (right) by Region (2011) ............................................. 40
Figure 24 Total Value of Imports and Exports and Value of Imports and Exports of ForeignFunded Enterprises (1978-2011) ....................................................................................................... 42
Figure 25 Domestic Value Added Embodied in Final Foreign Demand (2005, 2008, 2009) ....................... 43
Figure 26 Share of Domestic Value Added Embodied in Final Foreign Demand (2005-2009) ..................... 44
Figure 27 Total Amount of Foreign Investment Actually Utilised (1985-2011)................................................ 45
Figure 28 FDI Stock Share of World Total by Region and Level of Development, (1990-2011) ............... 46
Figure 29 FDI Inflows and Outflows from China and Hong Kong (2006-2011) ............................................. 47
Figure 30 Global Share of FDI Inward and Outward Stock by Select Economies (1990 and 2011)
.................................................................................................................................................................. 48
Figure 31 Source of FDI Actually Utilised in China and Chinese OFDI Stock by Region (2011) ............... 49
Figure 32 Hong Kong Inward and Outward Foreign Direct Investment Position (2012) .............................. 50
Figure 33 Persons Abroad for Labour Projects and Contract Services (1984-2011) ........................................ 54
Figure 34 Foreign Entrants to China by Nationality (2012) .................................................................................. 56
Figure 35: Value of New Zealand Exports to Top 5 Trade Partners (2002-2012)............................................ 69
Figure 36: Value of New Zealand Imports by Top 5 Trade Partners (2002-2012) ........................................... 70
There has been much debate about the rise of China and its impact on the world. Such
scholarly debate and policy interest in the problem has followed two streams: one
focuses on the geopolitical, diplomatic and strategic dimensions and is interested to see
how the rise of China, particularly change in its capacity, influence and interests,
affects the arrangements and structure of international politics, strategic relations, and
global and regional order. The other stream is more interested in how the rise of China,
particularly its growing economic position, influence and interests in the world, affects
the working of the world economic system and changes the dynamics and structure of
the international economic order, as well as impacting the national economies of
individual countries. These present two very different takes on the rise of China.
On the economic rise of China, much of the early stage of the debate and policy
discussion has focused on how China seeks a greater role in international economic
governance, more specifically, on its changing relations with the governing
international economic institutions such as the World Bank, IMF or WTO, and how
this would lead to change in the shape and mechanisms of global economic
governance. We now seem to understand well how growing Chinese economic power
and influence has led to its interests and efforts in seeking a greater role in those
international organizations and in international economic governance in general. This
is an important area where one measures and understands the impact of the rise of
China but alone it is not enough. Something else deserves more attention. How
China‘s economic growth translates into direct and tangible effects on our everyday
economic life, patterns and dynamics of economic relations and on the economic
growth and development of individual countries and their economic policy and
strategy is not straightforwardly clear.
It is evident that the economic rise of China is more than just increased voting
rights in the World Bank or IMF. Rather it is a profound change that China‘s decades
of successful economic growth and expansion has brought on the world economic
system and on the substance and mechanisms of international economic activities:
where manufacturing capacity, markets and resources are; how access to these
resources is managed and distribution shaped; what, where and how economic factors
and activities move between national economies. This changing world economic
structure not only affects world politics and global governance, but more profoundly,
it creates different sets of opportunities and constraints in the international economic
China, the World Economy and New Zealand | Page 2 of 90
environment for individual national economies, in the working of their own economy
and their relations with the world economy.
There are a large number of studies and analyses on this issue in different countries.
These studies look at how the Chinese economy, its growth and development, shapes
the world economic structure, which, in turn, affects the economic growth, policy and
relations of their particular countries. Such studies are often from a particular national
perspective, such as the United States, Australia, Europe, Korea, Japan, etc. These
issues have also generated a lot of interest in New Zealand where there is a strong
interest among policy analysts, academics, and private sector representatives in how the
China factor features in our economic activities, growth and development, sectors and
society, and our position and relations with the world, as well as our policy and
relations with China itself.
This paper provides analysis and assessment of the structure and dynamics of the
Chinese economy and the driving forces of its growth and development; the
internationalization of the Chinese economy with its growing presence and influence in
the world and the consequent shifting structure and dynamics of the world economy;
the challenge and opportunities this changing world economic structure has presented
for New Zealand; the mechanisms and channels in which it affects New Zealand
economy and society and its international economic interests, relations and activities.
The paper is built on three underlying premises. First, the 30 years of Chinese
economic growth has been generated in a particular growth structure. The pace, scope
and quality of future economic growth will be determined largely by how the sources
of economic growth—exports, investment and consumption—would strengthen,
expand and prioritize under the evolving institutional, policy and operational
environment. How the challenge of shifting China‘s growth structure is dealt with will
largely determine the success or failure of the economy to move out of the middle
income range toward an advanced economy.
Second, changes brought on by China in the world economic structure have a lot
to do with the particular structure and model of Chinese economic growth. China‘s
international economic activities have evolved, developed and expanded to the extent
they are no longer interests and activities in select sectors through bilateral economic
relations, but rather part of the internationalization of the Chinese economy. This not
only changes the global structure of markets, resources, capital, supply and value
chains and production networks, and economic governance and organization, but also
distributions and flows of products, capital, people, and movement of prices.
Third, China-driven changes in the world economic structure present opportunities
as well as challenges for New Zealand. The challenges and opportunities are historical
and strategic. They are more profound than what New Zealand experienced in the
China, the World Economy and New Zealand | Page 3 of 90
early 1970s as export markets to Europe and the United Kingdom contracted and the
New Zealand economy experienced long-term economic depression. This changing
world economic structure redefines New Zealand international economic interests and
relations, impacts the structure and growth sources of the New Zealand economy and
affects New Zealand society and international relations. Strategic thinking and planning
in government policy and our economic activities will ensure New Zealand will emerge
in a more positive position in the changing world economic structure.
The first part of the paper will provide an assessment of the Chinese economy,
tracing the development of its growth pattern and discussing key issues in
understanding the structure of Chinese economic growth. It will then discuss in turn
some of the key forces and factors that affect the shaping of the growth pattern. This
part will discuss different scenarios of the evolving structure and transformation of the
Chinese economy.
Part II will build on the discussion in Part I and examine the pattern of China‘s
international economic activities, from international trade and finance to overseas
investment, consumption and enterprises, from world-wide efforts in market and
resource access to global and regional economic governance and integration. This part
will expose the connection between the patterns of China‘s international economic
activities and the structure of its economic growth and clarify a picture of the
international economic environment that this has created for individual countries like
New Zealand.
Part III brings the analysis down to the question of what this all means for New
Zealand. More specifically, it will outline the large picture of the world economic
structure facing New Zealand and identify specific mechanisms and processes in which
China related international economic conditions impact New Zealand. This part
focuses on the key sectors and macroeconomic forces shaping New Zealand‘s
economic outlook and shows how New Zealand economic growth and social
development is shaped by international and bilateral economic relations and how
China is increasingly a major driver of New Zealand‘s external and internal economic
After 30 years of high-speed economic growth, the Chinese economy has reached a
turning point. Its growth rate has moved from above 8% in the past 30 years to below
8% (Figure 1). In all post-War rapid economic growth experiences of Asian countries,
the 8% annual growth rate has been a critical indicator of the stage or level of
economic development of a developing economy. 30 years seemed to be a period of
rapid economic growth and expansion of earlier Asian catch-up industrialisation. 1
After that, Asian economies restructure, upgrade, and rebalance, and become a normal
or mature economy where growth rates fall below 8% and eventually settle around 3-5%
8% annual growth is also
important as it has become a
critical benchmark for economic
growth to be kept at a level and
speed that is politically (and
policy-wise) necessary for a
healthy economy. In China‘s case,
1980 1984 1988 1992 1996 2000 2004 2008 2012
it is needed for employment and
continual growth of income and
Figure 1 GDP Growth (1980-2012)
Source: IMF (2013), Unit: % on constant prices
living conditions. 8% therefore is
critical for us to assess the long term trends of Chinese economy and the structural
imperatives for its continual growth, as well as the short term dynamics of
macroeconomic factors and conditions for broad economic policy. China has
celebrated its successful 30 years of rapid economic growth and development over the
past few years but in 2012 the growth rate dropped below 8%, signalling a new era of
Chinese growth and development.
While this may have been expected according to the 30 year model, and
government policy is well prepared for this challenge, it is highly debated whether this
will be a temporary drop or fluctuation as seen previously, such as during the Asian
financial crisis in 1997-1998, or whether this is a more structural movement suggesting
an end to the 30 year rapid growth period. A key Chinese economist, former World
Japan, Korea, Taiwan, Singapore, for example, had average growth rate of their economies above 8 % for 30 years
during their rapid economic growth after World War II (with Japan shorter at 20 years because of the significant
conditions in the 1970s) (Huang 2005).
China, the World Economy and New Zealand | Page 5 of 90
Bank Vice President, Justin Yifu Lin, for example, suggests that Chinese economic
growth will continue at the high speed above 8% for another 20 years.
A second indicator of the turning point is China‘s gross national income (GNI) per
capita, considered by economists a principal indicator of the level of economic
development and efficiency of an economy. 2 China‘s GNI per capita grew from
USD$220 in 1980 to USD$ 4940
in 2010 (Figure 2). 30 years of
GNI per capita (current $US)
rapid economic growth has lifted
China from a ―low income
country‖ to an ―upper middle
income country‖ 3 in 30 years.
With GDI per capita at
USD$5000 today, China is in the
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
middle of the middle income
Figure 2 GNI Per Capita (1980-2012)
range. 4 Economic growth and
Source: IMF (2013), Unit: % on constant prices
development experiences show
countries can be trapped in the middle range income level for a long time, unable to
graduate into the high-income range. This can occur because when a country reaches
the middle income level, its economic growth can slow down and eventually stop,
unable to compete with low income countries for labour/resources-based export
competitiveness, nor with high income countries for technology/skills-based
competitiveness. This is often experienced through rising labour costs, low investment,
weaker competitiveness, inflation and instability. Alternatively, the middle income trap
theory suggests countries can ―avoid‖ the middle income trap and transform from a
middle-income economy to a high income economy, if structural reform, rebalancing
and upgrading take place. The Chinese economy could therefore go in either direction
depending on how the structural and institutional problems are addressed.
The third indicator of the turning point is the structure of economic activities for
growth. The contribution weight of key sources of growth in China is shifting from
exports and investment to consumption and investment. If we look at the evolution of
Douglass North and Robert Thomas (1973) see a long term rise in GNI per capita as a measure of the efficiency
of an economy, a key driving force of modern economic development.
World Bank categorization. The World Bank uses the following to classify countries: ―Economies are divided
according to 2011 GNI per capita, calculated using the World Bank Atlas method. The groups are: low income,
$1,025 or less; lower middle income, $1,026 - $4,035; upper middle income, $4,036 - $12,475; and high income,
$12,476 or more‖ World Bank: ―how we classify countries,‖ at
World Bank (2012); Aiyar, al et (2013).
China, the World Economy and New Zealand | Page 6 of 90
the structure of different types of economic activities that have constituted Chinese
economic growth over its rapid growth period of the past 30 years (Figure 3), we see
for much of the period, growth has been generated predominantly by exports, about
20% of growth in exports in the 1990s and 2000s, sometimes over 30%; and next by
investment, with growth at an average of 11.85% for the period, and 30-40% at some
points. Consumption has been a much weaker driver of economic growth so far.
This is important for
understanding the dynamism
economic growth. It not only
reflects different types of
economic activities as the driving
forces of growth and the relative
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
weight of their contributions to
overall economic growth, but it
also connects growth to
Figure 3 Structure and Shift in Sources of Growth (1980-2012)
Source: IMF (2013), Unit: % based on constant prices
economic policy and shows how
macroeconomic policies and structural change programs aim to promote or restrict
particular types of economic activities. It is noted in Figure 3 that in 2011 the growth
rates of these three major types of economic activities converge at around 10%,
suggesting the economy is more balanced in terms of the sources of growth, moving
from primarily exports and investment driven. The economy is at a turning point as to
whether future growth will rely more on domestic demand, consumption driven
economic activities (as the current long-term programme of structural rebalancing,
growth strategy change, and domestic demand expansion calls for), or whether it will
continue to look upon exports and investment as assuring sources of continual growth,
(as the short term policy and political concerns have pointed to).
Year on Year Growth (%)
There are also growing tensions between different income groups, between urban
and rural sectors, and between state and private enterprises and capital. These features
reflect the type of growth model that has built up in the past 30 years and hence the
particular structure of contributions to growth, where growth is generated primarily by
exports and investment. These tensions indicate economic development has reached a
critical stage beyond the dynamism of growth of the early catch-up period and that
China is shifting to a new model of growth. It also reflects the particular institutional
and policy environment, which, while having been nurturing for an internationally
competitive market economy, has also encouraged or facilitated the rapid expansion of
the financial economy over the real economy, shaped access to and contribution of
income distribution, and distorted the role of state and private enterprises, as well as
that of urban and rural sectors in overall economic growth and development.
China, the World Economy and New Zealand | Page 7 of 90
The Chinese economy has over the last three decades seen sustained rapid
economic growth over and above the growth of advanced economies and the world
average. At a very fundamental economic level then, China has clearly become a more
important area of the world economy and a driver of global growth. This has
significant implications for the New Zealand economy. This section presents a
framework for understanding those implications today and over the next few decades
by providing a detailed picture of the drivers of Chinese economic growth and the
changing structural makeup of the economy. This is done in five parts. The first part
reviews the 30 years of rapid growth and development. The second part looks at
Chinese growth models to explain this growth and development. The third part
overviews the relative and shifting weight of exports, investment and consumption in
the economy. The fourth part explores the key drivers of economic growth, namely,
industry, reform policy, structural rebalancing and rural-urban integration and
improvements in innovation, research and technology, education and the overall
strengthening and upgrading of Chinese enterprises. The final part summarises these
findings and explores the implications and challenges of a new growth model.
a. Chinese Economic Growth and Development: 30 Years On
The China story is one of rapid economic growth and development and the
remarkable re-entry of the world‘s most populated nation into the world economic
system. On the back of three decades of above 8% in average annual GDP growth,
500 million Chinese people have pulled themselves out of poverty, China has become
the world‘s largest exporter, manufacturer and the world‘s second largest economy
(World Bank 2012). Those who have visited China take away vivid images of modern
architecture and sophisticated transport infrastructure, including a world-leading highspeed rail system, juxtaposed with all the familiar hallmarks of a developing country.
China is achieving this rapid industrialization and socioeconomic transformation with
limited political instability, in absence of external conflict and through increasing
economic and political engagement at the regional and global level.
The early years of the People‘s Republic of China (PRC), however, were a very
different China story. During the period 1949 to 1978, the Chinese economy had very
limited economic reach or global impact. China‘s trade and investment links were
poorly developed and the vast majority of the economy remained isolated from
developed markets and regions of advanced economic activity. The first thirty years of
the PRC was a period of inward focus and national consolidation where state building
and the development of government capacity took precedence over global integration.
This process was periodically interrupted, including most vividly during the chaos of
the Cultural Revolution, but overall the first thirty years of the PRC consolidated the
China, the World Economy and New Zealand | Page 8 of 90
newly independent Chinese state. This in itself is a significant feat considering the size
and complexity of this ‗civilization state‘ and the tumultuous period of revolutionary
upheaval following the fall of China‘s last dynasty in 1911.
The consolidation of heavy industry and a large centrally controlled economic
planning system during the early years of the PRC secured the role of government in
the state building process, but also had the detrimental impact of institutionalising an
inefficient economic structure that relied heavily on central command. Moreover,
China‘s economy remained effectively isolated from the world economy, including
most parts of the developed western economies, the Soviet Union from the mid-1960s
and even the rapidly industrialising economies of East Asia, once crucial elements of
the premodern tributary system. The developmental experiences of this region, first in
Japan, then South Korea and Taiwan, showed the leadership in Beijing that alternatives
to statist models of development were not only possible but in the case of East Asia a
highly effective way to transform underdeveloped economies to first middle income
and then advanced economies. By the time of the Dengist reforms, the socialist
planned economy had run its practical course and many Chinese leaders and
intellectuals began to push through a new growth model.
The growth model that emerged from the late 1970s dismantled many of the most
inefficient systems of production and allocation of the Maoist era, but also built upon
the highly developed bureaucratic, education and health systems. Most importantly,
China seized the opportunity to open to the global economy as the Cold War divide
slowly melted and embarked on a series of reforms of the domestic economic structure.
At times the reform agenda was systematic, such as carefully targeting the eastern
coastline for the development of economic zones for export-oriented activities and the
attraction of foreign direct investment (FDI). At other times the reform process was
more ad hoc and experimental, such as in the development of the household contract
responsibility system (HCRS) or town and village enterprises (TVE) in rural areas,
which led to increased entrepreneurialism and productivity gains in the rural economy
and unleashed waves of rural-to-urban labour migration. The last three decades of
reform has taken many twists and turns but consistently moved China in the direction
of increased internationalisation, marketisation and industrialisation.
China‘s willingness to engage with the world economy has had a marked impact on
economic development. This has involved opening a once highly closed Chinese
economy to trade, investment and people-to-people exchanges. Differing from the
early post-war developmental state in Japan, which was characterised by a high degree
of domestic protection of infant industries and low levels of FDI, China‘s period of
rapid economic growth has occurred during a phase of global economic development
driven by increasingly open and globalised trade and investment systems and the
development of global value chains. China opened the country to international
China, the World Economy and New Zealand | Page 9 of 90
competition, attracted foreign manufacturers and became an integral part of global
value chains dominated by multinational and transnational industry leaders. This
provided China with increased employment opportunities, introduced technology and
foreign expertise and opened foreign markets for Chinese manufactured and
assembled goods providing increased capital formation and driving industrialisation.
At the same time, the reform movement incrementally shifted China away from
excessive planning and high levels of state intervention in economic activity. China‘s
approach to marketisation was one of incremental steps to avoid major economic,
social and political instability. The planned economy was not immediately dismantled
to make room for the growth of the market economy. Instead, reformers chose to
‗grow out of the plan‘ by freezing the size of the command economy and encouraging
the market economy to grow alongside it. As the economy grew, market-oriented
economic activities came to dominate growth and development (Naughton 1995). The
state‘s planning and command functions decreased as price controls were reduced,
allocation of resources and labour shifted into the market and contracting moved
outside of state agencies. State owned enterprises were either privatised or market
imperatives introduced. The influx of FDI increased marketisation and hurried the
establishment of a regulatory framework for supporting the functioning of a marketoriented economy.
China has stepped up industrialisation and urbanisation and has significantly
increased the share of the economy involved in manufacturing, construction and
assembly. Primary industries accounted for 30% of China‘s GDP in 1980, but by 2010
accounted for only 10%. Over the same period, the secondary industry and the tertiary
(service) industry changed from a 48% and 22% share in 1980 to a 47% and 43% share
in 2010 respectively (NBS 2008; World Bank 2012, Figure 13). The Chinese economy
has become more urban focused with 90% of Chinese GDP now consisting of nonagricultural activities. With this focus on the urban economy, infrastructure
development, construction, manufacturing and light and heavy industries, combined
with a growing balance of trade surplus, the Chinese economy has become investment
b. Growth Pattern and Sources of Growth
When economists, political economists or public commentators debate about China‘s
growth model, there can be several different things involved. Generally, there are three
different perspectives on growth models: first, those that focus on structural features
of economic organisation; second, those that look to conventional growth accounting
on primary inputs; and, third, those that analyse Chinese growth as that generated by
three types of economic activities. The Chinese growth model is most often taken as a
China, the World Economy and New Zealand | Page 10 of 90
unique way in which economic activities are organised. It is often put alongside the
Anglo-Saxon model, the Rhine model, the Japanese model, or the East Asian model.
This first perspective on growth models focuses primarily on the organisational
structure and institutional arrangements in an economy that facilitate gains in
efficiency and thus competitiveness of the economy. While this is useful for helping us
understand the institutional environment for economic growth, it does not explain or
even predict actual growth.
The growth model in the eyes of mainstream economists is slightly different. It
focuses on primary inputs into finished goods and services, or the factors of
production (FoP), such as land, labour, and capital. The growth accounting method is
much more direct at linking ―factors‖ into economic growth and therefore better
explains what actually contributes to economic growth. The ―factors‖ in this method
are very ―primary‖ ones that are quite ―distant‖ from real economic activities and
therefore are not always easy to serve as indicators directly accessible to policy
assessment and manipulation aimed at supporting and generating economic activities.
It is useful for us to understand the contribution weight of these factors to the total
output of an economy, a generic model that can apply to any economy. It is less useful
when trying to see the economic interests, relations and activities embedded in the
economy, and how they generate economic growth—an understanding of which seems
necessary for growth modelling and policy manipulation.
A third perspective in policy and scholarly debate on the Chinese economy focuses
on the ―sources‖ of Chinese economic growth: the type of economic activities and
how much they contribute to economic growth. In this framework, Chinese economic
growth over the past 30 years has been built on three ―pillars‖: exports, investment and
consumption, and the consequent growth structure dominated by exports and
investment, with increases in consumption and relative decline in exports in more
recent time. Focusing on the structure of the contributions by types of economic
activities, this approach links actual economic activities (and associated interests and
relations) to growth outcomes. The growth structure in this framework not only
accounts for the growth outcome, but also reflects the underlying structure of the
economy (export concentration, the urban-rural divide, income gaps, domestic demand
driven), and therefore connects the state of the economy and prospects of future
growth and development to the policy and institutional environment.
c. Structure and Shift in Exports, Consumption and Investment
If we understand Chinese economic growth is generated by these three major types of
economic activity, we can show the structure of economic growth, and how that
structure has evolved over time.
China, the World Economy and New Zealand | Page 11 of 90
Figure 4 breaks down the measure of Chinese GDP using the expenditure method
over the period of rapid growth. We use exports rather than net exports to highlight
the contribution of exports to GDP. As shown in Figure 4, contribution of total
consumption to GDP has been steadily declining over the 30 year rapid growth period,
from 64% in 1980 to 48% in 2011. In the same period, the contribution of gross
capital formation has increased from 36% to 49% of GDP. The increase of the
contribution of exports is even more dramatic, from about 10% in 1980 to 39% in
2006. More importantly, in international comparison, China‘s gross capital formation is
significantly higher in contribution to GDP, being 45% in 2011 while the United States
was 20% and Japan 25%. The contribution of China‘s exports to GDP is also unique
and much higher than the international average at 31% in 2011, compared to the
United States‘ 8.6% and Japan‘s 11.3%. The share of total consumption in GDP, on
the other hand, is significantly lower internationally: 48% in 2011, compared to the
United States, 82%; and Japan, 68%. Clearly, over the last few decades of Chinese style
economy has developed a
Three Sources of Growth as weight to GDP
growth structure that
relies on consumption,
investment and exports to
growth but among these
three, the contributions of
exports and investment
are much higher, while
consumption is lower
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
than the international
Figure 4 GDP by Expenditure (1980-2011)
Source: World Bank (2012); Unit: % of GDP
(1). Investment
Since the turn of the century investment into China has expanded and ‗been a major
and increasingly important driver of China‘s growth‘ (Lardy 2006:1). Using
investments in fixed assets as an example, the last decade of Chinese growth has
witnessed amazing growth in investment. The vast majority of this investment has
been channelled into urban assets. Twenty per cent of all investment in fixed assets is
now in real estate in urban areas. Investment in fixed assets in rural areas has dropped
in the new century as a share of total investment in fixed assets and fallen dramatically
China, the World Economy and New Zealand | Page 12 of 90
Figure 5 shows a sevenfold increase in total investment in fixed assets over a ten
year period, from 4.35 trillion in 2002 to 30 trillion in 2011. Figure 5 shows this major
increase has been driven by investment in fixed assets in urban areas, in particular,
investment in urban real estate. In
1995, 77 per cent of all investment
in fixed assets went to urban areas,
Urban Real Estate
Urban Other
but by 2011 this had increased to
97 per cent. The share of
investment in real estate has
grown from around 13 per cent in
the late 1990s to 20 per cent in
2011. However, while this share
has increased, this has not
occurred as fast as the increase in
investment in other fixed assets in
Figure 5 Total Investment in Fixed Assets (2002-2012)
Source: NBS Statistical Yearbook (2012) Unit: 1000 billion Yuan
urban China.
Moreover, the increasing
investment in urban fixed assets
and urban real estate is not
driven by major increases in
domestic loans or the state
budget. In fact, the primary
source of the growth of
investment in fixed assets has
been ‗self-raising fund and
other‘. This private investment
suggests there is an increasing
amount of domestic capital in
China for investment.
Urban Real Estate
Urban Other
Figure 6 Share of Total Investment in Fixed Assets
in Rural and Urban Areas (1995-2011)
Source: NBS Statistical Yearbook (2012), Unit: %
Analysing the share of each source of investment in fixed assets over the last thirty
years shows a few important trends (Figure 8). Firstly, the state budget has dropped as
a share of total investment in fixed assets. In 1981 the state budget accounted for 28
per cent of all investment in fixed assets, but had dropped to 4 per cent by 2011. The
major drop occurred in the latter half of the 1980s. Secondly, domestic loans now sit at
a 13 per cent share of investment in fixed assets just as they were in 1981. In the years
following the GFC this share increased to 15 per cent as capital constraints were
loosened to promote investment, but not to the level experienced from 1985 to 2005
when domestic loans accounted for roughly 20 per cent of all investment in fixed
assets. Thirdly, foreign investment has dropped its share from 4 per cent in 1981 to
China, the World Economy and New Zealand | Page 13 of 90
Self-raising Fund and Others
Foreign Investment
Domestic Loans
State Budget
Figure 7 Investment in Fixed Assets by Source of Funds
over 1 per cent in 2011. Foreign
investment has not been the major
driver of investment in fixed assets
in China. Finally, and most
significantly, are the massive
increases in ‗self-raising and other
investment‘ in fixed assets in China.
This share has increased from 55
per cent in 1981 to a majority 81
per cent share in 2011. This is an
important trend in Chinese
Source: NBS Statistical Yearbook (2012) Unit: 1000 billion
The analysis above shows that a
great proportion of investment has
been sourced from self-raising funds. This suggests a private capital rich environment
which provides a good basis for the
continual advance of the private
State Budget
sector in the overall national
Domestic Loans
Foreign Investment
economy. This rich capital is also the
Self-raising Fund and Others
source of overseas investment and
internationalisation of the Chinese
economy. Investment so far is also
urban centric. This has contributed
to the urban-rural divide in Chinese
1981 1985 1989 1993 1997 2001 2005 2009
economic growth and hence will be
critical for the structural rebalancing
Figure 8 Share of Investment in Fixed Assets by
and urbanisation programme to be
Source of Funds (1981-2011)
Source: NBS Statistical Yearbook (2012), Unit: %
(2). Consumption
Investment aside, the other major component of GDP over the last three decades is
consumption. Increasingly, economists are pointing to the growth of Chinese
consumption as the most important driver of growth in the coming decades. Due to
the major increase in the share of investment/capital formation as a share of GDP,
and the post-2000 period of significant increases in the balance of trade surplus, the
third component of GDP as measured by the expenditure method, (final consumption
expenditure) has decreased as a share of GDP from 62 per cent in 2000 (6 trillion
Yuan) to 48 per cent (19 trillion Yuan) in 2010. This share increased slightly in 2011 to
China, the World Economy and New Zealand | Page 14 of 90
49 per cent on a 4 trillion Yuan increase in final consumption expenditure.
Figure 9 shows large increases in Chinese consumption expenditure since the turn
of the century. Household consumption expenditure continues to account for more
Rural Household Consumption Expenditure
meaning the bulk of this
Urban Household Consumption Expenditure
Government Consumption Expenditure
consumption as opposed to
However, the real value of
government expenditure is on
the rise. As in many developed
Figure 9 Breakdown of Final Consumption Expenditure
economies, the state is
Source: NBS Statistical Yearbook (2012) Unit: 1000 billion Yuan
increasing social provisions in
response to distributional
demands from the public, and investing in the development of infrastructure, science
and technology and education and training. As the Chinese economy matures we will
likely continue to see real gains in government expenditure.
The possibility that consumption data are underrepresented in Chinese GDP
calculations should also be considered. Studies point to the possibility that household
consumption in particular is underreported. For example, a Morgan Stanley report
argued private consumption, at 35 per cent of GDP since 2008 by official figures, is
according to their ‗bottom-up‘ estimate closer to 45 per cent of GDP (The Economist
2013). If this private consumption data has been misattributed to other categories, then
there is also the possibility that the share of household consumption to GDP is even
higher than the 45 per cent estimate by Morgan and Stanley. Morgan and Stanley‘s
estimates suggest the structural shift from investment-led growth to consumptiondriven growth is already well under way in China.
(3). Exports
Finally, the high contribution of exports of goods and services to the growth of GDP
is unique in the Chinese growth model. China, Japan and the United States were at a
similar level of export weight to GDP in the early 1980s (Figure 10). Japan and the
United States have been moving around 10-15% in contribution of export to GDP.
China‘s GDP has been steadily growing and peaked in 2006-2007. It has decreased
remarkably since the global financial crisis (GFC). From 2005 to 2007, growth in
China, the World Economy and New Zealand | Page 15 of 90
exports contributed around
40% to the growth of GDP
in these years. This is a
remarkably high level. In 2008,
when annual exports reached
a 10.04 trillion Yuan, exports
were 32% of GDP. By 2011
exports reached a new high of
12.32 trillion Yuan, but had
dropped off as a percentage
of GDP to 26% due to both
growth in the contribution of
Figure 10 Contribution Share of Exports to GDP (20012011)
GDP from investment and
Source: World Bank (2012) Unit: %
consumption and massive
increases in imports from 2009 to 2011.
In the years following the GFC, export markets contracted as the advanced
economies of the world focused on fiscal consolidation. Investment was boosted
through stimulus and credit easing, and final consumption expenditure increased
slightly to maintain a more than 40 per cent share in the growth of GDP. While this
could be temporal fluctuations in global movement of macroeconomic forces and
factors, this is taken as providing strong evidence that the Chinese economy is passing
over a turning point. Further sustainable economic growth will require growth model
reorientation and structural rebalancing, and in-depth institutional reforms in areas
which China has not been able to move on in the past. This will be critical for
economic growth on a sound, long-term sustainable structure of sources or
contributions to growth.
Reform will require a clear direction from the government in its broad economic
policy and development strategy, urban-rural integration, structural rebalancing,
income distribution reform, science & technology development and the strengthening
of enterprise competitiveness. These are key forces shaping a more rationalised
structure of economic growth and indeed themselves important sources for the types
of economic activities required for long-term sustainable economic growth, namely,
increased domestic consumption and the development of a sustainable investment and
export sector contribution to economic growth.
d. Key Forces Shaping Economic Growth
China‘s growth model over the last three decades of Dengist reforms has therefore
been characterised by a high investment to GDP ratio, reaching a high of 48% of total
China, the World Economy and New Zealand | Page 16 of 90
GDP in recent years, and a growth at any cost mentality as shown by the rapid GDP
growth rates and high levels of investment. This has been an effective growth strategy
for China to date, but one that is unsustainable in the long run. China has now reached
the stage where it must grow out of this model to meet the challenge of maintaining
growth, development and socioeconomic transformation as it negotiates the transition
from middle-income to advanced economy. China has reached ‗another turning point
in its development path when a second strategic, and no less fundamental, shift is
called for‘ (World Bank 2012: xv).
The next few decades of development require a rebalancing of the contributions
of capital formation/investment and consumption to GDP. As exports are predicted
to decrease due to the growth of imports and the relative saturation of Chinese
products in a global market
characterised by advanced
economies focused on fiscal
demand will need to be an even
stronger driver of the Chinese
economy. Figure 11 shows The
Investment/GDP Ratio
World Bank predicts the ratio
Consumption/GDP Ratio
of investment to GDP to
decrease from more than 46%
in 2010 to a ‗relatively normal‘
38% in 2020 and to a low 34%
Figure 11 Projected Ratio of Investment and
by 2030. As this drop cannot be
Consumption to GDP (2010-30)
Source: World Bank (2012:9). Unit: %
accounted for by an increase in
net exports, the ratio of consumption to GDP is set to rise from just under 49% in
2010 to 60% in 2020 and to 66% in 2030, a rate not dissimilar to the ratio of
consumption to GDP in today‘s advanced economies.
The shift in the relative weight of exports, investment and consumption reflects a
major structural transformation of the economy involving changes in the relative
weight of the economic activities in three major sectors, agriculture, industry and
services, and in the well-established trend toward the urbanisation of the Chinese
population. It also reflects the upgrading of Chinese economic activities through
strengthening of Chinese enterprises and large private and state investments in
research, innovation, technology and education. These factors, more than any other,
are the major drivers of the on-going shift toward an advanced economy that is more
reliant on consumption and domestic demand. How successful these drivers of growth
are will be determined by the ability of the state to balance policies that ensure shortterm growth with an ability to introduce reforms to secure long-term sustainable
China, the World Economy and New Zealand | Page 17 of 90
(1). General Policy Environment
The overall programme of further economic reform and hence the general policy
environment for economic development is a primary factor that determines the
direction and structure of future economic growth. There is no lack of debate and
tensions within policy circles, and by academics and the political elites over the
direction and next step in the reform process, the nature of the problems in the
economy and the strategy to rebalance and restructure. Most issues involve tense and
assertive interests of different groups, economic sectors, and different parts of society,
and therefore any major shift in policy orientation will engage substantive
consequences on economic activities. Early signs in the past two years show conflicting
evidence between concerns over short term growth performance and the influences of
existing interests in keeping up the existing model of growth, driven primarily by
investment and exports, on the one hand, and determination to move on to ―deep
reforms‖ required for structural rebalancing and growth model reorientation on the
other hand. It is possible that the political logic of economic policy has scheduled
these reform programmes to roll out in the next couple of years as the new leadership
establishes itself from late last year and early this year.5
The issues that have dominated the policy agenda are: macroeconomic policy;
debate over further marketisation and development of market institutions; debate over
the role of state and private enterprises; relations between state and state-owned
enterprises; prices of resource products; the exchange rate mechanism and interest
rates; organizational competitiveness and R&D innovation; control of core
technologies and intellectual property rights protection and promotion; ‗going global‘
and internationalisation of enterprises; and the structural balance between exports and
domestic demand, urban and rural sectors. These policy interests and concerns are
driven largely by a consensus that seems to have emerged among policy makers and
political elites that Chinese economic growth has reached a historical turning point
where further economic growth and transformation will require substantial change in
the structure of its economy and the way its growth is generated. The current
programme of ―structural rebalancing and model change‖ adopted by the government
reflects such a consensus and more polices on individual aspects of that are expected
to follow.
The Guidelines of Deepening Reforms in Economic Institutions issued by the State Council in May 2013 includes
key tasks of reform this year in seven areas: administration, budgetary and tax; monetary and financial system;
investment system; resources product price mechanisms, social security system; urbanization and urban rural
integration. It is expected that the third plenary meeting of the CPC later this year, where major economic policy
is often decided, will roll out more broad and comprehensive programs of reform, which could include land use
rights, the household registration system, urbanization and income distribution reform.
China, the World Economy and New Zealand | Page 18 of 90
On the other hand, structural rebalancing and growth model reorientation is a long
term programme and it will take time to see their expected effects and thus enhanced
contributions to economic growth. Moving from export driven to domestic demand
driven growth, shifting the weight of investment and consumption to GDP, shifting
perhaps from a financial economy to a real economy, and moving away from urban
industrial development biases to urban-rural concurrent growth, can initially dampen
the growth momentum. Therefore, there is great tension in the government‘s overall
economic policy between firstly its interest and determination to seek structural reform
and rebalancing of the economy for long-term economic and social development and
secondly its macroeconomic and even political concerns over short term growth
performance outcomes.
This tension leads to ambiguity in the direction of the general policy environment:
whether and how strongly, for example, the overheated housing and property sector
should be controlled; whether the domestic demand drive is more of macroeconomic
management through stimulus packages with injection of public sector capital into the
economy, or if it should be developed through structural reform and growth model
reorientation. The government, for example, promotes and supports major state
owned enterprises for their modern transformation, and nurtures them to become
leaders of modernisation and globalisation of the Chinese economy. At the same time,
it strikes to advance further marketisation and development of market institutions and
foster an open and fair market environment for different types of capital, business and
enterprises. This is particularly important for private domestic enterprises which have
been in a venerable position in the Chinese economic structure dominated by public
and international capital and enterprises.
The general policy environment is also shaped by the underlying different interests
and forces over the historical direction of China‘s economic and social development.
Deng‘s 30 year reform and development is seen by many as efficiency-driven,
economic growth-centric and world economic structure-dependent, with the growth
dividends not fairly distributed in society. This is often labelled as ―rightist‖ in political
and ideological debates between factions in the political arena and among different
social groups.
The ‗left‘ in China is a mixture of different kinds: those who see the importance
and value of the model and system of Mao which Deng‘s reform and change is
considered to have negated; those who see a broad historical picture of China‘s
modern development from the late 19th century and continuity in modern Chinese
history across Deng‘s period, Mao‘s era, republic era, and late Qing period that has
driven China‘s historical rise; and those who are marginalised from the growth process
and emergent economic and social structure and want to see a fair society not driven
primarily by efficiency and capital. The debate and fanfare over the Chongqing model
China, the World Economy and New Zealand | Page 19 of 90
and Guangdong model in the last few years is a reflection of this tension. China has
never lacked such tension and conflict over ―political lines‖ throughout its history.
These tensions can significantly affect economic growth and the course of economic
development and can impact the ability of the government to deepen the reform
(2). Urban-Rural Integration
Urbanisation will be a major driver of China‘s structural transformation and move to a
more consumption-based economy in the coming years. Far more of the economic
activity in China will be domestically driven as more citizens become reliant on the
urban economy to sustain their lifestyle. China‘s rural residents will continue to move
out of rural lifestyles characterised by a high degree of self-sufficiency and familybased farming on small-scale leased plots and become an integral element of the urban
economy. These urban consumers are more likely to demand higher standards of living,
have more disposable income for consumption and many will be in day-to-day contact
with well-developed and fully integrated production and distribution chains at both the
domestic and global levels.
Figure 12 shows how population stabilisation policies and the increasing economic
cost of having multiple children have dramatically limited population growth and
facilitated the movement of rural labour into urban industries. In 1980, the Chinese
population accounted for 22% of the world‘s population, but only 2% of world GDP
as measured in PPPs. By 2010,
China‘s share of the world
Urban Population
Rural Population
population had dropped to 19% 1400
(Xinhua 2011) and its share of
economic activity had risen to
14%. The key driver behind
this rapid change has been the
movement of low productive
agricultural labour into highly
productive industrial and
service industry employment.
Figure 12 Rural-to-Urban Transition and Population Stabilisation
As such, we can see the classic
Source: World Bank (2012:9). Unit: millions
Lewis model of labour
transition in action.
Lewis (1954) argued that in highly populated countries with large agrarian-based
economies, economic growth and development is driven through labour migration to
urban areas. As the source of ‗surplus‘ labour from rural areas becomes scarce, wages
China, the World Economy and New Zealand | Page 20 of 90
increase in both urban and rural industries and a structural transformation of the
economy from primarily rural-based to overwhelmingly urban-driven occurs. As
shown in Figure 12, China has some way to go before this structural transformation is
complete. Moreover, if we assume an industrial agricultural sector would only require a
rural population of around 300 million, a further 300 to 400 million more rural-tourban transfers can be expected.
Even with the brakes put on the rapid growth of the Chinese population, at times
through highly controversial family planning policies, the Population Division of the
Department of Economic and Social Affairs of the United Nations Secretariat predict
that China will reach one billion urban residents around 2040. This is likely to be
roughly 300 million more urban residents than today. By that time the rural population
will have likely dropped from its high of roughly 840 million in the early 1990s to a low
of 360 million, a real loss of 480 million rural residents in a short fifty-year period. This
will be facilitated by the fact that the population will likely begin to decrease by 2025,
just over ten years from now, and by the trend towards urban living. Based on the
experience of previously industrialising economies it seems highly likely that China‘s
citizens will continue to be attracted to urban living in the coming decades.
A key driver of consumption has been and will continue to be the movement of
people within the country. The trend of the majority of the rural population moving to
urban living is already well underway and is expected to deepen in the coming decades.
To date, China remains a country where nearly fifty per cent of the population still live
rural lives. This is far higher than the less than 20 per cent urban rate in 1980, but still
well below the 85-95 per cent urban rate in advanced economies. Japan, by comparison,
reached the fifty per cent urban point in the 1950s, and the United Kingdom and the
United States in the early 1900s. Urbanisation in China will be a major driver of the
structural transformation of the economy as a further 300 million rural people are
expected to transfer to urban living in the coming decades. After this transition, China
will be home to 1 billion urban consumers.
There are various assessments of the levels of consumption demand and
investment this will bring to the Chinese economy, ranging from 20 trillion to 30
trillion Yuan if 260 million rural residents urbanise over the next 10 years. This will be
more than enough to offset the projected decline in export contribution. Urbanisation
on this scale will involve substantial government investment in infrastructure, housing
and education, and medical and social security. Prime Minister Li Keqiang is a strong
proponent of stimulating economic development and modernisation through rural-tourban migration and the Government‘s budget planning for the urbanization
programme is said to centre around 4 trillion Yuan in new investment. Scholars such as
Li Yang from the Chinese Academy of Social Sciences argue urbanisation will not only
stimulate urban growth, but will also facilitate integration of rural and urban economies
China, the World Economy and New Zealand | Page 21 of 90
and stimulate the development of new agricultural practices on larger and more
efficient farming systems.
(3). Rebalancing of Industrial Structure
Population changes are accompanied by an on-going relative decline of the agricultural
sector, relative stability in the industrial sector and major growth in the services sector,
as measured through each sector‘s contribution share to GDP. This is a development
pattern not unique to China. Figure 13 shows how this process occurred prior to 2010
and how it is predicted to progress in the coming two decades. One significant trend in
these figures is the growth in the share of the service sector from 20 per cent of GDP
in 1980 to 43 per cent today. Services are set to rise to account for more than 60 per
cent of Chinese GDP by 2030. While agriculture and industry will likely decrease as a
share of GDP in the coming decades, each will remain important elements of the
Chinese economy.
The growth of urban
employment and structural
economy will be reflected in
the rapid increase in the
number of people working in
the services sector and on20
going decline of agricultural
employment. Figure 14 shows
a steady and predicted ongoing
Figure 13 Share of Agriculture, Industry and Services in GDP (19802030)
employment in China as
Source: NBS of China (2008:33), and World Bank (2012:9). Unit: %
agricultural employment into urban or non-agricultural employment. In 1980, nearly 70
per cent of total employment was in the agricultural sector. This declined to 38 per
cent by 2010 and is predicted to decline to 12.5 per cent by 2030. Fewer employees in
the agricultural sector will facilitate the industrialisation of agricultural production and
the creation of leading agricultural enterprises. China will have the opportunity to
move away from an agricultural sector organised around the goal of providing selfsufficiency to rural families and to introduce larger and more efficient agricultural
As the share of employment in the agricultural sector declines, we will likely see the
on-going importance of industrial sector employment and major growth of
employment in the service sector. The share of those employed in the industrial sector
China, the World Economy and New Zealand | Page 22 of 90
has increased from 20 per cent in 1980 to 28 per cent in 2010. The World Bank
predicts this share to remain stable. The service sector accounted for only 17 per cent
of employment in 1980 but had doubled its share to 34 per cent by 2010. This share is
predicted to grow rapidly to account for nearly 60 per cent of total employment by
2030. The on-going growth of the service sector, and shift in relative weight of this
sector in the overall economy, will drive the shift from a middle-income to an
advanced economy. These major employment changes will be reflected in structural
changes within each sector.
As economies move to
modern economic arrangements,
a well-established development
trend is the relative decline of the
agricultural sector. The addition
of industrial processes into
agricultural production increases
agricultural output and decreases
the need for a large agricultural
labour force. However, these
increases are unlikely to lead to
Figure 14 Share of Employment in Agriculture,
productivity and income gains
Industry and Services (1980-2030)
Source: NBS of China (2008:18), and World Bank
that can match the gains seen in
(2012:9). Unit: %
the industrial and service sectors
for a number of reasons. First, the agricultural sector in developing countries usually
plays the role of providing provision for an urban sector unwilling or unable to make
rapid increases in how much they pay for agricultural product. Second, agriculture can
be an important export earning, but as the urban population grows, and less people
live self-sufficient rural lifestyles, there is increasing domestic demand for agricultural
product decreasing product for export. Finally, in the early stages of development the
agricultural sector is unlikely to attract the type of investment that goes to urban areas
where return on capital is higher and therefore agricultural industries will struggle to
China, with its large population, has been no exception. The agricultural sector
experienced rapid productivity gains in the years following the introduction of the
household contract responsibility system and breakdown of the commune system (Lin
1992). However, the agricultural sector was still primarily seen as a source of
agricultural supply and effectively continued to act as a labour sink for China‘s massive
population, hiding much under-employment. Now that the rural population is, for the
first time in Chinese history, smaller than the urban population, and many of this
population are involved in non-agricultural work in rural areas, there is the opportunity
China, the World Economy and New Zealand | Page 23 of 90
and the structural requirement for the role of agriculture to shift from one of a source
of basic subsistence for rural people to an efficient and highly productive industrialised
agricultural sector. In recent years, the state has set policy to promote the
establishment of a modern, industrialised and large-scale agricultural sector. This is
likely to continue to facilitate the movement of the vast majority of China‘s labour into
the more productive urban sector and to strengthen the agricultural industry.
Industry has consistently been an important part of the Chinese growth strategy.
Since the Nationalist era and particularly during the Maoist era, the development of
heavy industry lay at the forefront of the national growth agenda. During the Great
Leap Forward (1958-60), China‘s stated goal was to overtake the United Kingdom in
industrial production. The resources of the state were channelled into this goal and
into the development of heavy industry. In the Dengist era, industrial production
expanded to incorporate the development of light industries such as textiles, assembly
and electronics. These formed an important part of the export-led growth policy but
did not replace heavy industries. Today, and into the foreseeable future, heavy and
light industry will likely remain central to economic growth and development. As the
second section shows, Chinese industries will continue to play a major, but changing,
role in the global value chains of the world economy.
Chinese industry conforms to a dualistic model of economy. In the early 1980s as
industry expanded, first through the town and village enterprises (TVE) in rural areas
and later in urban areas, through the privatisation of many smaller state enterprises, a
new dualistic system developed where the state maintained control over important
sectors such as oil or electricity and privatised the remainder. The state ‗grasped the
large and let go the small‘ state owned enterprises (SOE) allowing both bottom-up
entrepreneurialism and competition as well as state direction of the commanding
heights of the economy. FDI was also encouraged into special economic zones and
industrial parks. Foreign companies were welcomed and encouraged to establish
factories through a series of preferential policies and the high (and ongoing)
competitive advantage of accessing a well-educated but comparatively cheap labour
pool. This spurred a lot of competition in the industrial sector at one level but also
entrenched state control of strategic industries. This has created a dynamic industrial
economy that lies at the heart of China‘s competitive global advantage. Industrial
expansion has driven the Chinese economy over the last thirty years and this is likely to
The development of the service sector is the most exciting element of the
structural transformation of the Chinese economy. This is creating a fundamentally
different type of economic structure in China as more people become involved in
service provision. This will also contribute positively to the development of a
consumption driven economy. It is worth noting here that most advanced economies
China, the World Economy and New Zealand | Page 24 of 90
are dominated by their service industries suggesting that China‘s transition from
middle-income to advanced economy will require the development of a strong service
sector. This will fundamentally reshape the Chinese economy in the coming decades
away from a growth at any cost model to a more sustainable and high quality growth
These structural changes have become well established over the last three decades
of reform. They point to the likelihood of major increases in domestic consumption
spending, particularly in urban areas, and to the growth of services in China. In
absence of an unlikely major turnaround in these well-established trends, Chinese
economic growth will continue as it is stimulated by the urbanisation process and
structural changes in the domestic economy. In the coming years, this will likely occur
at a much slower and more sustainable rate as workers move into industry and services
to meet domestic demand and export-oriented industries are maintained but no longer
expand their share of the Chinese economy. This means the Chinese economy will not
only be quantitatively different in the coming decades as growth continues, albeit at a
slower pace, but will also be qualitatively different as the major drivers of growth shift
away from an over-emphasis on investment and exports to the expansion of the
service industry and the rise of the Chinese consumer. An important part of this shift
will be the internationalisation of Chinese capital and leading brands.
(4). Capital and Enterprise Internationalisation
State market relations have been a core issue in China‘s economic transition. In many
of the early years, it was a problem of how to ―grow out of the plan‖ (Noughton 1995)
where inefficient and unproductive state-owned enterprises were allowed to decline,
collapse or privatise. At the same time, private capital and enterprises were encouraged
to develop, and expand. This was a period of ―state capital retreating and private
capital advancing.‖
From the mid 1990s and particularly in the 2000s, there have been a growing
number of enterprise restructurings where private capital has withdrawn. The
Government‘s industry promotion scheme and the economic stimulus packages have
brought huge resources and capital to state enterprises. In key industries such as steel,
coal, airlines and finance the state has built its dominance to almost monopoly status,
and expanded further to areas where private capital had been dominant. The IT
industry, real estate, private capital markets and private enterprises have been confined
to downstream industries or sectors. Entry barriers to many industries are particularly
high for private capital. There is therefore heated debate over whether this is a reverse
of the early trend and whether we can still see ‗state capital retreating and private
capital advancing‘.
China, the World Economy and New Zealand | Page 25 of 90
Statistics on gross industrial output value suggest the trend for private industry
advancing continues. For example, in 1991 there were 8 million industrial enterprises in
China of which there were only 104,700 that were state-owned and 1.6 million that
were collective-owned enterprises. In the same year there were 6.4 million ‗individualowned enterprises in urban and rural areas‘. However, the vast majority of the gross
output value of industry for that year, some 2,662.5 Billion Yuan according to the 1996
National Bureau of Statistics Yearbook, occurred in enterprises that were not private.
SOEs accounted for 56% of all industrial gross output. Collective-owned enterprises
accounted for 33% and ‗individual-owned enterprises in urban and rural areas‘
accounted for less than 5%. By 1995 this share had increased to nearly 13% as ‗other‘
types of ownership and collective ownership increased their share of gross industrial
output and SOEs decreased their share to 34% of gross industrial output (NBS 1996).
This compares to a height of 90% of gross output value of industry accounted for by
SOE activities in 1965 and 78% at the start of the reform era.
By 2000, the share of gross industrial output value in enterprises funded from
Hong Kong, Macao, Taiwan and foreign funded enterprises had reached 12% and 15%
respectively. The share of gross industrial output value from SOEs had dropped to 24%
and collective-owned enterprises had dropped their share to 14%. However, the
number of state-owned or state majority share enterprises still represented 47% of
total gross industrial output value (NBS 2001). Limited liability corporations, including
those with state funding, made up 13% and private enterprises made up only 6% of
total gross industrial output value.
By 2011, the share of gross industrial output value in enterprises funded from
Hong Kong, Macao, Taiwan and foreign funded enterprises had reached 9% and 17%
respectively. SOEs made up only 8% and collective-owned enterprises only 1% of
gross industrial value. Private enterprises accounted for 30% of total gross industrial
output. Combined with the Hong Kong, Macao, Taiwan and foreign funded
enterprises, non-state enterprises accounted for well over half of China‘s industrial
output, the rest coming from SOEs in commanding heights of the economy and a
number of limited liability corporations, cooperatives and shareholding enterprises
(NBS 2012).
A further way to measure the relative weight of private and state capital in the
domestic economy is through total wage bills. In 1995, the total wage bill of employed
persons in urban units was 806 billion Yuan. 77% of this was for SOE units, 15% for
urban collective-owned units and 8% for units of other types of ownership. By 2011,
SOEs had decreased their share of the total wage bill of employed persons in urban
units by 29 percentage points to 48%. Urban collective-owned units also slowly
China, the World Economy and New Zealand | Page 26 of 90
decreased to 3% while units of other types of ownership increased their share of the
total wage bill of employed persons in urban units from 8% in 1995 to 49% in 2011,
for the first time surpassing the share of SOEs. This shows non-state urban units are
becoming the dominant driver of urban wages and therefore the main source of urban
household consumption spending in China today.
The relation between state and private capital and enterprises today is no longer an
ideological issue as was originally intended in the early years of reform. Nor is it simply
about who owns the national economy. It has increasingly become a problem of
creating the best business environment for economic growth. There is an embedded
tension in the institutional environment shaping these relations. On the one hand,
there are consistent efforts by the government to promote core state owned
enterprises in key industries to build highly competitive corporations on the basis of
large-scale activities and monopoly position. On the other hand, there is great pressure
on the government to deepen market reform and nurture a fair and open playing field
for all business, state and private, domestic and international. Prime Minister Li
Keqiang is reportedly a strong advocate of promoting structural rebalancing and
stimulating economic growth by reducing the role of the state and planning for private
businesses and for market forces to play a larger role in the economy.
The problem of capital and enterprise has also to do with the international capital
and economy. Our early analysis showed that investment has driven the Chinese
economy. Both international capital and self-raising funds are dominant in the process
of capital formation. Therefore there is great overlap between private and international
capital. Private capital ―retreat‖ is therefore also in some way a ―retreat‖ of
international capital. An unimproved business environment would leave
private/international capital wanting and investors would likely redirect their capital
overseas. As shown in the next section, China remains an important host country for
global capital flows. These flows and the activities of international enterprises in China
have played an important role in the development of the regulatory environment of the
market-oriented economy.
The flip (and more recent) side of increasing global capital flows has been the
introduction of a wide range of Chinese enterprises to the international economy. In
order to enhance the competitiveness of state owned enterprises and further secure
global support of Chinese economic growth, there has been almost a state organised
campaign for state enterprises to ―go out‖ and establish themselves in the international
economy. These state enterprises are key agents of the internationalisation of the
Chinese economy but are clearly no longer the only significant economic actors in this
The growing importance and presence of China‘s largest enterprises is already
China, the World Economy and New Zealand | Page 27 of 90
evident. For example, in 2005 the Global Fortune 500 ranking of the world‘s largest
corporations contained only 16 Chinese companies and only 3 Chinese companies in
the top 200. By 2012, the Global Fortune 500 list contained 73 (15%) Chinese
companies of which 22 (11%) were in the top 200. Sinopec Group, China National
Petroleum and State Grid were ranked the fifth, sixth and seventh largest corporations
in the world respectively (Fortune 2013). On the back of this massive growth in
Chinese economic output, it comes as no surprise to see that of the 1,426 billionaires
listed on the Forbes list in 2013, 161 or 11 per cent were Chinese citizens (including 39
billionaires from Hong Kong) (Forbes 2013).
The tension between these two trends will continue in the development of the
ownership model, capital types, corporate organisation and the business environment.
The direction of this development will not only define the type of capitalism or market
economy China is but more importantly affect the extent to which efficiency gains will
continue and whether the economy will continue to grow and expand. While there are
very real concerns in the short to medium term, the long-term trend is toward an
economy driven by the private sector. Through this process, however, income
distribution and socioeconomic inequality has become a major challenge.
(5). Income Distribution and Social Gaps
Income gaps have emerged as a key problem underlying the unhealthy structure of the
economy and point to the problems in the existing income distribution system where
there are huge income gaps between urban and rural sectors, between costal and inland
regions, and between different sectors of society. These problems are exacerbated by
the tax system, social security and welfare provision, hidden income and illegal income.
In 2013, the Government released the official Gini coefficient for China for the first
time since the year 2000. The Gini coefficient is a measure of income distribution
where a score of zero indicates all people have the same income and a score of 1
indicates maximum inequality. In 2003, China‘s Gini coefficient sat at 0.479 but grew
steadily to a high of 0.491 in 2008 before dropping slightly to 0.474 in 2012 (Yang
2013). Most modern economies aim for a Gini coefficient between 0.3 and 0.4 as
recommended by the United Nations. A score above 0.4 suggests income distribution
inequality and social gaps have the potential to create major social issues and impact
development and growth.
Tackling this challenge is multifaceted. Income distribution can refer to distribution
at two levels. At the primary level income comes directly from factors of production:
labour, land, capital and technology. At the secondary level, there is redistribution of
―income‖ not directly gained from work but legally gained through government
redistributions such as tax breaks, social security and transfers. Recently, the Chinese
China, the World Economy and New Zealand | Page 28 of 90
Government have stressed the importance of acknowledging inequality in both levels
of income distribution. Both levels are important if China is to avoid the trap of
working to address poverty alleviation and potential instability through extreme
income disparity by focusing only on redistributive measures. Instead, measures such
as improving the income of rural farm workers through reforms to ‗taxation, subsidies,
salary system, financial regulation, household regulation and social security‘ (Xinhua
Feb 6, 2013) can target key inefficiencies and barriers to further development in rural
and less developed regions of China. The potential for income distribution inequality
to dampen economic growth by reducing household consumption, however, still
A key structural issue in China‘s growth model is the relatively weak contribution
of consumption to economic growth. This has a lot to do with the income distribution
model that has been an effective instrument for rapid economic growth for decades, in
part due to household income remaining significantly low, the share of wage income
being relatively low in primary income distribution, and government provisions such as
social security, pension or unemployment support remaining relatively low as a share
of the government budget. This has increased the propensity for household savings
that have been channeled into domestic investment. However, this model cannot drive
the growth of household or even government consumption as China structurally
rebalances its economy. Reform in primary level income distribution, therefore, needs
to significantly close income gaps and raise the consumption capacity of middle and
low-income groups. At the secondary level, Government redistribution policies are
gradually becoming more complete even over the traditionally disparate rural-urban
divide. China is building a comprehensive national and local social security system,
including health and employment insurance and pension schemes.
Changes in income distribution could therefore positively help meet the challenge
of structural rebalancing by increasing the propensity of rural and new urban residents
(China‘s migrant workers or nongmingong) to spend more of their income on
consumption. Alternatively, if income distribution continues to remain problematic,
China not only runs the risk of increasing socioeconomic tension between regions and
employees in different sectors, but also of failing to rebalance the economy to meet the
challenge of moving toward a middle-high-income society. Income distribution and
social gaps are a key driver and an important indicator of China‘s economic
transformation, growth and development over the coming decades.
(6). Research, Innovation, Technology and Education
The on-going structural transformation of the Chinese economy has led to the
invigoration of economic activities not traditionally associated with Chinese growth
and dynamism. Chinese enterprises are developing highly competitive and, at times,
China, the World Economy and New Zealand | Page 29 of 90
cutting edge practices within the domestic economy and spurring innovation far
beyond the ‗shanzhai‘ model of copying western technology and design. Section 2
shows how Chinese companies are competing more for a global share of leading
industries. This section provides the background for understanding the development
of Chinese competiveness by analysing the investment in human capital, the rise of
Chinese research and development and science and technology and by highlighting the
importance of the growth of leading Chinese enterprises. Investments in education,
innovation and up-skilling the Chinese labour force are beginning to bear fruit as
industries seek more skilled and semi-skilled workers to push Chinese enterprises up
the value chain and into the realm of an advanced economic structure.
China is investing heavily
Institutions of Higher
in education and training to
Technical Schools
create human capital for an
advanced economy. From 2000
to 2011 the number of annual
graduates of institutions of
higher education grew from 1
million to 6 million. Each year
China now produces more
graduates of higher education
institutions than the entire
Figure 15: Annual Graduates of Higher Institutions and Technical
Schools (2000-11)
population of New Zealand. Source: NBS of China (2008:20-9, 20-36), and World Bank (2012:9).
Unit: millions
Figure 15 shows that the number
of graduates of technical schools has grown over the last decade to more than a million
annual graduates. One challenge for China, a country where education holds a special
place in the cultural tradition, will be to incentivise the study of technical skills in order
to ensure a balanced and all-round labour force that is required by enterprises in the
new economy.
Figure 16 shows the number of annual graduates of postgraduate studies has also
increased rapidly over the last decade, from less than 60,000 in the year 2000 to well
over 400,000 in 2011. This is a remarkable increase in postgraduate studies and
suggests there will be ample highly educated graduates in China to meet the demands
of an advanced economy. Along with this quantitative increase, there is some evidence
that Chinese institutions of higher learning are becoming higher quality education and
research centres. For example, in 2003, only 14 Chinese universities (including in Hong
Kong) were ranked in the academic ranking of world universities produced by
Shanghai Jiaotong University, which ranks the top 500 universities primarily by
academic quality. No Chinese universities were in the top 200 and only 4 were in the
top 300. By 2012, 33 Chinese universities made the ranking cut-off, 6 were in the top
China, the World Economy and New Zealand | Page 30 of 90
200 and a further 6 were ranked in the top 300 (ShanghaiRanking Consultancy 2013).
Using scientific articles as an example, there has also been a rapid increase in China‘s
academic output. Kamalski and
L‘Huillier (2011) predict that China
Postgraduate Graduates
will have the highest output of
Students Studying Abroad
scientific articles of any country in
Returned Students
the world in the post-2013 years
and that the quality of those
articles are increasing as shown by
rising citation rates.
More Chinese students are
also graduating with foreign
degrees and returning to China. In
Figure 16 Number of Postgraduates and Students
2000, there were only 39,000
Studying Abroad (2000-11)
Source: NBS of China (2012:10); Unit: Thousands
Chinese students studying abroad.
By 2011, 340,000 Chinese students
were overseas studying foreign qualifications, a near ten-fold increase. The number of
Chinese overseas students returning to China has also increased from 9,121 in 2000 to
186,000 in 2011, and the ratio of returning students to students studying abroad is
narrowing. In 2000, the number of students returning after studying abroad was 15%,
the size of the number of students studying abroad. By 2011, the number of students
returning to China after studying abroad had grown to 55% the size of the total
number of students studying abroad. This demonstrates a greater proportion of
Chinese students studying abroad are returning after their studies to take up
opportunities in the Chinese economy. This facilitates China‘s global integration and
knowledge and strengthens the
capacity of the Chinese labour
Tuition and Fees
force to meet the demands of
Income from Teaching, Research etc
an advanced economy.
Figure 17 Education Funding (2000-10)
Source: NBS of China (2012:20-39); Unit: billion Yuan
Funding for education has
increased dramatically over the
last decade from under 500
billion Yuan in the year 2000
to over 2 trillion in the year
2010. This increase has
primarily been driven by
growth in the government
China, the World Economy and New Zealand | Page 31 of 90
budget from 208 billion to 1.3 trillion over the same period. Income from teaching and
research, as well as tuition and fees charged, are an increasingly important portion of
overall education funding. Some scholars even argue that China, along with the other
newly industrialised economies of East Asia, ‗have created a distinctive model of
higher education more effective in some respects than systems in North America, the
English-speaking world and Europe where the modern university was incubated‘
(Marginson 2011). As Chinese higher education to date is ranked behind the world‘s
leading universities in Europe, the United States and Japan, it remains to be seen if
higher education can develop to narrow the education and research gap. What is clear,
however, is that the state and the Chinese household are increasing the resources these
institutions have and Chinese institutions are steadily moving up the global rankings.
As China‘s economy has grown over the last few decades, the amount of resources
dedicated to research and development has also increased. The shift from low-cost
production to an economy that is driven by technological adoption and innovation is
crucial for the promotion of a high-tech industry and for moving from middle-income
to advanced economy. The National Guidelines for Medium and Long-term Plans for Science
and Technology Development, released in 2006, set the goal of becoming one of the top
three spenders on annual research and development by 2020 (along with Japan and the
United States) accounting for 2.5 per cent of annual GDP. This guideline also
anticipated China becoming the world‘s leading science power by 2050 (Xinhua 2006a).
China has outlined for itself the major strategic task of building an ‗innovationoriented country‘ (Xinhua 2006b). This is arguably the central economic development
policy of the Chinese government (Naughton 2007) and is an exceedingly difficult task
that few countries outside of the Western world and East Asia have achieved. China is
investing heavily in this goal.
Figure 18 shows the
growth of research and
development expenditure as a
‗Expenditures for research and
development are current and
capital expenditures (both
public and private) on creative
work undertaken systematically
Figure 18 R&D Expenditure by Selected Countries (1996-2012)
Source: World Bank (2013a), NBS (2012: 2-41); Unit: % of GDP
humanity, culture, and society,
and the use of knowledge for new applications. R&D covers basic research, applied
research, and experimental development‘ (The World Bank 2013a). In 1996, research
China, the World Economy and New Zealand | Page 32 of 90
and development accounted for 0.57 per cent of China‘s GDP. By 2011, China had
significantly narrowed the gap with the world‘s most research-intensive countries, and
R&D expenditure accounted for 1.84 per cent of GDP. China is well on the way to
achieving the goal of R&D expenditure of 2.5 per cent of GDP by 2020 (Xinhua
As China‘s economy has grown in absolute size, increases in R&D expenditure as a
percentage of GDP mean absolute expenditure on R&D is growing rapidly. In a short
five-year period, expenditure on R&D more than doubled from 371 Billion Yuan in
2007 to 869 billion in 2011. While a portion of this increase can be accounted for by
the growth of government spending on R&D, the majority cannot as government
funds as a percentage of R&D have actually decreased over this period. This does not
negate the role of the state as an important driver of industrial and technical upgrading
of the Chinese economy. It does, however, show that Chinese industrial upgrading is
being driven by enterprises in the market supported by the role of the state. As the
growth of exports and imports of high-tech products shows, this innovation is also
supported by foreign enterprises and institutions. This bodes well for the future of
Chinese industrial and technological upgrading and suggests innovation is increasingly
an important driver of the Chinese economy.
Table 1 Research and Development, Science and Technology (2007-11)
Expenditure on R&D (billion Yuan)
Experimental Development (percentage of total R&D)
Government Funds (percentage of total R&D)
Export of High-tech Products (billion USD)
Import of High-tech Products (billion USD)
Number of Patent Applications Granted
Source: NBS (2012) 20-41
Table 1 shows the number of annual patent applications granted over the last five
years has nearly tripled from 351,782 in 2007 to 960,513 successful patent applications
in 2011. The increasing number of patents originating in China is evidence of the
growth of innovation and enterprise upgrading. Chinese enterprises are no longer
predominantly reliant on foreign technology. Instead, the interaction and in many cases
the cooperation of foreign and domestic research institutions and enterprises is driving
industrial upgrading and a technological revolution in Chinese enterprises. This is
China, the World Economy and New Zealand | Page 33 of 90
evident in the fact that expenditure of industrial enterprises for technology acquisition
and technology reconstruction has increased dramatically in recent years.
Expenditure for acquisition of foreign technology has increased from 39.7 billion
(1,000 million) in 2004 to 44.9 billion in 2011. Over the same period, expenditure on
assimilation of technology has increased from 6.1 billion to 20 billion and expenditure
on purchase of domestic technology has increased from 8.2 billion to 22 billion.
Expenditure on technical renovation has increased from 295 billion to 429 billion
(NBS 2012:20-44). Expenditure on acquisition of foreign technology has remained
relatively consistent as expenditure for the purchase of domestic technology has grown
and the on-going technology costs have exploded. This shows the on-going role of
foreign technology in China‘s economic upgrading and the expanding role of domestic
research and technology and science and innovation.
Increased investment, however, does not automatically translate into increases in
quality output. Global innovation rankings do not place China in the top ten most
innovative countries in the world. For example, Bloomberg‘s Global Innovation Index,
which measures seven factors to give an innovation score, ranked Hong Kong the 36th
and China the 29th most innovative country in the world. China was ranked 25th on
R&D intensity, 67th on productivity, 9th on high-tech intensity, 40th on researcher
concentration, 6th on manufacturing capability, 66th on tertiary efficiency and 4th on
patent activity (Bloomberg 2013). However, there has been steady improvement. In
the 2008-09 Global Innovation Index China was ranked 37th and Hong Kong 12th
(INSEAD 2009). By 2012, China ranked 34th and Hong Kong ranked 8th (INSEAD
and WIPO 2012).
On the back of investment in education, research and technology, Chinese
enterprises are becoming more globally competitive. The growth of China‘s high-tech
industries has led to a major turnaround in the balance of imports and exports in the
field of high-tech. In 1995, China exported 10 billion USD of high-tech manufactured
goods but imported 22 billion creating a 12 billion dollar balance of trade deficit. This
deficit increased to 15 billion in the year 2000 but remarkably turned to a 21 billion
dollar balance of trade surplus in 2005 as exports of high-tech manufacturers surged
from 37 billion to 218 billion while imports only grew to 197 billion. By 2011, this
surplus had increased further to 85.6 billion as exports of high-tech manufactured
goods grew to an annual 549 billion and imports grew to 463 billion. Over the period
1995 to 2011, the share of high-tech products as a percentage of the total value of
exports has grown from 7 per cent to 29 per cent while the share of high-tech
products as a percentage of the total value of imports has grown from 17% to 27%
(NBS 2012:20-64). China‘s import-export industries are increasingly high-tech. As the
next section shows, this growth is closely linked to global value chains and foreign
direct investment flows.
China, the World Economy and New Zealand | Page 34 of 90
e. Prospects of Chinese Economic Growth
In summary, on the back of three decades of more than 8% average annual growth the
Chinese economy has significantly increased as a share of the world economy. This
major economic expansion has been driven by domestic reforms that moved China
from an autarkic centralised economy dominated by heavy industry to a dynamic
market-oriented economy and, through opening China to the world economy, through
trade, investment and people-to-people exchanges. China has experimented with a
variety of transitional institutions and created an environment conducive to the
transition from an agrarian-based economy to one in which the majority of
employment is in the productive secondary and tertiary industries.
China‘s economic growth in the past 30 years has formed a unique structure of
sources of growth and it has reached a point where the growth model is no longer
suited to contemporary challenges. A high reliance on investment to fuel capital
formation, and a high balance of trade surplus, has created imbalances in the Chinese
economy. As China moves from a middle-income to an advanced economy, these
imbalances need to be addressed. This will involve promoting domestic consumption,
growing the share of the service industry in the economy, facilitating urbanisation and
removing barriers to the realisation of economic efficiency. As evidenced by the
massive investment in and upgrading of higher education, research and development
and science and technology, this process is already well underway. China‘s investment
in human capital, both through private and public funding, is a necessary prerequisite
for this strategic shift.
Furthermore, the factors discussed above, from the general policy environment to
programmes to promote research, innovation, science and technology, and education,
from urbanisation and urban-rural integration to structural shifts and rationalisation to
generate domestic demand and consumption based growth activities, and to income
distribution system reform, are key forces that shape the direction and process of
economic reform. This transformation is, and will likely continue to, effect structural
rebalancing and growth model reorientation in the hope their can be more sustainable
sources of growth and new or enhanced types of economic activities that can provide a
sustainable basis for long-term, healthy economic growth.
As our analysis has shown, the current growth pattern and momentum can
continue for some time. However, given that it is at the end of the catch-up, rapid
growth phase, it would not be a surprise if growth slowed to an annual rate below 8%,
occasionally, or even permanently. A recent working paper from The Treasury found
similar findings arguing ‗while there are cyclical risks to China's economic performance
in the medium term, these risks are manageable; China's economic growth is likely to
ease to a more stable and sustainable rate over the next decade compared to the
China, the World Economy and New Zealand | Page 35 of 90
previous decade‘ (Bowman and Conway, 2013a). Moreover, given that the Chinese
growth model has been heavily internationally dependent (investment, markets, global
value chains), China‘s economic growth is significantly affected by the global economy.
This is especially apparent in the 2008-9 financial crisis in the United States and the
Eurozone. Long-term and fundamental confidence in the Chinese economy must
therefore be found in the direction and extent of structural rebalancing and growth
model reorientation currently underway.
Experiences of the middle income trap and the Asian economic model have shown
that significant reform and upgrading are required for a catch-up economy to move on
to become a mature or advanced economy with a balanced structure of sustainable
growth contributions, thus, meeting the challenge of modern economic development.
As our analysis has shown, there are significant tensions in these key areas of structural
rebalancing and growth model reorientation, between different interest groups,
between different aspects of reform and restructuring, between short-term growth
performance and long-term structural adjustment. These tensions can translate into
ambiguity and uncertainty amidst the bold declared moves toward reform and
restructuring. This, in turn, can have profound effects on growth activities, shaping
growth outcomes.
The previous section showed how Chinese economic growth and development has not
only increased economic output in the Middle Kingdom but has also reshaped the
nature of that activity. China has moved from a closed command economy focussed
on state building and consolidation of national borders to an open economy focussed
on international markets, attracting foreign investment and developing international
centres of science, research and technology excellence. For a developing economy, the
level of integration with and dependency on the world economy is almost without
precedence. It should come as no surprise then that this high level of integration with
such a large country is reshaping the world economy.
Using GDP-based purchasing power parity (PPP) as a measure, this period of
rapid growth has increased China‘s share of global economic activity from just over 2%
in 1980 to over 14% in 2011 (IMF 2013). Even now as economic growth has slowed in
the wake of the global financial crisis, and there is a new focus on a more sustainable
growth model, it has not slowed to the levels of growth seen in the advanced
economies and it remains well above the global average. As such, China continues to
account for an increasingly large share of world economic activity.
The economic rise of China
is as much if not more a story of
the world economy as it is a
story of China. We seem used to
seeing Chinese international
economic activities more from
the perspective of bilateral trade
relations, than of China seeking
greater presence in world
economy. Our analysis below
1980 1984 1988 1992 1996 2000 2004 2008 2012
shows that Chinese international
Figure 19 GDP Share of World Total (1980-2012)
economic activities are more
Source: IMF (2013). Unit % PPP based
of the
Chinese economy. Whether this is strategically driven or it just happened that way, the
sheer size of the Chinese economy, the international logic of its growth model and the
way economic growth is organised and promoted in China has led to the international
presence of the Chinese economy in a systemic and coherent way, with growing
China, the World Economy and New Zealand | Page 37 of 90
activities in each sector covering markets, resources, capital, technology and
production supplies on a global scale. Moreover, these activities are changing the
structure of the global economy and international economic order and affecting the
way economic activities are exchanged, managed and governed in the international
This section argues the internationalisation of the Chinese economy, whilst
important for all national economies, needs to be conceptualised as a systemic shift in
the structure of the world economy. Following the work of the WTO and IDEJETRO (2011) the section avoids a national level analysis of Chinese economic
activities and argues Chinese businesses and people are now an integral part of the
world‘s most important international production networks, particularly those in Asia.
Furthermore, the section shows how Chinese international activities, from trade in
goods and services, investment and people flows, are interlinked with trade, investment
and people flows all supporting the internationalisation of the Chinese economy.
The section proceeds in six parts. The first explores changes in the global trading
order that show an increasingly China-dominant trade order. This is followed in the
second part by an analysis of Chinese inward and outward investment flows and the
activities of Chinese enterprises abroad. The third part explores people flows, including
contract labour, migration, tourism and education. The fourth part looks at China in
regional economic order. This is followed by an examination of China as a force of
stability and movement in global macroeconomic factors, capital, money, currency,
rates and credit, before a discussion of the significance of Chinese economic activities
for the structural landscape of the world economy.
a. Trade in Goods and Services
China is a major trading nation. Its development has been driven by export-led growth,
providing capital, technology and resources. Figure 3 of the first section showed how
net exports of goods and services have made major contributions to Chinese GDP,
particularly in the middle of the first decade of this century. The following gives a
more detailed picture of the growth of China‘s share of world trade, China‘s main
trade partners and the makeup of that trade. Imports have expanded as resource needs
have increased with the rise of Chinese manufacturing. Partially completed products
have been imported into China where they are finished and then re-exported. Whether
exporting products fully made in China under a Chinese or foreign brand or exporting
partially completed products in the region‘s global value chain, the growth of Chinese
trade has been a central feature of China‘s growth model.
The growth of Chinese trade is realigning global trade patterns. This process began
China, the World Economy and New Zealand | Page 38 of 90
more than six decades ago with the
growth of Japanese trade, followed
by the Asian tigers and dragons and
the growth of Southeast Asian trade.
With the increases in Chinese global
and regional trade from the 1980s,
Asian trade has risen in 2011 to the
world‘s second largest trading
region behind Europe and ahead of
North America. While 71% of
Europe‘s exports are intra-regional
(destined for a European economy)
only 53% of Asian trade is intraregional with 16% and 17%
destined for North America and
Europe respectively (WTO 2012:23).
Asia is therefore central to the
global trading order.
Figure 20 Share of Exports in World Total (1980-2012)
Source: IMF (2013), Unit: %
Figures 20-21 show the United
Figure 21 Share of Imports in World Total (1980-2012)
States is one of the largest trading
Source: IMF (2013), Unit: %
nations globally, easily the largest
importer and the second or third
largest exporter behind China and Germany. China is the largest exporter as of 2011
but only the second largest importer trailing the United States by a long way, but
closing rapidly. The absolute growth of China‘s purchasing power will see China
become the world‘s largest importer very soon, even as China‘s per capita income
remains well below US levels. Putting the growth of Chinese trade in long historical
perspective, it becomes clear that China‘s dominance of world trade is very recent and
has occurred rapidly. Moreover, world trade in 2011 compared to 1953 has become far
more multipolar. The growth of Chinese trade has occurred in tandem with the relative
shift of trade activity away from the Atlantic to the Asia Pacific.
While China may be the largest exporter of merchandise trade, it remains only the
fourth largest exporter and third largest importer of world trade in commercial services
in 2011. China‘s 182 billion dollars of exports of commercial services in 2011 was well
behind the United States at 581 billion, the United Kingdom at 274 billion and
Germany at 253 billion. This is a reflection of the level of development of the Chinese
economy that is better suited to manufacturing exports and has yet to fully develop a
strong services sector. The 237 billion dollars of commercial services China imported
in 2011 was not that far behind the United States at 395 billion and Germany at 289
China, the World Economy and New Zealand | Page 39 of 90
billion showing the ongoing need for high-level services in China (WTO 2012:28).
Unlike merchandise trade, China remains a net importer of commercial services.
The composition of China‘s commodity trade has also changed dramatically over
the reform era. The value of primary goods exports has dropped from representing 50%
of the value of all commodity trade in 1980 and 1985 to only 5% post-2006. The major
drop occurred even though the value of primary goods exports continued to steadily
increase because of the post-1985 growth in the value of manufactured exports. From
1985 to 1990, the value of manufactured goods increased from 50% of the total value
of commodity exports to 75% and then steadily increased to 95% by 2011. Figure 22
shows the early importance of China‘s light textiles exports followed by the growth of
exports of machinery and transport equipment.
China‘s major trade
partners are in Asia with
Hong Kong, Japan and
Korea featuring prominently.
Figure 23 shows that 47% of
destined for Asia in 2011,
well down from 60% in
1994. 58% of China‘s
imports came from the
region in 2011, roughly
equivalent to the 60% share
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
in 1994. Over the same
period, Europe has increased
Figure 22 Share of Export Value by Category of Commodity (1990-2012)
Source: NBS (2012) Table 6-4
its significance as an export
destination for Chinese products from 16% to 22% of total Chinese exports and
North America has maintained a roughly 18% share. Both Europe and North America
have decreased as a share of total imports into China. Africa, Latin America and
Oceanic and Pacific Islands are becoming more important to Chinese trade, but have
started from a very low baseline.
Miscellaneous Not Otherwise Classified Products
Machinery and Transport Equipment
Light Textile Industrial, Rubber, Minerals and Metal Products
Chemical and Related Products
Breaking these figures down for 2011, we get some perspective on the size of
Oceanic and New Zealand trade with China. Of the 1,898 billion USD of total exports
from China in 2011, Oceania and the Pacific accounted for a mere 2%. Australia, the
primary destination for Chinese exports in this region, accounted for 1.79% of total
Chinese exports. New Zealand accounted for only 0.2% and the Pacific 0.17% of total
Chinese exports. Of the 1,743 billion USD of total imports into China, Oceania and
the Pacific account for 5%. Again, Australia makes up the vast majority of this at 4.74%
China, the World Economy and New Zealand | Page 40 of 90
of China‘s total imports, leaving New Zealand and the Pacific accounting for a mere
0.29% and 0.07% respectfully.
China‘s trade with its major
trade partners differs by the
composition of type of product
traded. Table 2 shows that 93% of
China‘s merchandise exports but
only 59% of merchandise imports
China‘s balance of merchandise
trade surplus comes from the
strength of its manufactured
exports. However, this trade
surplus comes primarily from
exports and limited imports to
and from the EU (27), particularly
the US and Hong Kong (Hong
Kong also re-exports many
products). However, the balance
of manufacture trade with Japan,
South Korea and Chinese Taipei
is significantly in these countries
favour. Clearly then, China‘s
impressive trade surplus is firstly
primarily made up of exports of
secondly the trade relations that
create this trade surplus are the
EU (27) and the US. These two
regions take 37% of Chinese
exports, but create 53% of China‘s
trade surplus in manufactured
product. The surplus with these
countries is well over twice the
value of China‘s total merchandise
trade surplus.
Figure 23 Share of Chinese Exports (left) and Imports (right) by
Region (2011)
Source: NBS (2012) Table 16-7
Table 2 also shows that China has a significant balance of trade deficit with the
world for trade in agricultural products and fuels and mining products. China is now a
net importer of agricultural produce in a country where over half the population still
China, the World Economy and New Zealand | Page 41 of 90
live in rural areas. Even with significant improvements in agricultural productivity, it is
unlikely Chinese agriculture will be able to feed a billion urban consumers in the
coming decades. It is highly likely China will remain a net importer of agricultural
produce creating much opportunity for countries that export value-added agricultural
product. The balance of merchandise trade deficit for fuels and mining products is
where the majority of China‘s trade deficit lies. China is a net importer of these
resources and this is the primary constraint on increases in China‘s balance of
merchandise trade surplus.
Table 2 China’s Merchandise Trade with Major Partners (2011)
EU (27)
S Korea
Fuels and
Source: WTO (2012:250 Table A22). Unit: 2011, Billion USD.
Understanding China‘s trade relations with its major trade partners also requires a
closer look at Hong Kong, which still remains the access and exit point for a large
amount of Chinese trade. Similar to the trade statistics for China, Hong Kong enjoys a
merchandise trade surplus with the EU (27) and the US largely due to exports of
manufactured products, but has a trade deficit with Asian economies, notably China,
Japan, Singapore and Chinese Taipei. However, differing from China, Hong Kong has
an overall trade deficit because it not only imports more agricultural products and fuels
and mining products than it exports, but because it also imports more manufactured
goods than it exports. In 2011, Hong Kong imported 432 billion of manufactured
products, but only exported 408 billion. China was the origin of just under half of all
Hong Kong imported manufactured goods but the destination of more than half of all
Hong Kong‘s manufactured exports (WTO 2012:252 A23).
Moreover, the level of re-exports out of Hong Kong is astounding. Re-exports are
‗products which have previously been imported into Hong Kong and which are reexported without having undergone in Hong Kong a manufacturing process, which
has changed permanently the shape, nature, form or utility of the product‘. Domestic
exports are defined as ‗the natural produce of Hong Kong or the products of a
manufacturing process in Hong Kong which has changed permanently the shape,
nature, form or utility of the basic materials used in manufacture‘ (Census and Statistics
Department 2013:I). These statistics exclude goods transiting Hong Kong on a bill of
China, the World Economy and New Zealand | Page 42 of 90
lading. WTO statistics classify 96% of Hong Kong merchandise exports in 2011 as reexports. Of the total 438 billion dollars of re-exports in 2011, 237 billion or 43% of
Hong Kong‘s re-exports are bound for China (WTO 2012:254 A24).
Put another way, Hong Kong plays an important role mediating Chinese trade
patterns with the world. Many imports to Hong Kong come from China and are reexported back to China while some are re-exported onto other countries, including the
EU (27) and the United States. The composition of Hong Kong exports has also
changed over time. In 1988, re-exports only accounted for 56% of total exports. By
2000, this had risen to 88% and to 98% by 2012 (Census and Statistics Department
2013:1). In 2011, 54% of Hong Kong‘s re-exports were destined for China, 10% for
the EU (27) and another 10% for the United States, as well as 4%, 2.4% and 1.6% to
Japan, Chinese Taipei and Singapore respectively. This shows the on-going role of
Hong Kong as an intermediary of Chinese trade with the world and adds weight to the
argument that the Chinese economy is having a large impact on world trade patterns.
China‘s balance of trade
with the world, in particular
Total Exports
Total Imports
trade in manufactured
Value of Exports of Foreign-funded Enterprises
goods with the EU (27) and
Value of Imports of Foreign-funded Enterprises
the United States is not
shows the rapid increase in
exports and imports from
around 2003 as well as a
sharp drop during the
height of the global
financial crisis followed by
Figure 24 Total Value of Imports and Exports and Value of Imports and
a rapid recovery. From
Exports of Foreign-Funded Enterprises (1978-2011)
Source: NBS (2012) Tables 6-3 and 6-12; Unit: USD $100 billion
2005 to 2008, the balance
of trade surplus increased
from 100 billion to nearly 300 billion USD. Since the global trading recovery in 2010,
China‘s balance of trade surplus has continued to narrow to around 150 billion USD.
This is still a significant amount, but it is less than half the previous surplus. Notably,
the closing of this gap is driven by a rapid increase in imports suggesting China‘s shift
to a more balanced growth model and domestic consumption is well under way.
Factoring in the rise of multinational companies and joint ownership models in
China, a far more complicated picture of the place of the Chinese economy in the
global trading order emerges. Around half of all ‗China‘s trade‘ involves foreign-funded
enterprises. In fact, from 2000 to 2005, the share of total exports from foreign-funded
China, the World Economy and New Zealand | Page 43 of 90
enterprises increased from 48% to 55%. Over the same period the share of total
imports from foreign-funded enterprises increased from 52% to 53% (NBS 2012
Table 6-12). In other words, a large part of the share of world trade with the Chinese
economy involves non-Chinese capital and businesses, either through joint enterprises,
contracting and subcontracting or directly owned foreign enterprises producing in
China and exporting out of China. This is a large share and dispels any myth that
China‘s growth strategy conforms to a mercantilist model of national economic
development. In more recent years, this share has peaked and may be starting to
decrease as China‘s domestic industries focus on building international markets and
global value chains of their own, and as some multinational companies shift
production of export industries to developing markets in Southeast Asia. By 2011, the
share of exports and imports from foreign-funded enterprises in China‘s total exports
and imports had dropped to 52% and 50% respectively.
Care is needed when analysing China‘s role in the global trading order. Clearly,
China is the world‘s largest exporter and the world‘s second largest importer, but a
large share of this trade is conducted by enterprises that are foreign-funded. In short,
China is part of the global value chain and well integrated into the world trading order.
As such, China‘s presence in global trade should not be thought of simply as an
importer and exporter of product but rather as a site of production and assembly of
many of the world‘s products by many of the world‘s companies.
Finally, another measure of China‘s role in the world trading system is the OECD‘s
measure of ‗exports of value-added‘. This measure goes further than simply tracking
trade between economies, instead focusing on a measure of export value both ‗through
direct final exports and via indirect exports of intermediates through other countries to
foreign final consumers‘. Domestic Value Added Embodied in Final Foreign Demand
is the standard OECD measure of ‗exports of value-added‘ and is designed to ‗reflect
how industries (upstream in a
value-chain) are connected to
consumers in other countries,
even where no direct trade
relationship exists‘ (OECD 2013).
Figure 25 shows industries
based in China account for the
exports of value-added. China
exported 1 trillion (1,000 million)
USD ‗exports of value-added‘ in
2008, a significant increase on the
Figure 25 Domestic Value Added Embodied in Final Foreign
Demand (2005, 2008, 2009)
Source: OECD (2013); Unit: USD Billion
China, the World Economy and New Zealand | Page 44 of 90
516 billion USD in 2005 and slightly more than the 946 billion USD in 2009 during the
height of the global financial crisis. Over this period China has closed the gap with the
world‘s largest export economy of ‗exports of value-added‘ from a shortfall of 363
billion USD to 210 billion USD, overtaking Germany and Japan in the process.
Figure 26 shows the share of
China‘s value-added exports has
changed significantly in a short
Rest of the World
four-year period. The United States,
the EU (27) and Japan accounted
for a massive 60% of Chinese value10
added exports in 2005, but by 2009,
this number had dropped to 47%.
For the first time in our
Figure 26 Share of Domestic Value Added
Embodied in Final Foreign Demand (2005economies outside of Europe, the
United States and Japan account for
Source: Source: OECD (2013); Unit: %,
the largest share of value-added
exports. The US, the EU (27) and Japan as individual economies and single markets
are still the most important final foreign demand for China, but this is slowly changing
as developing economies and newly-industrialised nations increase their capacity to
absorb Chinese exports both for final consumption and through their integration in
global value chains that link China to the rest of the world economy.
Thirty years of rapid economic growth and expansion has established China as a
major trading country and an economy driven significantly by exports. Beyond China‘s
great share of the world total of exports and imports, the strength of China‘s exports
and imports are in different industries and sectors. For example, China is strong in
imports of agricultural products and raw materials and a major source of exports of
manufacturing products. China‘s trade partners are largely in Asia where there is a lot
of trade with other countries indirectly through Hong Kong. This structure matches
well with the trade structure of countries such as New Zealand and Australia.
As part of the growth model, much of China‘s trade involves foreign funded
enterprises. This provides a natural link for trade relations to move onto investment
relations if it is not originally driven by investment in the first place. Moreover, at this
stage of economic growth, China‘s manufacturing competitiveness is transforming as
labour wages increase and increased technology is introduced. With industrial
upgrading and campaigns to meet domestic demands for growth, the role of exports in
Chinese economic growth will likely be less than in the previous decade. Investment
and capital flows are also experiencing large and globally significant change and we can
expect these flows to increase in the coming decades.
China, the World Economy and New Zealand | Page 45 of 90
b. Investment Flows and Chinese Enterprises Abroad
The growth of the Chinese economy has been facilitated by a steady flow of
international investment. This is a major and defining difference between the Japanese
model of economic growth in the post-war years and the Chinese model since the
1980s. Even today, Japan‘s balance of inward FDI and outward FDI is well in surplus
(see Figure 30). Inward FDI has not been and is still not a major driver of the Japanese
domestic economy. China, on the other hand, opened to international flows of capital
and worked hard to attract multinational companies to operate in China as part of its
growth strategy. Now that Chinese enterprises are developing local brands and looking
to secure access to resources and markets overseas, the Chinese economy is going
global through a prolonged and steady flow of overseas foreign direct investment.
Inward FDI has been
an important driver of
Foreign Loans
Direct Foreign Investment
From 1979 to the end of
Other Foreign Investment
2011, the total value of
direct foreign investments
was 1.16 trillion USD
(NBS 2012: Table 6-13).
Figure 27 shows the total
investment actually utilised
1985 1988 1991 1994 1997 2000 2003 2006 2009
over the period 1985 to
Figure 27 Total Amount of Foreign Investment Actually Utilised (1985-2011)
2011. This shows clearly
Source: NBS (2012: 6-13); Unit: USD Billion
the importance of foreign loans in the early decades of China‘s development and
opening to the world. However, from the early 1990s, FDI became the major form of
foreign investment into China. Foreign loans ceased just after the turn of the century.
The on-going growth in the amount of annual FDI utilised in China suggests foreign
investors still have confidence in making a good return on their capital even as the
state negotiates the complex and challenging shift from a middle-income to an
advanced economy. The majority of respondents to the UNCTAD survey asking
TNC‘s for the top prospective host economies for 2012-14 ranked China first in both
2011 and 2012 further suggesting China remains a top destination for transnational
investment (UNCTAD 2012:22). China‘s share of global FDI flows is beginning to
resemble the dominance of flows in and out the EU (27) and the US.
The EU27, the United States and Japan have all maintained an important share of
global FDI flows but their share is slowly decreasing. Over the 2006 to 2011 period,
their respective shares of global FDI inflows fell from 44% to 28% in the EU27, from
China, the World Economy and New Zealand | Page 46 of 90
16% to 15% in the US with considerable variation and remained negligible in Japan.
The share of FDI outflows from the EU27 dropped from 56% to 38% over the same
period but increased from 16% to 23% out of the US and increased from 3.6% to 6.7%
out of Japan. These markets remain important destinations and sources of FDI.
However, a major trend is the rise of the developing world as a destination for FDI
and the beginnings of FDI outflows out of the developing world. In 2011, the
developing world for the first time accounted for more FDI inflows than the
combined developed world, increasing its share of FDI inward flows from 33% to 51%
from 2006 to 2011. The developed world‘s share of outward FDI flows also dropped
from over 80% to just over 70% (UNCTAD 2012), showing an ongoing dominance of
OFDI by the advanced economies. These increases in the developing world‘s share of
global FDI inflows and outflows, especially China‘s increasing share, are slowly leading
to changes in the share of the stock of global investment.
Figure 28 shows the share of stock of world FDI by region. The main theme in
this figure is the on-going dominance of the developed economies in global FDI stock
but a slowly decreasing share as the developing world becomes more integrated into
global capital markets. However, some qualifiers are necessary. The measurement for
Europe, for example, is the total of investments going into all countries in Europe.
This means investments into
France from Germany are
Developing Economies
included in the investment
North America
Asia (incl. Japan)
Oceania (incl. Aust. & NZ)
total. The table does not
illustrate the inward and
investments going into and
out of Europe per se.
Likewise, for China, the
investment stock in Hong
1990 inward 2000 inward 2011 inward 1990 outward 2000 outward 2011 outward
Kong and the mainland is a
Figure 28 FDI Stock Share of World Total by Region and
Level of Development, (1990-2011)
Source: UNTCAD (2012: 173-174) Annex table 1.2; Unit: %
similar dynamics to Europe.
Asian trade and investment
more generally is, as with Europe, predominantly intraregional. Notwithstanding this,
the long-standing dominance of the advanced economies in investment is slowly
changing global shares of stock of inward FDI.
In 1990, developed economies were host to 75% of global FDI stock, representing
1.56 trillion dollars of the 2.08 trillion dollar total. This has decreased significantly to
64% or 13 trillion of the total 20 trillion by 2011, largely due to a rapid decrease in the
China, the World Economy and New Zealand | Page 47 of 90
share of FDI hosted in the United States. At the same time, the rise of developing
economies as important FDI hosts has occurred. China (including, Hong Kong, Macau
and Taiwan), the world‘s largest developing economy, has accounted for a large
portion of this increase. In 1990, China hosted 11.2% of global FDI (235 billion) and
in 2011, 9.4% (1.9 trillion). This decrease is accounted for by a decreasing share in
Taiwan and Hong Kong and is offset by an increasing share of global FDI hosted on
the mainland. This is still far behind the share of FDI hosted by developed economies,
particularly the 35% hosted by the EU27, but it represents a significant global shift in
FDI stock (UNCTAD 2012).
The share of FDI stock originating from developing economies is also increasing,
but it has a long way to go before comparing to the stock of FDI originating in
developed economies. In 1990, 93% of global FDI stock (1.9 trillion) originated in
developed economies. This has decreased to a 78% share (17.1 trillion) in 2011. China
has increased its share of outward FDI stock from 2.2% (46 billion) in 1990 to 7.4%
(1.6 trillion) in 2011 largely
due to increases in
outward investment out of
Hong Kong and steady
increases out of the
2012). As the previous
paragraphs showed, the
share of outward FDI
China FDI Inflows
Hong Kong FDI Inflows
flows are still dominated
China FDI Outflows
by the developed world
Hong Kong FDI Outflows
but China‘s shares are
increasing rapidly resulting
Figure 29 FDI Inflows and Outflows from China and Hong Kong (2006-2011) in slow changes in the
Source: UNCTAD (2012: 169-170) Annex table 1.1; Unit: USD Billion,
presence of China as a
source of global FDI.
Placing China‘s share of FDI inward and outward stock with comparable
economies, we get some idea of the rapid increases in Chinese FDI over a short 21
year period. But we also note that China is still not a major player in investment as it is
in levels of trade and GDP. Figure 30 omits data for the United States to preserve
comparative perspective with other countries. In 1990, the US share of the world‘s
inward FDI was an astounding 26% and its share of outward FDI was an even more
staggering 34%. While absolute numbers have continued to increase, the US share of
global inward and outward FDI has decreased to 17% and 21% respectively. China is
nowhere near this level of dominance of FDI stock. In fact, Chinese FDI stock
China, the World Economy and New Zealand | Page 48 of 90
remains well below the each of the US, France, Germany, the UK and Hong Kong
economies. Japan‘s share of global outward FDI stock remains far higher than China‘s,
but it is notable to see China‘s share of inward FDI stock has been consistently well
above Japan‘s.
Figure 30 shows that Chinese FDI inflows and outflows have increased steadily
since 2006. Annual Chinese FDI inflows have increased over the period 2006 to 2011
in China from 72.7 billion dollars (1,000 million) to 124 billion, in Hong Kong from 45
billion to 83.1 billion, in Macao from 1.6 billion to 4.4 billion, and dropped in Taiwan
from 7.4 billion in 2006 to 2.5 billion in 2010 with 2011 showing a negative flow. Over
the same period, Chinese FDI outflows have increased in China from 21.2 billion to
65.2 billion, in Hong Kong from 45 billion to 81.6 billion, and decreased in Macao
from 636 million to 62 million and increased in Taiwan from 7.4 billion to 12.8 billion
(UNCTAD 2012:170).
These statistics point
1990 FDI Inward Stock
2011 FDI Inward Stock
to the slow changes in 12
1990 FDI Outward Stock
2011 FDI Outward Stock
China‘s share of stock of 10
investment. China has 8
increased its share of FDI 6
inflows from around 4%
in 2006 and 2007 to
around 8% in 2010 and 2
2011, and increased its
share of FDI outflows
from around 1% in 2006
and 2007 to around 4% in
Figure 30 Global Share of FDI Inward and Outward Stock by Select
Economies (1990 and 2011)
2010 and 2011. Over the Source: Calculated from UNTCAD (2012: 173-174); Unit: per cent of total
same period, Hong Kong
has increased both its share of FDI inflows and outflows from 3 to 5%. If this trend
continues, China will, over time, increase its share of global FDI stock. As with the
global shift occurring over the last few decades that has seen the developing world
become, for the first time in history, the largest recipient of flows of global FDI,
increases in flows of FDI in and out of China will slowly change the dominance of the
advanced economies in global capital flows. This has important implications for how
the world economy will function, the directions of trade and the nature of economic
The stock of FDI in China is dominated by Asian economies. By 2011, Asia
accounted for 77% of the stock of FDI in China. The remainder came from Latin
China, the World Economy and New Zealand | Page 49 of 90
America (10.8%), Europe (5%), North America (3.1%), Oceanic and Pacific Islands
(2.3%), Africa (1.4%) and other (0.2%). The major economies investing in China in
Asia include Hong Kong with a 61% share of total FDI actually utilised in China, as
well as Japan (5.5%), Singapore (5.3%), South Korea (2.2%) and Taiwan (1.9%). In
Europe only Germany invested
FDI Actually Utilised in China
close to 1% of the total share of
FDI actually utilised in China and
the remaining 4% European share
was spread across a wide range of
European economies. For Latin
America, the Virgin Islands and
Cayman Islands made up the bulk
of Latin American investment in
Islands and
China on 8.4% and 1.9% of the
world total. In North America, the
United States represented 2% of all
investment in China. In Oceania
and the Pacific Islands, Samoa
Chinese OFDI Stock
1.8% of global
investment in China in 2011. These
statistics show a large amount of
investment is channelled through
Hong Kong and intermediary
investment areas such as the Virgin
Islands, Cayman Islands and 2% of
FDI in China enters through Samoa.
The ‗foreign direct investment
actually utilised‘ in 1995 already
reflected the dominance of Asian
Figure 31 Source of FDI Actually Utilised in China and
Chinese OFDI Stock by Region (2011)
economies investing in China. The
Source: NBS (2012) Tables 6-14 and 6-19
big investors in the mid-1990s
included Hong Kong (53% of the total), Japan (8.5%), Taiwan (8.4%), United States
(8.2%), Singapore (4.9%), South Korea (2.8%), United Kingdom (2.4%), Germany (1%)
and France and Italy (each less than 1%). In Oceania, Australia accounted for 0.6% of
‗foreign direct investment actually utilised‘ in China in 1995 and New Zealand 0.05%
(NBS 1996: Table 16-15). Comparing these shares to shares in 2011, we can see that
Asian economies, particularly Hong Kong, have increased their dominance of
investment in Asia even as Japan and Taiwan‘s shares have decreased. Moreover, the
United States and Europe have dropped their share. However, the growth of
China, the World Economy and New Zealand | Page 50 of 90
intermediary regions suggests that much of this investment may now be channelled
through the Virgin Islands, Cayman Islands or Samoa (NBS 2012: Table 6-14).
To date, the majority of Chinese OFDI has been destined for Asia. Using data
from the NBS (2012), which omits Hong Kong, Macao and Taiwan, of the total stock
of recorded Chinese OFDI at the end of 2011 (424.8 billion), 303.4 billion (71%) is
stocked in Asia, including 261.5 billion in Hong Kong and 10 billion in Singapore. The
nature of the Hong Kong and Singapore economies suggests much of this investment
then moves to other parts of the world. The remaining 120 billion of China‘s OFDI
stock is spread over the globe, with 55 billion (13%) in Latin America (though 50
billion of that is ‗in‘ the Cayman Islands and Virgin Islands), 24.5 billion (5.8%) in
Europe (less than 1% of total OFDI stock is held in the UK, Germany, France or
Russia respectively), 16.2 billion (3.8%) in Africa, 13.5 billion (3.2%) in North America
and 12 billion (2.8%) in Oceania. Australia alone is host to 11 billion of the 12 billion
Chinese OFDI stock in Oceania, a figure larger than the 8.9 billion OFDI stock in the
US and far larger than the 185 million in New Zealand (NBS 2012).
Looking at OFDI from Hong
Kong, the British Virgin Islands
holds 43% of the ‗position at end of
year‘ of ‗outward direct investment‘
in 2010, some 3.2 billion Hong
Kong dollars. Mainland China also
accounts for 42% showing a strong
two-way investment relationship
between Hong Kong and the
mainland. These two aside, the
Inward Direct Investment Position Outward Direct Investment Position
remaining countries make up small
Figure 32 Hong Kong Inward and Outward Foreign Direct
portions of Hong Kong‘s stock of
Investment Position (2012)
Source: NBS 2012: Tables 24-33 and 24-34; Unit: %,
outward direct investment, and
include Bermuda, United Kingdom,
Luxembourg, Cayman Islands, Singapore, Thailand, Liberia and Malaysia (NBS 2012:
Table 24-34).
British Virgin Islands
Furthermore, 37% of the ‗position at end of year‘ of ‗inward direct investment‘ in
2010 to Hong Kong was from Mainland China. Coming a close second, on 32%, is the
British Virgin Islands, followed by the Netherlands (7.1%), Bermuda (6.5%), United
States (3.6%), Japan (2.2%) and the United Kingdom, Singapore and Cayman Islands
at more than 1.5%. Interestingly, the Cook Islands have 67.3 billion Hong Kong
Dollars of investment in Hong Kong (0.8% of the total) (NBS 2012: Table 24-33).
FDI flows and stocks in Hong Kong remain dominated by the Mainland and by
China, the World Economy and New Zealand | Page 51 of 90
companies hoping to enter China through the financial and economic hub and to do
business in Hong Kong where regulatory practices are more familiar and well enforced.
The growth of trade and investment relations and the strength of the Chinese
economy have created opportunities for Chinese enterprises to go abroad, perhaps the
most visible presence of Chinese global economic activity. The stated government
objective since the new century began has been to encourage Chinese enterprises to
invest overseas and to increase their presence in foreign markets, including through the
promotion of domestic Chinese brands. Since 2005, this policy has begun to bear some
fruit. The rationale behind China‘s ―go abroad‖ strategy is to expand the presence of
China‘s enterprises into consumer markets over the world and to acquire overseas
enterprises to facilitate that expansion and secure resource trade. The state continues
to facilitate this process and actively promote investment through policies such as the
National Development and Reform Commission’s Catalogue for the Guidance of Foreign Investment
Industries (2011). These policies also continue to encourage and prohibit investment
flows in and out of China. The recent US-China Strategic and Economic Dialogue in
July 2013 started negotiation of a new investement agreement between the two
countries to use pre-establishment national treatment with a negative list to futher
promote and facilite investment.
For New Zealand this strategy will impact our economic relations with China. For
example, China has an increasingly challenging strategic goal of ensuring food security
for a large urbanising population. Chapter 4 of the Medium Term Plan for National Food
Security (2008-2020), Important Tasks for Ensuring Food Security, devotes a section to
Strengthening International Food Cooperation that directs companies to ―Strengthen
intergovernmental cooperation and establish long-term and stable agricultural industry
(food) cooperation relationships with some important agriculture producing nations.
Bring into effect the agricultural ‗go abroad‘ strategy, encourage domestic enterprises
to ‗go abroad‘, establish a stable and reliable system of sourcing food imports, [and]
increase the ability to safeguard domestic food security‖ (CCCPC and SC 2008).
Chinese firms are keen to acquire both technology and knowhow involved in New
Zealand‘s dairy sector and to own farmland and processing facilities that currently
export to China.
But we should also remember that New Zealand has a relatively tiny trade and
investment relationship with China and Chinese investors are not exclusively interested
in food security. Table 3 shows Chinese overseas direct investment (ODI) stock at the
end of 2011 by sector. Over 142 billion USD is invested in the ‗leasing and business
services‘ sector, 33.5% of total ODI stock. This is followed by 67.4 billion USD
invested in ‗financial intermediation‘ (15.9%) and 67.0 billion USD invested in ‗mining‘
(15.8%). 27.0 billion USD is invested in ‗manufacturing‘ (6.4%) and 25.3 billion USD is
invested in ‗transport, storage and post‘ (6.0%). The stock of Chinese overseas direct
China, the World Economy and New Zealand | Page 52 of 90
investment at the end of 2011 in ‗agriculture, forestry, animal husbandry and fishery‘
was 3.4 billion USD or 0.8% of the total.
Table 3 Chinese Overseas Direct Investment Stock by Sector
Agriculture, Forestry, Animal
Husbandry and Fishery
Overseas Direct
Share of Total
Investment (ODI)
ODI Stock at
Stock at End of 2011
End of 2011 (%)
(million USD)
Production and Supply of
Electricity, Gas and Water
Wholesale and Retail Trades
Hotels and Catering Services
Transport, Storage and Post
Information Transmission,
Computer Services and Software
Financial Intermediation
Real Estate
Scientific Research, Technical
Service and Geologic Prospecting
Management of Water
Conservancy, Environment &
Public Facilities
Services to Households and
Other Services
Health, Social Security and Social
Leasing and Business Services
measuring Chinese economic
activities abroad is to look at
Chinese statistics on ‗economic
countries or regions‘ (NBS 2012:
table 6-21). These statistics show
that the number of contracted
projects with foreign countries or
regions has increased from 138 in
1980 to 920 in 1990 to 2,597 in
2000 to 9,544 in 2010. The value
of turnover fulfilled in these
contracted projects has grown
from 123 million USD in 1980 to
8.4 billion USD in 2000. In 2011
the value of turnover fulfilled in
these contracted projects hit an
all-time high of 103.4 billion USD
even though the number of
contracted projects fell to 6,381.
Overseas investment from
China will likely increase in the
coming decades due to the
growing perception in Beijing that
Source: NBS (2012) Table 6-20. Unit: millions of USD, %.
Chinese companies need to secure
resources, market share and access to skills and technology and due to the strength of
the Chinese economy and Chinese enterprises. This strategy is hardly unique to China,
but some have argued the nature of Chinese business practices is creating new
dimensions to the global business environment and that it brings businesses in
advanced economies into contact with Chinese business practices unfamiliar to them.
As with Japan‘s expansion of FDI in the 1980s, the growth of mergers and acquisitions
of Chinese enterprises overseas has created some backlash, particularly in advanced
economies where strategic and mercantilist views have led to indirect forms of
protectionism. Already however, names such as Sinopec, China National Petroleum
Corp, Chery, Huawei or China Investment Corporation (CIC) are becoming well
known in developed and emerging markets. Others, such as Non-Ferrous China Africa
Culture, Sports & Entertainment
Public Management & Social
China, the World Economy and New Zealand | Page 53 of 90
(NFCA) or Investor Group, will likely become better known as their investments
In summary, capital flows and investment into and out of China show different
patterns to China‘s trade flows. Capital inflow as investment in China has been a key
enabling factor in Chinese economic growth and has been traditionally higher than
capital outflow. FDI has become the dominant form of foreign investment over
foreign loans which were crucial in the early years of the reform period. Capital
outflow and Chinese overseas investment has also been increasing in recent years but
as a share of overall global investment, Chinese overseas investment is still small. Of
this small but rapidly growing Chinese overseas investment, an even smaller amount
goes to Oceania, where Australia takes the lion‘s share.
c. People Flows
Since the early European incursions into China in the 19th Century, China has
fluctuated between an internationalist and an isolated outlook. The forced opening
post-1840 Opium War created unprecedented internationalist areas in China. Shanghai,
perhaps the most vivid example of China‘s partial integration in the international
community in the 19th Century, was a potent mix of foreign commerce, education and
ideas with some of the best, brightest and most industrious and entrepreneurial
Chinese of the era. It was also a city of decadence that bore the worst of industrial
excess for some at the bottom of society and the Paris of the East for a select few.
After the establishment of the PRC, China once again became isolated from the
majority of the world, in particular the established markets in Europe and America,
where the most advanced industrial, educational, science and institutional knowledge
was rapidly expanding. China was also severed from its relations with many of its
Asian neighbours. The post-1978 Dengist reforms once again began to open China to
the world, encourage the flow of information into China and to promote collaboration
and cooperation through international business, government relations and people-topeople exchanges.
Just as many scholars of Meiji Japan point to the importance of sustained and
proactive absorption of global technology, philosophy, science, technology and
institutions for Japanese development, the economic development of contemporary
China rests heavily on the absorption of foreign information and the integration of
China into the global flow of people and knowledge. Even though we live in the
information age where people-to-people exchanges through travel are no longer
necessary to exchange information, these face-to-face exchanges still play an important
role bringing people into contact with each other, for building relationships and trust
and for opening people to new information. China has spent three decades absorbing
China, the World Economy and New Zealand | Page 54 of 90
information and participating in global epistemic communities.
The first area of note when looking at people flows is Chinese labour abroad. The
number of people classified as abroad at end of year for labour services and contracted
projects has grown considerably over the last few decades. Figure 33 shows large
growth from the early 1990s particularly for labour services. Since 1992 the number of
Chinese personnel abroad
for labour and contracted
Persons Abroad by the End of Year
projects has increased from
(Contracted Projects)
130,000 to 800,000. This is a
Persons Abroad by the End of Year
considerable international
(Labour Services)
presence that is closely
linked to the domestic
Chinese enterprises going
global either through aid
work or contracted work
tied to government loans
1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
from China.
Figure 33 Persons Abroad for Labour Projects and Contract Services
Chinese migration is also
Source: NBS (2012) Table 6-21; Unit: thousands
on the rise. United Nations
Population Department statistics on international migrant stock show large increases in
the number of people migrating to China and very large numbers of Chinese migrating
abroad. In 1990, 376,000 migrants resided in China. By 2010, this number had nearly
doubled to 686,000, a faster increase than the increase in the total number of migrant
stock in the world from 155 million to 214 million over the same period. In 1990
China was the destination for only 0.24% of the world‘s migrant stock. This share had
increased only marginally to 0.32% in 2010. Excluding Hong Kong and Macao, the
major origin countries and regions for migration to China include South Korea, the
Philippines, Brazil, Indonesia, the United States and Viet Nam.
The size of the migrant stock in China remains only 8% the size of Chinese
migrant stock overseas which has increased from 4.3 million in 1990 to 8.4 million in
2010. The major destination for Chinese migrants is East Asia. In 2010, Hong Kong
accounted for 2.2 million Chinese migrants, Japan 585,000 and South Korea 296,000.
The stock of Chinese migrants in Japan has more than tripled from 150,000 in 1990.
The United States and Europe have also experienced major increases from 610,000 to
2 million and from 234,000 to 887,000 respectively. South-Eastern Asia has increased
its share of Chinese migrant stock from 553,000 to 846,000. The size of the Chinese
migrant stock in Australia and New Zealand has also increased rapidly, though to a far
China, the World Economy and New Zealand | Page 55 of 90
smaller size than in the above regions.
Tourism is an
Migrant Stock at Mid-Year in China
Chinese Migrants at Mid-Year
important driver of
Country of
Region of
1990 (%)
2010 (%)
1990 (%)
2010 (%)
2,417 (1)
6,758 (1) Africa
17,319 (0)
54,568 (1)
integration. In 2012,
12,090 (3) 93,225 (14) Central Asia
4,687 (0)
7,291 (0)
China was the 4th
3,756 (1)
11,137 (2) Eastern Asia
2,335,783 (55) 3,381,327 (40)
4,496 (1)
12,152 (2) Southeast Asia 552,780 (13)
846,311 (10)
21,305 (6) 47,392 (7) South Asia
166,354 (4)
185,888 (2)
4,547 (1)
7,058 (1) Western Asia
2,511 (0)
15,919 (0)
tourists as measured
28,155 (7) 98,052 (14) Europe
234,739 (6)
886,882 (11)
South Korea 148,141 (39) 179,646 (26) Latin America
49,102 (1)
85,421 (1)
5,839 (2)
18,877 (3) North America 785,099 (18) 2,594,324 (31)
Hong Kong was the
4,737 (1)
10,202 (1) Oceania
104,015 (2)
374,496 (4)
10th largest earner of
16,962 (5) 34,474 (5) - Australia
87,633 (2)
244,867 (3)
Viet Nam
18,063 (5) 25,179 (4) - New Zealand
9,188 (0.2)
118,591 (1.4)
international tourism
685,775 World
receipts and enjoyed
Source: UNDP (2012) Tables 1 and 7
a 10% increase in
2012. The volume of
international trips by Chinese travellers has grown from 10 million in the year 2000 to
83 million in 2012. This has corresponded with rapid growth in Chinese expenditure
abroad as the Chinese currency appreciates, Chinese citizens have more disposable
income and the state relaxes restrictions on foreign travel.
Table 4 Chinese Migrant Stock by Destination and Origin (1990 and 2010)
An eight-fold increase in expenditure from the year 2000, including a massive 40%
increase in 2011, has seen China rise to become the number one tourism source
market with an annual expenditure of 102 billion USD on international tourism in the
year 2012. In 2005 China was only the 5th largest spender on international tourism but
by 2012 it had surpassed expenditure from Italy, Japan, France, the United Kingdom
and the second largest spender on tourism, the United States (83 billion USD in 2012).
China is leading the increasing importance of emerging markets in the international
tourist market (UNWTO April 2013). A recent State Council document, Outline for
National Tourism and Leisure (2013-2020), strengthens efforts to ensure employees take
annual leave and strongly supports outbound tourism further suggesting the number of
international Chinese tourists is likely to increase (UNWTO March 2013).
Chinese international tourists are predominantly Asia-focussed. The only nonAsian economies ranking in the top ten destinations for Chinese international tourists
are the United States (#5) and Russia (#10). Rome is the only non-Asian city in the
top ten most popular city destinations ranking tenth. This trend has increased over the
last decade. From 2000 to 2010, Asia and the Pacific increased the share of Chinese
China, the World Economy and New Zealand | Page 56 of 90
international tourists from 62% to 67% while Europe decreased its share from 25% to
24%, the Americas dropped from 10% to 8% and Africa dropped from 3% to 1%
(Frederik 2012). Annual expenditure by Chinese tourists is now over 100 million. This
is perhaps the most vivid example of an important emerging Chinese international
economic activity that is ‗Asian-centred‘.
In recent years, more people
Figure 34 Foreign Entrants to China by Nationality (2012)
are also visiting China, though Source:
China National Tourism Administration (2012); Unit: Million
far below the number of
Chinese going abroad. Annual
United States arrivals in China
have increased by half a million
in the short period from 2005 to
2012, growing from 1.6 million
to 2.1 million. Over the same
Other Asia
period, annual New Zealand
arrivals have increased from
78,365 to 128,300 and annual
German arrivals have increased
from 454,859 to 659,600. Asia
continues to dominate arrivals
accounting for just over 60% of all arrivals in 2005 and 2012 (China National Tourism
Administration 2006 and 2012). Figure 34 shows the on-going dominance of Asian
visitor arrivals to China. Korea alone accounted for 15% of all annual arrivals to China
in 2012, followed by Japan (13%), Malaysia (5%) and Mongolia (1%) and Singapore
(1%). The only non-Asian countries of equivalent arrival shares in 2012 were Russia‘s
2.4 million arrivals (8.9%) and the 2.1 million arrivals from the United States (7.8%).
Annual New Zealand arrivals in 2012 accounted for 0.5% of the total, slightly above
the 0.39% of total arrivals in 2005.
Figure 16 in section one of this paper showed that the number of Chinese students
studying abroad has increased significantly over the first decade of the new century
from 97,756 in 2000 to 769,894 in 2011. Over half of these students are postgraduate
students. The number of returning students each year has also increased significantly
from 9,121 in 2000 to 186,200 in 2011. This is significantly increasing China‘s ability to
converge on international best practices in a range of academic fields and has exposed
many of China‘s current and future leaders to life, culture and systems of government
and economy in other parts of the world. This is greatly facilitating China‘s foreign
relations, international trade and their ability to expand their domestic companies into
foreign markets. Sadly, this approach is only beginning to pick up in the advanced
economies where students are more likely to study in other advanced economies than
China, the World Economy and New Zealand | Page 57 of 90
to experience life in emerging markets such as China. By most accounts, it is these
markets that will become the largest economies on the globe and new centres of
excellence in a variety of fields. A lack of attention to China will severely hamper the
ability of the advanced economies to engage and to partake in emerging global value
chains or markets centred on Chinese economic activity, such as the Chinese
international tourist market, in the coming decades.
d. China in Regional Economic Integration and Cooperation
The increasing presence of Chinese enterprises in foreign markets, the growing
strength of Chinese brands and the domination of Chinese manufacturing are perhaps
only the early manifestation of China‘s global economic presence. We should expect
far more in the coming decades from a country with good fiscal and economic policy,
a country that values education and technological innovation and a country that
contains 1/5th of all humanity. As China‘s economic expansion has progressed, it has
become increasingly interdependent on the world and particularly the regional
economy. It should come as no surprise that the Chinese Government has in recent
years put a concerted effort into developing bilateral, plurilateral and multilateral
agreements on trade, investment and cooperation as well as becoming an active
participant in regional forums on security and environmental issues.
As Table 5 shows, since the turn of the century China has been proactive in
seeking out partners to sign economic cooperation agreements with. This has led to
the signing of seven bilateral FTAs, one plurilateral FTA with ASEAN, a series of
economic partnership and cooperation agreements between the Mainland and Hong
Kong, Macau and Taiwan, and efforts to update the Bangkok Agreement. China is
currently negotiating seven FTAs, one of which could be the most important
plurilateral economic agreement for Northeast Asia, the China-Japan-Korea or CJK
FTA. China and India are also discussing the possibility of an FTA. On top of this is a
lot of activity in ASEAN to push forward a Regional Cooperation Framework
Agreement (RCEP) involving the ten ASEAN countries and China, Japan, Korea,
India, Australia and New Zealand. At the same time, the Trans-Pacific Partnership is
negotiating expansion from the original four members, including New Zealand, which
could in time also include the Chinese economy.
This flurry of bilateral and regional activity is a response to both China‘s increasing
stake in global and regional trade and investment, as well as the complexity of doing
business across borders when standards and institutions differ, and to the stalling of
multilateral agreement in the Doha Round of World Trade Organisation negotiations.
Similarly, the goal of an Asia-Pacific Economic Cooperation (APEC) FTA has also
been postponed in recent years. Since China joined the WTO in 2001, it has learnt a
China, the World Economy and New Zealand | Page 58 of 90
great deal about international
trade negotiation and the
potential harm of being isolated
from any emerging trade or
regulatory/standards bloc. We
can expect China to continue to
be an active joiner and more of a
shaper of these types of bilateral
and plurilateral agreements in the
near future.
China is also playing a
stronger role in the International
Monetary Fund, the World Trade
Nations and at the regional level
is very active in APEC and a
whole range of ASEANorganised
including ASEAN+3, the East
Asian Summit, the ASEAN
Regional Forum and the ASEAN
Defence Ministers Meeting.
These forums are driven by the
‗ASEAN way‘ of cooperative
security, open regionalism, soft
consensus (Acharya 1997). China
Tajikistan and Uzbekistan to
create the Eurasian security
Cooperation Organization in
Table 5 China's FTAs, Economic Cooperation Agreements and
Negotiations (as of 2013)
Bilateral Free Trade Agreements
China-Chile FTA
China-Pakistan FTA
China-New Zealand FTA
China-Singapore FTA
China-Peru FTA
China-Costa Rica FTA
China-Iceland FTA
China-Switzerland FTA
Multilateral Agreements
China-ASEAN FTA (framework agreement; trade in goods;
trade in services; investment)
Chinese Economic Cooperation and Partnership Agreements
2003 to 2009 Mainland and Hong Kong Closer Economic Partnership
Arrangement (CEPA) + supplement agreements
2003 to 2009 Mainland and Macau Closer Economic Partnership
Arrangement (CEPA) + supplement agreements
(Cross-Strait) Economic Cooperation Framework Agreement
Preferential Trade Agreement
1975, 2006
Asia-Pacific Trade Agreement, formerly the Bangkok
Agreement (Bangladesh, China, India, Lao, Korea & Sri
Under Negotiation (since)
China-Gulf Cooperation Council (GCC) FTA Negotiations
China-South Africa Customs Union FTA Negotiations
China-Australia FTA Negotiations
China-Norway FTA Negotiations
China-Switzerland FTA Negotiation
China-Korea FTA Negotiations
China-Japan-ROK FTA Negotiations
Under Consideration (since)
China-India Regional Trade Arrangement Joint Feasibility
Source: MOFCOM (2013a, 2013b)
e. Global Economic Governance and Management
Much has been said about China‘s increased influence in global economic governance.
Indeed, along with 30 years of rapid economic growth, expansion and
China, the World Economy and New Zealand | Page 59 of 90
internationalisation, China has acquired great influence in international financial
organisations and arrangements. While many developing countries are more actively
and effectively participating in the working of international financial organisations
China has gone one step further to gain a decisive role in these organisations that
regulate and govern international economic activities. For example, China‘s voting
rights in both the World Bank and IMF have substantially increased. China‘s voting
share in the IMF has increased from 2.93% in 2006 to 6.1% in 2012. China has
significantly increased its influence in global economic governance.
Beyond the greater role and influence in international financial institutions, China
has become an important force shaping the global conditions for macroeconomic
management. China‘s influence in this regard was first shown in its role and handling
of the Asian financial crisis in 1997-98 when it chose not to devaluate its currency as a
counter-measure against the competing devaluations in response to the collapse of
currency exchange regime of many countries in the region. China‘s unique role can also
be seen, but in a slightly different way, in the recent credit and financial crisis in the
United States and debt and budget crisis in the Eurozone. China‘s stimulus package
and surge in imports helped stabilise global trade and finance at a critical time for the
world economy. Global markets and investors react to how China responds to
macroeconomic situations, which gives China great power to influence the movement
of markets.
A healthy balance of trade combined with large flows of FDI into China has
created large current account surpluses and the accumulation of foreign exchange
reserves. In 2007, the current account surplus reached 10% of GDP but fell sharply to
3% in recent years (OECD 2013). These two factors have driven major growth in
China‘s foreign exchange reserves since the turn of the century. In 2000, foreign
exchange reserves were less than 200 billion dollars. By 2006, they had accumulated to
one trillion dollars, reached two trillion by 2009, and 3 trillion by 2011. Growth then
slowed in the 2011 and 2012 years but in the first quarter of 2013 increased again to
3.44 trillion dollars. China has also become the largest single holder of U.S.
government debt.
China has developed a great number of sets of bilateral and multilateral
arrangements for currency clearance and use of RMB for transactions. Even though
China‘s currency is not formally convertible on the existing international currency
exchange regime, many countries have chosen to make their currency directly
convertible with RMB, taking advantage of the stronger RMB and the benefit of a
broader basis for currency stability and predictability. Australia is one of the latest
examples and New Zealand is following this trend in its own negotiations.
An important element in the accumulation of foreign currency reserves has been
China, the World Economy and New Zealand | Page 60 of 90
the low value of the RMB. The basic argument in the policy of maintaining an
undervalued currency is that like Germany, Japan, South Korea and Taiwan previously,
pursuing an export-led strategy with an undervalued currency provides a short-term
competitive advantage to promote rapid economic development. This policy appears
to be successful in these economies just as the model of ‗import substitution
industrialisation‘ that involved an overvalued currency and mechanisms to block
imports from advanced economies resulted in low growth and poor economic
development. However, while this has proven to be an effective catch-up strategy, the
experience of other countries becoming middle-income economies suggests it is
unsustainable in the medium and long-term due to domestic and international
economic imbalances.
The world‘s largest foreign exchange reserve has led some analysts to argue China
is running the risk of too much liquidity in the domestic market that could or is
creating poor investments and leaving local government in particular with large
amounts of bad debt on their books. At the international level many argue China‘s
current account surplus is the primary driver of advanced economies‘ current account
deficits and that this global imbalance is unsustainable in the medium term. Moreover,
some analysts argue that currency manipulation in the PRC needs to stop in an effort
to enforce some kind of Plaza Accord-like agreement to force faster appreciation of
the value of the RMB.
Moreover, internationalisation of China‘s currency is steadily taking place. In recent
years, more economies are setting up currency swaps with Beijing. This year, France,
Brazil and Australia added currency swap agreements and on-going negotiations with
the Bank of England in the UK suggest advanced economies are now vying to be
leading cities for international trade in RMB. These efforts, however, remain well
behind Singapore and Hong Kong, which operate as offshore Yuan centres. China
already has currency swap agreements with over twenty countries including South
Korea and Malaysia. Singapore achieved a currency swap as early as 2010 and recently
agreed to double the amount of RMB held. New Zealand set up a currency swap in
2011 (New Zealand Herald 2011) and Australia recently reached a similar currency
swap agreement in March 2013 followed by clearance for Australian banks to engage in
direct currency trading in April 2013. Japan and the US also enjoy direct currency
trading but only Japan also has a currency swap agreement since late 2012.
However, internationalisation of the RMB is only in the early stages and the USD
still remains the global reserve currency. The value of the RMB remains pegged to a
bundle of currencies, the most important of which is the United States Dollar (USD).
Trade and investment in China is still dominated by use of the USD. Only 10% of
trade between China and France, for example, is finalised in RMB. It will take decades
for the RMB to be internationalised and it is hard to predict if it could ever become a
China, the World Economy and New Zealand | Page 61 of 90
reserve currency. Notably, even as Japan‘s economy grew to become the world‘s
second largest economy, the Yen never became a global reserve currency. China, with
its on-going challenges in domestic economic reform, the on-going intervention in
exchange rates and the challenges of developing offshore Yuan centres means that it
will be some time before we can ascertain if the RMB will become an international
reserve currency. Perhaps it is more likely that in the coming decades, a bundle of
currencies including the USD, the Euro, the Yen and the Yuan, will act as a type of
reserve currency.
China‘s huge capacity and the new international mechanisms it has developed to
manage international finance, currency, credit as well as trade and investment gives it
great ability to influence global markets, capital movement, currency arrangements and
product flows. We are likely to see this influence increase in two ways as the Chinese
economy matures. First, when China‘s economy is strong, Chinese economic actors
and the state that represents their interests can have direct influence on global
economic outcomes. This can act as a stabilising force in the global economy, due to a
healthy diversification of sources of capital, credit and production that minimises
others exposure to risk. Second, China‘s role in supporting, enforcing and developing
global and regional governance of the world economy is likely to increase in the
coming decades to match its share of and its interests in world economic activities.
f. China, in and of the World Economy
The analysis above has shown that after 30 years of rapid economic growth and
expansion, the Chinese economy is an integral part of the world economy. Chinese
international economic activities have become a predominant dimension of the global
economy in trade, investment, people flows, regional integration, global economic
governance and management. More importantly, Chinese international economic
activities are a wide ranging, comprehensive, coherent extension of the Chinese
economy. The internationalisation of the Chinese economy brings new factors of
production to the global economy, affects the structure and dynamics of the world
economic system and how economic activities and relations are managed or governed,
and provides structural challenges and opportunities.
This emergence remains contingent on the maintenance of a benign international
environment. As such, the maintenance of positive relations with the United States and
Europe as well as with surounding Asian countries is an important dimension to the
internationalisation of the Chinese economy. At present, the long-term trends are
positive, but in the short-term there is likely to be some tension requiring deft
diplomacy in China and abroad if disruption to international production networks and
supply chains are to be avoided. The last few decades suggest China and the existing
China, the World Economy and New Zealand | Page 62 of 90
economic powers have managed any tensions and the new transition in a manner that
has created an environment for these networks to flourish and for the Chinese
economy to grow.
China‘s economic rise should, therefore, be viewed as bringing in a major structural
shift in the global economy. Such a shift reflects, first, the fact that China has become a
global centre of manufacturing. This has evolved as envisaged under the neo-liberal
theory of the 1980s and 1990s that deployment of factors of production is best
determined and driven by market allocation for maximum global efficiency. This is
where multinational corporations can deploy parts of their production process in
optimal locations and outsource their business and operations globally. Global
manufacturing concentration in China creates a significant challenge for the global
economy where the political economy of economic growth and development is still
organized at the national level.
Manufacturing means employment and income for societies organised at the
national level. This is a critical challenge, particularly for advanced economies which
have increasingly been losing manufacturing competitiveness to China. Manufacturing
concentration in China can therefore be seen to be contributing to the ―imbalances‖ in
the global economy and significant economic, social and political problems in
advanced economies that will require new policies and a more developed global
division of labour to be remedied. Recently we see some ―rebalancing‖ of the global
economy as US companies move parts of their supply chains closer to their consumer
markets in the west through a process of near-shoring. However, as consumption
levels continue to grow in Asia, this trend is unlikely to lead to the removal of Asia
from the supply chains of the world‘s largest producers. In fact, manufacturers will be
looking to be close to consumer markets in Asia.
Global manufacturing concentration also requires global access to markets,
resources, capital and supply chains. While this furthers China‘s integration into the
world economy, it also leads to inevitable tensions between China and other countries
over market access, business competitiveness, resource control and respective
positions in value and supply chains. This structural shift reflects the presence of
Chinese international economic activities and the institutions, mechanisms and
arrangements through which they affect the global economy, brings new substance to
the world economic system, broadens opportunities and incentives as well as risks and
uncertainties to the existing international economic order, and provides a more
pluralist and dynamic institutional environment for the global economy.
This structural shift finally reflects the fact that a great part of the global economy
is affected or driven by China and indeed related to the internal development of the
Chinese economy and the structure and dynamics of Chinese economic growth. The
China, the World Economy and New Zealand | Page 63 of 90
Chinese economic growth model clearly has had a shaping effect on the structure and
direction of international activities in the past, with capital investment into China and
manufacturing exports out of China. The emergent new direction and structure of
economic growth, particularly under the grand programme of structural rebalancing
and growth model reorientation, will bring new dynamics and purposes to international
activities. Whether we will see more overseas investment and less export growth from
China, more enterprise, business and people from China or less of this are issues
clearly affected by which direction internal reform and restructuring go in the years to
come and how other actors in the world economy respond to China‘s changing role.
China has become an important site of economic activity and a driver of world
economic growth with far reaching implications for New Zealand. The world economy
of the 20th Century has been shaped by a transformative US-Euro economic system
that is likely to continue to sustain its impact. The 21st Century, however, is already one
where other economies of significance are matching this impact. The Chinese
economy in particular will likely continue to increase its global presence. The rise and
structural transformation of the world‘s most populated economy will have far
reaching impacts on the existing system of political economy, many of which will be
hard to predict. This presents New Zealand with a dynamic and structurally evolving
international environment and the opportunity to consider what that means for New
Zealand. How New Zealand fits into this changing, dynamic global economy, and how
it should strategically position itself to best serve New Zealand interests in the longterm, remains highly debated. Such discussions will involve important choices in
economic and development policy and new modes of international economic strategy.
The first two sections of this paper focussed on two aspects of Chinese economic
activity. The first section looked at the drivers of China‘s re-emergence as a national
economy of global significance and the major challenges of development ongoing in
China. The second section showed how such a large economy and one so integrated
into the world economy has already had a transformative impact on the structure of
the world economy, but that China‘s global impact has a further way to run. This final
section asks what all this means for New Zealand economy and society. New Zealand
is an internationalist but small economy that is highly dependent on the world
economy. As a small economy, the state must live with changes in the world economy
by adapting to them, preferably in a proactive manner and with good strategic vision.
The growth of the Chinese economy has the potential to be the most significant
change in the world economy since the formation of the modern New Zealand state.
The economic rise of China is therefore a significant turning point in New Zealand‘s
relationship with the world economy that presents a range of new challenges and
The New Zealand economy has of course faced major changes in its relations with
the world prior to the recent growth of China. The first such strategic shift came as
Britain no longer represented as lucrative an export market and then negotiated to join
the European Community in the 1970s. New Zealand lost some preferential trade
relations that had grown out of British colonialism and the close links that were
maintained with Britain after the adoption of the Statue of Westminster in the post-
China, the World Economy and New Zealand | Page 65 of 90
war years. This relationship provided New Zealand exporters with a stable and
prosperous market, comfortably sending roughly 80% of New Zealand exports to the
United Kingdom. The New Zealand economy was born of dependence on the United
Kingdom for integration into the international flow of trade, services, finance and
knowledge. Loosing this preferential relationship forced New Zealand to seek new
trade and investment partners and to take a more internationalist approach to finding
New Zealand‘s place in the world.
What emerged was a strategy to diversify and enter markets in Europe, Australia
and the Americas and to develop strong economic relations with the emerging markets
in Asia. Today, Australia, Europe and the Americas remain important economic
partners for New Zealand. The economic rise of Asia, however, has provided the
greatest new opportunity for developing new markets for New Zealand products, and
is an important new source of capital, imports and increasingly skilled labour and
businesses. Relations with Asian economies require negotiating transactions with nonAnglo-Saxon societies involving much learning on the part of New Zealand businesses
and government. At the same time, New Zealand‘s domestic economy has slowly
adapted to a changed ethnic makeup, the dominance of Asian imports and the
presence of Asian businesses.
Ultimately, the challenge created by slowing traditional markets, such as the United
Kingdom, was the shock needed for New Zealand policymakers and businesses to
diversify their focus on the world economy and to actively seek out new economic
partners. In retrospect, this had a positive impact on government by forcing it onto the
front foot at a time when the emerging markets of East Asia presented the most
opportunity for expanding exports and purchasing more efficiently produced goods
for the New Zealand market. Through this process, New Zealand trade negotiators
have successfully developed a strategy for promoting New Zealand exports by seeking
out trade and investment partners in the region, and aggressively negotiating
preferential trade agreements at the bilateral and plurilateral level to provide most
favoured nation status to New Zealand exporters and to link New Zealand businesses
to the dynamism of the newly emerging Asian economies. Three decades of domestic
structural reform in New Zealand have created a more open, internationalist and
competitive business environment that has made New Zealand an attractive economic
partner for many economies in Asia.
The second major strategic shift for New Zealand came as the rise of Japan
signalled the end of singular Euro-American dominance of the global trading order.
Growing economic dependence on Japan as a market for New Zealand products, the
growth in Japanese investment in New Zealand, and the increasing prevalence of
Japanese tourists, students and migrants, created New Zealand‘s first taste of
significant economic relations with non-European/North American partners. Many
China, the World Economy and New Zealand | Page 66 of 90
predicted Japan would soon surpass the United States as the world‘s largest and most
important industrial economy in the 1980s. Fear of Japanese economic expansion and
concern at Asian business practices were common. However, during the early 1990s,
the Japanese economy experienced major financial crisis on the back of the oil shocks
in the 1970s, the Plaza Accord in the 1980s and the hangover from decades of
industrial policy and inappropriate investment. A severe banking crisis was averted
only by the state taking on large debt obligations. Today, Japan remains the world‘s
third largest economy and one of New Zealand‘s top 5 trade partners, but Japanese
growth has slowed considerably curtailing the rapid growth in New Zealand
opportunities in the Japanese market.
Some commentators take the view that the impact of the growth of the Chinese
economy on New Zealand‘s economic policy and business relations will somehow
follow what occurred with Japan. As the argument runs, ―hysteria‖ over the Japanese
economy, such as calls for learning Japanese language and active promotion of
exploration of the Japanese market, subsided with the slowdown and collapse of
Japanese growth. Surely then the economic rise of China will follow a similar pattern?
This view is however mistaken for two important reasons.
Firstly, Japan‘s economy in the early 1990s was at a very different stage of
development than the China of today. By the time Japanese growth slowed, it had
completed an amazing economic transformation from a devastated economy in the
post-war years, where over half the population remained rural, to a dynamic and highly
advanced urban economy with leading technology, research and innovation and
impressive export market saturation all over the globe. Japanese growth slowed in
response to a maturing of the economy, the culmination of decades of development
and the saturation of the domestic market. Just like the other advanced economies in
Europe and North America, we should not expect a mature economy to present
rapidly growing markets. Instead, we should expect these markets to remain significant
and stable destinations for New Zealand products and sources of imports, capital,
skilled labour and technological innovation. China, on the other hand, is still
developing and the drivers of economic growth, just as in Japan in the second half of
the 20th century, and in Europe and North America even earlier, are still running their
course. This suggests China will continue to expand its economic presence for much a
longer period.
Secondly, size matters. Japan is home to some 127 million people or 1.8% of
humanity gathered on a series of large islands that are not naturally abundant in
resources. The level of development Japan has achieved is a remarkable feat and
testimony to the good management, diligence and high level of human capital in Japan.
However, as the large development gaps in technological, scientific and organisational
fields between advanced economies and the developing world are reduced, economic
China, the World Economy and New Zealand | Page 67 of 90
fundamentals like population size once again become significant. In 2010, the Chinese
economy surpassed the size of the Japanese economy with a population more than ten
times the size of Japan‘s, a significant feat at the national level but less significant on
the level of individual productivity. Similarly, as China‘s economy approaches the size
of the United States economy, the average productivity of Chinese workers needs to
only reach just under a fifth of the average United States‘ worker for China to be more
productive at the national level than the United States. China, the world‘s most
populous nation, therefore, has more potential to impact the world economy than the
development of Japan and even the prior development of the United States.
China‘s economic resurgence presents New Zealand with a series of unknowns
that must be grappled with and planned for. The New Zealand economy has never
traded in a world where China, India, or more broadly Asia, has been the major region
of economic activity even though ‗New Zealand and Australia are geographically really
an extension of Asia into the southern seas – Australasia‘ (Alley 1986). Prior to the
industrial revolution, however, China and India dominated world economic output.
New Zealand only became integrated into the global trading order after European
industrialisation, commercial trade and political and military power supplanted this
dominance. New Zealand began to trade in the British Empire and was linked to
China through the Euro-American treaty port system and New South Wales in the 19th
Century at the apex of Chinese economic decline. In the very early years, China and
Australia dominated New Zealand trade.
After a century and a half, we have returned to this pattern of trade relations but
the overarching British order has been replaced, first by a bipolar cold war order in the
post-war years and then by the period of US unipolarity. Most scholars expect China‘s
growing and deepening economic relations with New Zealand, and its impact on
global affairs, to increase along with its economic rise, and suggest this presents some
challenges for New Zealand (see Elder and Ayson, 2012). The structural change in the
international economic system also gives New Zealand the opportunity to strategically
think about how to position itself in the world economy, how to manage our economic
relations with China and how to develop a broader set of relations with countries in
the region. The imperatives of the dynamic and evolving international economic
system also means our China focused strategic adjustment in our economic and
development policy and in our international economic activities and relations could
lead to an over-dependency on China and the Chinese economy. This could spell risk
if China does not continually grow and the world economic system is not transformed
further toward a China dominant if not China centric economic order. This is a
situation for New Zealand with little historical precedence but one nevertheless that is
before us.
China, the World Economy and New Zealand | Page 68 of 90
a. The Growth of China in the New Zealand Economy
Like most countries around the world, the growth of New Zealand‘s economic
relations with Asia has been rapid. In 1990, only 24% of merchandise imports to New
Zealand came from Asia, but by 2010, this had grown to 43%. By 2010, Asia was easily
the largest origin of New Zealand imports, well ahead of Europe (16.5%) North and
Central America (12.3%) and Oceania (18%, including Australia). Similarly, but not as
pronounced, Asia is now the destination for the largest regional share of New Zealand
exports. In 1990, 30% of New Zealand merchandise exports went to Asia. This had
grown to 38% by 2010, well ahead of Europe (11.8%), North and Central America
(11.3%) and Oceania (25%) (ADB, 2011). Asia has become a major focus for New
Zealand‘s trade relations on the back of decades of economic growth and
development. China is increasingly the major focus of that broader Asian relationship.
New Zealand-China relations have developed steadily since diplomatic ties were
established in 1972, but not until the turn of the century has the economic relationship
really flourished. This relationship is, as with other economies, primarily driven by the
rapid growth in the Chinese economy. New Zealand has put a great deal of effort into
nurturing the political relationship to facilitate trade and economic cooperation. Both
sides refer to the ―four firsts‖ as
Table 6 Goals of the New Zealand China Strategy
Retain and build a strong and resilient political relationship with
economic China;
relationship: New Zealand was Double two-way goods trade with China to $20 billion by 2015;
the first country to agree Grow services trade with China (education by 20%, tourism by at
bilaterally to China becoming a least 60%, and other services trade) by 2015;
member of the World Trade Increase bilateral investment to levels that reflect the growing
commercial relationship with China;
Grow high quality science and technology collaborations with
Zealand was the first country to China to generate commercial opportunities.
recognise that China had Source: NZTE and MFAT (2012)
established a market economy
system; New Zealand was the first OECD country to begin negotiating a Free Trade
Agreement (FTA) with China in November 2004; New Zealand was the first OECD
country to sign a FTA with China in April 2008.
The New Zealand-China FTA (Government of New Zealand and China 2008) in
particular represents an important acknowledgement by the New Zealand Government
that the Chinese economy will have significant implications for New Zealand‘s
economic prosperity. More importantly, it is a proactive step designed to facilitate
economic relations between the two economies and to provide the best opportunities
available for New Zealand businesses dealing with Chinese partners. By 2016, all trade
from China to New Zealand will be duty-free. By 2019, over 96% of trade from New
China, the World Economy and New Zealand | Page 69 of 90
Zealand to China will be duty free. Chapters on investment, education, science and
technology, and regulatory cooperation ensure the FTA will continue to impact the
New Zealand-China economic relationship in the coming years (MFAT 2010).
In February 2012 the New Zealand Government released its ‗China Strategy‘
(NZTE and MFAT 2012) to coordinate government direction and promote strategic
economic engagement with China. Table 6 lists the five goals contained in the short
strategic document. This is the beginning of a comprehensive China strategy. This
report argues the bilateral goals within the existing strategy can be complemented by
recognition of the significance of the growth of the Chinese economy in the world
economy and acknowledgement of how this is shaping New Zealand‘s economic place
in the world. A more comprehensive strategy would not only proactively position New
Zealand to make the most from the growth in Chinese domestic consumption, but
also look to position New Zealand well in this systemic shift in the global economy. As
the following segments show, these objectives are not mutually exclusive. A China
strategy should grapple with systemic changes in the world economy at the same time
as continuing to pay attention to the bilateral relationship that has expanded
dramatically in recent years.
relations with China have increased
significantly since the turn of the
United Kingdom
century, primarily in the area of
increased trade, but other areas are
beginning to pick up. Over a tenyear period from 2002 to 2012,
annual exports to China to the year
to June have more than quadrupled
from 1.4 billion New Zealand
dollars (NZD) to 6 billion NZD.
Figure 35: Value of New Zealand Exports to Top 5 Trade
Annual exports to China have
Partners (2002-2012)
Source: Statistics New Zealand (2012); Unit: Billion, NZD
grown by 4.6 billion NZD, with 4
billion NZD of that growth
occurring in years following the FTA coming into force. Exports to Australia have
grown by 3.9 billion NZD over the same period. Annual exports to Australia remain
New Zealand‘s largest export market by more than 3.5 billion NZD. The remaining
three of New Zealand‘s top 5 trade partners have decreased their contribution to New
Zealand export earnings. Merchandise exports to China have grown from the
equivalent of 0.8% of New Zealand‘s nominal GDP in 2000 to 3.3% in 2012, driven
primarily by growth in dairy and forestry production exports (Bowman and Conway,
China, the World Economy and New Zealand | Page 70 of 90
However, the composition of exports to China lacks diversity and thus increased
risks. Over 90% of New Zealand exports to China are primary products, led by dairy
and timber, as well as meat, wool and seafood (Goff 2013). The opportunity to
strengthen our trade with China by exporting more value-added products and by
inserting our businesses in the international production networts located in Asia, and
thus diversifying our risks, remains an important challenge for New Zealand businesses.
More exports of processed agricultural products can provide further opportunity for
growth in New Zealand exports to China. For example, both Fonterra and Synlait are
supplementing the sale of milk solids to China with sales of New Zealand produced
milk powder products. Fonterra has a major share of the market for cheese in
restaurants in China and anyone who has stayed at a hotel in China will be familiar
with the dominance of Anchor butter. Knowledge of the Chinese consumer‘s tastes
wants and needs, as well as their buying preferences, their perception of ‗Brand New
Zealand‘ and their preference for how products should be presented, can facilitate
greater sales of value-added New Zealand products.
New Zealand businesses should also seek opportunity to participate in Asia‘s
international production networks. Rakon is a good example here. Rakon makes crystal
oscillators used in smart phones. They partner with a Zhejiang company and create a
product that is a major component in the rapidly expanding smartphone market. As
most smartphones are produced in international production networks with
manufacturing centred in China, Rakon have moved their production to China to
facilitate integration into these
production networks. Whether
United Kingdom
through joint ventures and 9
Chinese 7
companies or going it alone, New 6
Zealand businesses can create high 5
value products from New Zealand 4
commodities, either in New 2
Zealand or China, that appeal to 1
the Chinese consumer. Moreover, 0
New Zealand companies can find a
role in Asia‘s production networks
Figure 36: Value of New Zealand Imports by Top 5 Trade
Partners (2002-2012)
if they understand how these
Source: Source: Statistics New Zealand (2012); Unit: Billion,
networks function and are up to
date with what opportunities exist.
The growth of China as a source of imports has been even more rapid. The value
of imports from Australia, Japan, the United Kingdom and the United States have
remained stable over the last decade with only Australia and the United Kingdom
China, the World Economy and New Zealand | Page 71 of 90
recording slight increases. Australia has remained a significant source of New Zealand
imports with an annual value of 7 billion NZD. Annual Chinese imports have grown
by 5 billion NZD from 2.2 billion NZD in 2002 to 7.3 billion NZD in 2012. Chinese
imports are now the largest single source of imports into New Zealand overtaking
Australia in the 2012-year to June.
New Zealand‘s economic relations with China are in many ways similar to most of
the developed world. Chinese trade with our other major trade partners has grown just
as rapidly as it has with New Zealand. China is Australia‘s largest trade partner.
Exports to China have grown from $8.8 billion in 2001 to $77.1 billion in 2011, an
annual growth of over 25%. Australia‘s exports to China in 2011 were dominated by
resource and energy commodity exports (80.9%). China is Australia‘s largest individual
two-way goods and services trading partner. In the 2011-12 year, China accounted for
20.4% ($127.8 billion) of total Australian trade. Japan accounted for 12.1% ($75.7
billion) and the United States 9.0% ($56.7 billion). In the same year China accounted
for 26.1% ($82.5 billion) of Australian goods and services exports and 14.6% ($45.3
billion) of Australia‘s goods and services imports (Australian Government 2012).
China is the United States‘ third largest trade in goods partner. In 2012, China‘s
share of total US imports in goods reached 19% or 426 billion USD of the 1.275
trillion USD total. China‘s share of US exports in the same year reached only 7% or
111 billion of the 1.547 trillion USD total (United States Census Bureau 2013). China is
the US‘ largest source of imports and the third largest export destination. As with the
rest of the globe, China has a large balance of goods trade surplus with the United
States, over 295 billion USD in 2012. Japan‘s largest trade partner is China. China
overtook the United States as Japan‘s largest export market in 2009 on the back of real
declines in exports to the US and steady growth in exports to China. The Chinese
market purchased 20% of all Japanese exports in 2011. China is also the second largest
source of Japanese imports, ahead of the Middle East, accounting for 21% of total
imports in Japan in 2011 (Statistics Bureau of Japan 2012). The United Kingdom, once
New Zealand‘s largest trade partner and origin of models of social, economic and
political organisation, is now only New Zealand‘s fifth largest trading partner with
exports and imports each remaining below 2 billion NZD over the last decade. China
was the 9th largest export market for the United Kingdom in 2011, growing by 21%
from the previous year, and the 3rd largest source of imports, growing by 7.1% from
the previous year.
We can see that the growth of the Chinese economy has impacted all of our major
trade partners significantly. This has important implications for New Zealand. First,
China‘s economic rise is creating systemic change in the world economy not just
changes in New Zealand‘s patterns of trade. In real numbers, the significance of New
Zealand‘s increased trade with China pales in comparison to the growth of US,
China, the World Economy and New Zealand | Page 72 of 90
Japanese and even Australian trade with China. Second, the level of economic
interdependence New Zealand has with China cannot be measured in our bilateral
relations alone. Any change in China‘s economic presence globally will not only have a
direct impact on New Zealand through our strong trade relations, but also an indirect
impact through our other major trade partners who are also heavily interdependent
with the Chinese economy.
Furthermore, New Zealand is a very small economy but the Chinese economy is
large. This creates an asymmetrical economic relationship with a series of important
considerations for New Zealand policymakers. China may be New Zealand‘s largest
source of imports and second largest export market, but New Zealand‘s economic
significance for the Chinese economy is in no way comparable. New Zealand trade
accounts for only 0.2857% of total Chinese imports and 0.1968% of total Chinese
exports. New Zealand‘s share of Chinese overseas foreign direct investment (OFDI) in
2011 was a mere 0.004% excluding any investment through Hong Kong or the Virgin
Islands. As a comparison, Australia holds a 4.74% share of Chinese imports and a 1.79%
share of Chinese exports and is host to 2.6% of Chinese OFDI.
This asymmetry is partially obscured by the level of development in each country.
The stereotypical developed-developing economy relationship is turned on its head in
the New Zealand-China case because New Zealand is far more dependent on Chinese
trade than China is on New Zealand trade. In this sense, New Zealand businesses must
work hard to maintain a presence in China and to brand New Zealand products in a
way that is attractive to Chinese consumers. As China has become a larger market and
international interest has increased, thus increasing competition for market share, it has
become harder for New Zealand companies to do just that.
In summary, the economic rise of China presents New Zealand with a major
strategic shift in its global trading relations that is the logical extension of New
Zealand‘s increasing economic relations with Asia. The Free Trade Agreement in 2008
symbolised our efforts to facilitate trade with China, and develop a clear strategic
approach to engaging the world‘s largest developing economy. At the same time,
however, New Zealand‘s major trade partners have also increased their economic
interdependency with China. Chinese economic activities have created systemic
changes in the world economy that New Zealand policymakers and businesses should
watch carefully. China‘s impact on New Zealand trade will be much more than what is
evident in our bilateral relations. All of New Zealand‘s major trade partners have
strong trading relations with China. Any slowdown or growth in the Chinese economy
will have a large impact on New Zealand patterns of trade with all our major trade
partners, not just with China. Furthermore, New Zealand businesses should be aware
of the international production networks centred in China and Asia and seek a place
within them.
China, the World Economy and New Zealand | Page 73 of 90
b. Deepening Economic Relations
This part argues New Zealand‘s economic relations with China reflect the changing
nature of China‘s international economic presence and that New Zealand is adapting
to these changes. It identifies a series of areas that are likely to become more
important as Chinese economic development reconfigures trade, investment and
people flows and as China‘s international economic impact deepens. These areas are
bilateral investment, people-to-people flows, cooperation in research, science
technology and agriculture, and cooperation in regional and global economic
management and governance. As recent research shows the increasing importance to
New Zealand of growth spillovers from China (Osborn and Vehbi 2013) we argue for
more attention to those markers of deeper economic integration with China. Moreover,
this part makes two further arguments. First, economic activity in today‘s world
Table 7 New Zealand-China Investment Stock (2007-12)
interlinked. Services,
At 31 March
PRC Investment Stock in New Zealand
Direct Investment Stock
flows of people
Portfolio Investment Stock
should therefore be
Other Investment Stock
Total Investment Stock
seen as supporting
Estimated FDI
Hong Kong (SAR) Investment Stock in New Zealand
Direct Investment Stock
Zealand‘s economic
Portfolio Investment Stock
Other Investment Stock
relations with China
Total Investment Stock
are far broader than
Estimated FDI
(1067) (1149)
our bilateral relations
Taiwan Investment Stock in New Zealand
Direct Investment Stock
Portfolio Investment Stock
Previous sections
Total Investment Stock
have shown that the
Estimated FDI
level of investment
New Zealand Direct Investment Stock
In the PRC
economy relative to
In Hong Kong (SAR)
In Taiwan
c (20)
c (n/a)
c (n/a) c (109)
c (17)
c (115)
New Zealand Total Investment Stock
expenditure remains
In the PRC
high. While not the
In Hong Kong (SAR)
In Taiwan
major component of
Source: Statistics New Zealand (2012), C = confidential, N/A = calculation not
domestic investment,
available, () = estimate. Unit: millions NZD
foreign direct investment (FDI) has been an important driver of Chinese economic
growth. Moreover, FDI in China has linked the advanced economies to global value
chains and production and assembly networks embedded in China. This ‗networking
Other Investment Stock
China, the World Economy and New Zealand | Page 74 of 90
effect‘ has been a very important part of how the Chinese economy has become
integrated into the world economy and how the existing advanced economies have
benefited from Chinese growth.
Notably however, New Zealand‘s total direct investment stock abroad in 2007
included very little investment stock in China. Only 40 million NZD or 0.19% of New
Zealand‘s total direct investment abroad was invested in China (Statistics New Zealand
2012). This number has increased slightly to 112 million NZD in 2012, representing
0.46% of total New Zealand direct investment abroad. Even more concerning
however, is that New Zealand not only invests little in China relative to other advanced
economies, which is understandable due to relative economic size, but that the share of
New Zealand‘s total investment abroad that is destined for China also remains small.
The 545 million NZD invested in Hong Kong is also only 2.2% of total New Zealand
OFDI. This is a very low level of New Zealand OFDI in China at a time when other
advanced economies have secured their economic relations and linkage to the
increasingly China-centred production networks in Asia. As a comparison, New
Zealand OFDI in other major trade partners is much higher. Australia holds 52% of
New Zealand OFDI stock, the United States 17% and the United Kingdom 4%. Japan,
like China, is a major trade partner but only has 22 million of New Zealand OFDI.
New Zealand businesses can trade with Asia but find it hard to invest there.
The previous sections also showed how Chinese overseas foreign direct investment
(OFDI) is beginning to play a more significant role in global flows of capital and that
Chinese enterprises abroad are beginning to increase their presence and to stimulate
the development of more China-centric global value chains. Again however, New
Zealand has benefited only marginally from this trend. New Zealand‘s share of
Chinese overseas foreign direct investment (OFDI) in 2011 was only 0.004% (NBS
2012). By 2012, only 93 million NZD of direct investment stock came from China, a
minority 0.1% share of total direct investment in New Zealand. Hong Kong direct
investment in New Zealand was 989 million or 1% of direct investment stock in New
Zealand. In the same year total investment stock from China in New Zealand was 1.86
billion NZD or 0.6% of total investment stock in New Zealand (Statistics New
Zealand 2012). These numbers show Chinese investment in New Zealand is not only
low by international standards, but also low in comparison to investment from New
Zealand‘s other major trade partners.
Building the investment relationship is therefore an important aspect of deepening
overall economic relations with China and linking the New Zealand economy to the
international production networks throughout Asia. Investment however, especially
investment in land and productive industries, will take time to develop. The New
Zealand public take time to warm to investment from new economies as shown in the
public debate stimulated by the investment in the bankrupt Crafar Farms by Shanghai
China, the World Economy and New Zealand | Page 75 of 90
Pengxin. This created a large public backlash at Chinese investment in one of New
Zealand‘s most productive industries, the dairy industry. Notably, investments by
Bright Dairy into Synlait, and Yili and Yashili into dairy processing did not elicit the
same public reactions or the purchase of Fisher and Paykel by Chinese whiteware
manufacturer Haier. Ultimately, the debate created through Chinese investment is
healthy. Strategically, it brings the opportunity for the Government and the Courts to
consider how investment in New Zealand from China and other places can benefit the
New Zealand economy by ensuring it can provide jobs, business activities and through
linking the New Zealand economy to China and the broader supply chains in Asia.
There is a need, however, to facilitate a deeper discussion on how foreign
investment from China impacts the New Zealand economy and to create the
understanding that it is not possible, or desirable, to only trade with China. In today‘s
world economy, sustainable economic relations are built not only on trade relations but
also through services, investment and people flows. The media and academia have an
important role to play increasing the public dialogue and awareness of the impact of
these investments on the New Zealand economy and by illustrating the systemic
changes in the world economy brought on through the internationalisation of Chinese
economic activities. Just as investment brings people in each country closer and
represents a deeper and more sustainable economic relationship, the flows of people to
and from China support these investment and trade activities.
As the previous section showed, Chinese economic development has resulted in an
increasing flow of tourists, students and migrants globally. Here the New Zealand
service industry has developed some capacity to attract these groups from China.
There is, however, less evidence to suggest New Zealanders are taking the opportunity
to travel to China and engage with this new centre of global growth.
216,832 or 8% of the total 2.6 million short-term overseas visitors to New Zealand
in the year to April 2013 were permanent residents of China. A further 27,392 shortterm visitors were from Hong Kong and 20,176 were from Taiwan. Of the 1.2 million
short-term visitors to New Zealand who arrived for the purpose of holiday/vacation,
158,080 (13%) were from China. Chinese holidaymakers are now the second largest
group of international tourists in New Zealand, still well behind Australia‘s 444,544.
Just three years ago Chinese tourists were only the fourth largest tourist group. From
the 2012 year to April to the 2013 year to April Chinese tourist arrivals increased by
34.5% or 40,528. This is by far the largest real increase at a time when most tourist
arrivals to New Zealand from most other countries are stagnant or reducing.
The growth of China as a source of international tourist earnings has been
dramatic. Previous sections showed that Chinese tourists are now the largest spenders
on international tourism (102 billion USD in 2012). Tourist expenditure is a significant
China, the World Economy and New Zealand | Page 76 of 90
driver of the New Zealand economy. The slowdown in visitor arrivals from many parts
of the world has increased the significance of Chinese tourist spending. Chinese
tourists are now the second largest tourist market by expenditure. In the year ended
March 2013, Chinese tourists spent 673 million NZD, a 42% increase on the previous
year. China has grown from New Zealand‘s fifth largest tourist market in 2009 to the
second largest market. Australia remains the largest market, with 1.6 billion in
expenditure in the year to March 2013.
The China Market Review undertaken by the Ministry of Business, Innovation and
Employment projects the Chinese market has potential to grow even further and
highlights a number of important changes in the New Zealand tourism industry. These
include becoming more ‗Asia-ready‘, targeting the market better and developing highend tourist offerings for the Chinese market in order to meet the vast potential of the
world‘s largest and still growing tourist market (MBIE 2013). The New Zealand tourist
industry is well on the way to grow tourist trade with China by 60% from 2012 to 2015
(NZTE and MFAT 2012) but some changes in New Zealand service provision will be
required to attract and satisfy these new service users. This is a radical change in New
Zealand‘s visitor demography.
Such a radical change requires new skills and knowledge. Previously, tourist
operators in New Zealand had the advantage of sharing the same language or at least a
similar western cultural background with the majority of tourist visitors to New
Zealand. The growth of Asian tourism, in particular the recent rapid growth in Chinese
tourists, requires a new set of language and cultural skills. This can be as simple as
knowing a few words of welcome in Chinese (as all Chinese operators in China know
at least a few words of English or Japanese) and having an understanding of cultural
norms. It also means having an understanding of what the tourist consumer needs and
wants. This could be as simple as providing rice cookers in camping grounds or as
intricate as understanding eating patterns and the style of touring practiced in China.
Chinese tour operators in the New Zealand market should be studied and partnered
with to facilitate the provision of New Zealand tourist services to Chinese visitors.
Along with increasing short-term visits, the Chinese share of permanent and longterm arrivals to New Zealand has also increased. According to the United Nations
Development Programme (2012), the stock of Chinese migrants in New Zealand has
increased from 9,188, just 0.2% of the 4,252,389 total Chinese migrants in 1990, to
118,591 or 1.4% of the 8,432,427 total in 2010. Statistics New Zealand records China
as the third largest source of New Zealand‘s permanent and long-term arrivals (12
months or more, permanent and returning New Zealand residents). In the 2013-year
to April, there were 7,894 permanent or long-term arrivals to New Zealand from
China, representing 8% of the New Zealand total.
China, the World Economy and New Zealand | Page 77 of 90
Table 8 Arrivals in New Zealand by Top 5 Countries of Permanent Residence (2011-2013)
Short-term Overseas Visitor Arrivals (year to April)
45 1,161,476
44 1,171,504
100 2,615,821
100 2,616,292
Permanent and Long-term Arrivals
Country of last
Permanent Residence Number
Number %
1. Australia
2. United Kingdom
3. China (PRC)
4. India
5. United States
Source: Statistics New Zealand
Country of last
Permanent Residence
1. Australia
2. China
3. United Kingdom
4. United States
5. Japan
Change 12-13
48,668 28.9
-27,176 -12.6
8,628 12.9
Change 12-13
2,480 18.1
Immigration and an ageing population in New Zealand, as well as the growing
numbers of New Zealand born Asians, are shifting the ethnic makeup of the country.
‗Asian‘ is now the fastest growing ethnic category in New Zealand census data
estimates and projections. In the 1996 New Zealand Census, 194,800 people identified
as Asian, just over 5% of the national total. In the 2006 Census this number had more
than doubled to 404,400, or 9.6% of the total population. By 2026, in just over a
decade, medium range projections estimate that 791,200 people will identify as Asian
in New Zealand, representing more than 14% of a total estimated New Zealand
population of 5.6 million (Statistics New Zealand 2013).
The China Strategy released in 2012 also made the goal of growing services trade
with China in education by 20% from 2012 to 2015. China is already the largest source
of foreign students in New Zealand with 21,000 enrolments in New Zealand in 2010.
90% of these students are in the tertiary sector. 6,000 of the total 17,000 international
students enrolled in New Zealand universities are Chinese students. Chinese students
in New Zealand are estimated to contribute $600 million to the New Zealand economy
annually (NZTE and MFAT 2012). Chinese students in New Zealand make a large
contribution to New Zealand growth and funding of the tertiary education sector.
Increasing the number of Chinese students in New Zealand will require New Zealand
institutions to reach out and be better known in China, especially as our main
competitors in Europe, North America and Australia aggressively target the Chinese
overseas student market and as Chinese institutions increase their standards of
education provision.
This may require a more concerted effort on the part of New Zealand education
providers to establish a stronger presence in China through joint marketing (Brand
New Zealand) and by establishing New Zealand campuses. There seems to be great
China, the World Economy and New Zealand | Page 78 of 90
need to ensure the experience of Chinese students in New Zealand creates a positive
reputation for our institutions in terms of quality of education received and level of
pastoral care. The quality of experience is not just important for New Zealand‘s
reputation in China, but is also important for retaining the best and the brightest of
Chinese graduates here in New Zealand. Finally, mutual recognition of qualifications,
particularly practical skill qualifications, could make New Zealand qualifications more
attractive to Chinese students. There is good reason to be positive about the growth of
service trade with China in these areas, but it will require structural adjustments in the
New Zealand service industry.
Chinese citizens have increasingly ventured to New Zealand for tourism, education
and migration, but this positive engagement has not been reciprocated by New
Zealanders. The numbers of New Zealanders engaging with China has not grown as
rapidly. This is in part due to the asymmetry of the New Zealand-China relationship,
but also reflects an ongoing deficit in Asia literacy and knowledge in New Zealand and
a lack of understanding of the systemic changes occurring in the world economy.
Today, China is just as important economically as our traditional partners. New
Zealand businesses and people also need to put in far more effort to reach any sort of
parity in understanding this new global actor. This is in part due to cultural similarities
with the Anglo-Saxon world (Australia, United Kingdom, United States and Canada),
which traditionally dominated New Zealand‘s economic relations, but it is also due to
the rapidity of the transformation of China and the world economy and the growth of
East Asia and China as a centre of global economic activity.
For example, China is New Zealand‘s second largest export market and largest
source of imports, but just as New Zealand businesses have a very small share of New
Zealand direct and portfolio investment in China, New Zealanders are also less likely
to travel to China than to New Zealand‘s traditional economic partners. China remains
only the 6th largest destination for short-term New Zealand-resident traveller
departures with only 68,000 departures for China in the year to April 2013. This is only
3.1% of all short-term New Zealand-resident traveller departures in year to April 2013,
a slight drop on the 3.3% share of short-term departures for China in the year to April
2011. Australia (45%), the United States (6%), Fiji (5%), the United Kingdom (4%)
and the Cook Islands (3.3%) remain more popular short-term destinations. Permanent
and long-term departures show a similar trend. China remains New Zealand‘s fourth
largest destination in the 2013 year ended April with 2,452 permanent and long-term
departures for China. This is just under 3% of the total New Zealand share.
Looking to cooperation in research, technology and agricultural development,
there are large opportunities for leveraging New Zealand‘s strong reputation in a
number of fields that are slowly emerging. This is an area where the asymmetric
economic relations between China and New Zealand are moderated by New Zealand‘s
China, the World Economy and New Zealand | Page 79 of 90
high levels of all-round education, research and agribusiness skills and technology. This
advantage is unlikely to remain as pronounced in the future as China‘s R&D budget
and quality of provision increases and as China‘s agricultural sector transitions to an
industrial and commercial sector. The final goal of the New Zealand China Strategy is
to ‗grow high quality science and technology collaborations with China to generate
commercial opportunities‘. The priority areas identified for this goal include ‗food,
health and biomedical sciences, environmental science, and high technology platforms‘
(NZTE and MFAT 2012). A Joint Funding Mechanism of 2 million NZD has been
established to kick-start this process.
The 2008 China-New Zealand FTA also included a chapter devoted to cooperation
in areas of economic cooperation, small and medium sized enterprise, labour and
environmental cooperation as well as technical support on food safety and biosecurity
programmes and cooperation. The Environmental Cooperation Agreement established
cooperation in areas of management of water environment, coastal ecological
conservation and pollution control, air pollution control and monitoring,
environmental awareness and education, management of disposable waste,
management of chemicals, environment and trade and biodiversity conservation
(Government of New Zealand and China 2008). China and New Zealand have also
entered a partnership at the request of the Cook Islands to jointly deliver a 60 million
NZD project to improve water quality in Rarotonga. This is ‗the very first time China
has partnered with a developed country to deliver an aid and development project‘
(New Zealand Aid Programme 2012).
In summary, the growth of China in the world economy has deeply impacted the
New Zealand economy in a number of areas. Bilaterally, New Zealand has worked
hard to position itself to take the opportunities presented by the economic
development of China. The New Zealand Government has been quite successful at
developing good political relations with China to help facilitate that process. The 2008
New Zealand-China Free Trade Agreement remains the main marker of the political
relationship that shows how political relations with China are a prerequisite to
developing a deep economic relationship.
However, the FTA may have ‗opened the door for trade with China more widely
than before‘ but it remains ‗up to business in New Zealand to actually go through the
door and seize those opportunities‘ (Goff 2013). The growth in commodity exports
has been nothing short of stunning, largely sheltering New Zealand from the slowdown brought on by the global financial crisis of 2009. This growth has not been
matched by growth in value-added exports, in the bilateral investment relationship or
supported by high levels of New Zealand engagement with China. Chinese tourists,
students and businesses are presenting good opportunities for the growth of New
Zealand trade in services with China but require some domestic upgrading and up-
China, the World Economy and New Zealand | Page 80 of 90
skilling if the potential of the growth of Chinese economic activities abroad are to be
positively engaged. New Zealand businesses should be aware of the emergence of Asia
as the centre of the world‘s global production networks and seek opportunities to
participate in them. Businesses, the public and Government should view the economic
relationship with China as one of global integration into these networks and see trade,
services, investment and people flows as deeply interrelated economic activities.
The final section looks at this potential and takes a cautionary view on potential
risks involved in integrating with the Chinese market and China-centred global
economic activities. It asks what New Zealanders need to be aware of when assessing
the health and impact of the Chinese economy as well as summarising the systemic
impact of Chinese growth on the world economy. The section further asks where the
New Zealand economy fits in with this new world economy and focuses attention on
the new dynamics in the global economy that New Zealand policymakers, business
leaders and everyday people need to pay attention to.
c. China, the World Economy and New Zealand
The early sections of this paper outlined the process of Chinese reform to date and
identified the major drivers of growth as well as pointing out the major challenges and
possible barriers to transitioning from a middle-income country to an advanced
economy. These sections had two major conclusions. The first is that the fundamental
drivers of Chinese development are the structural transformation of the economy
from an agrarian based society to an urban industrial and service sector and the
ongoing role of investment as a driver of economic growth at the same time as
consumption begins to play a more significant role. This part of the section suggested
growth would continue. The second major finding was that for Chinese growth to
continue, a new approach was now needed and that, as the economy structurally
transforms growth is likely to slow. As such, both conclusions suggest that irrespective
of whether growth remains strong in China or falters, changes in the domestic
economy and in how the Chinese economy impacts the global economy will affect the
structure of the world economy. The second major section showed that Chinese
economic presence in the world economy has increased dramatically since the turn of
the century, from trade to investment, to the presence of Chinese enterprises abroad.
This section asks how the New Zealand economy can be placed throughout this
systemic change in the world economy to best meet New Zealand interests.
New Zealand is an advanced but small and internationally reliant economy with
major strengths in agribusiness, science and technology manufacturing and research,
creative industries, and tourism. Annual expenditure on GDP in New Zealand has
grown from 184 billion NZD in 2008 to 206 billion in 2012 (year to March). Final
China, the World Economy and New Zealand | Page 81 of 90
consumption expenditure as a percentage of GDP in 2012 reached 80% (165 billion
NZD), 20% in general government expenditure (42 billion NZD) and 60% private
expenditure (123 billion NZD). Gross fixed capital formation as a percentage of GDP
has decreased from 23.5% in 2008 (42 billion NZD) to 18% in 2012 (37 billion NZD).
The remaining 2% of expenditure on GDP came from physical increase in stocks (1.8
billion) and net exports of goods and services (1.9 billion).
The New Zealand
economy is export driven.
Year Ended
30 September
Exports of goods and
(dollar amounts in millions)
Current Account
services represent 30% of
Export receipts
New Zealand‘s gross
Import receipts
domestic product (GDP).
Merchandise balance
Services balance
Exports of commodityInvestment
(14,17 (8,095) (9,706)
based products are the
Transfers balance
main source of export
Current account balance
(15,96 (5,542) (6,264)
receipts. The primary
Deficit as % of GDP
sector accounts for 7.4%
Financial account (net)
of GDP and contributes
Foreign investment in
14,447 (7,194)
over 50% of total export
NZ investment abroad
(973) (1,797)
earnings. New Zealand‘s
manufacturing sector is
Financial account balance
15,420 (5,397)
Capital Account
also dominated by the
primary industries. Food
Source: Table 17, p.30 of New Zealand Government (2013)
manufacturing accounts
manufacturing in New Zealand. Exports of meat and dairy products reached 17 billion
NZD in the year ended September 2012, roughly 27% of export earnings and 8% of
total GDP (New Zealand Government 2013). However, because the New Zealand
economy is reliant on imports of raw materials, consumer products and capital
equipment for industry, New Zealand needs to maintain a strong exporting sector.
New Zealand has consistently run a balance of payments deficit due in part to balance
of goods and services trade deficits (primarily services) but mostly due to large deficits
in the investment income balance (10 billion NZD in 2012).
Table 9 New Zealand Balance of Payments (2008-2012)
After late 2008, the investment-income deficit narrowed markedly, driven by lower profits
accruing to overseas-owned firms as a result of weak domestic trading conditions. Another
factor was the lower interest payments flowing to holders of New Zealand debt as the result of
lower interest rates both domestically and internationally. Since 2010, the investment-income
deficit has widened again largely owing to higher repatriated profits earned by foreign-owned
firms (predominantly Australian-owned banks in New Zealand) (New Zealand
Government 2013).
China, the World Economy and New Zealand | Page 82 of 90
This suggests the challenges for the New Zealand economy are two-fold. First, the
New Zealand economy is reliant on export earnings primarily in the primary industries
and the manufacture of food products. These industries are the drivers of New
Zealand economic growth and there are signs international demand for these products
will continue to grow. Increasing export earnings is the most effective way of
decreasing the current account deficit and stimulating the economy. This occurred
from 2009-11, but it has been a concern to see once again the 2012 year to September
measuring little increase in exports but on-going increase in imports. Second, New
Zealand needs to attract more investment into productive industries and direct
domestic investment away from unproductive activity. For example, a large portion of
the current account deficit can be explained by a poor record of household saving in
New Zealand and high levels of household debt to purchase what the International
Monetary Fund describes as a housing market 45% overvalued (IMF 2013).
Increasing domestic savings, attracting foreign investment into productive
industries and directing New Zealand investors to lucrative overseas investments is
needed to address the large 10 billion NZD deficit in investment income balance. An
important part of the structural transformation of the New Zealand economy is getting
the Government books in order, but even more pressing is managing the broader New
Zealand economy‘s shift from an over-reliance on household and farming debt and
investment in unproductive local assets, such as housing, to attracting investment in
the export industries and increasing trade and services receipts as well as increasing
New Zealand investment abroad. China‘s economic development provides both
opportunities and challenges in meeting those goals.
The economic rise of China presents New Zealand commentators and analysts
with the task of constructing new frameworks to understand the world economy and
New Zealand‘s place in it. While this creates much uncertainty and presents more than
a few risks, it is also an important opportunity to reflect on New Zealand‘s place in the
world, to diversify our trade, investment and economic cooperation partners, and to
address the structural imbalances in the New Zealand economy. In order to achive
this, New Zealand will need to increase China capacity in both the public and private
sector. This is not just about learning Mandarin, though that is an incredibly important
first step, but it is about utilising the connections, skills and knowledge that already
exist in New Zealand to build our relations and grow public understanding of the
broad role of the Chinese economy in the world. Education, research and debate
should be focused on improving knowledge of China and the Chinese economy in
order to be able to identify the changes in the world economy as the economic rise of
China and Asia transform the traditional economic order. This will create capacity for
New Zealand businesses and Government to strategically position themselves to meet
these new challenges and opportunities.
China, the World Economy and New Zealand | Page 83 of 90
This paper has arrived at three general conclusions. First, Chinese economic
development has reached a turning point after 30 years of high-speed growth. The
pace, scope and quality of future economic growth will be determined to a large extent
by how contributing sources of economic growth, exports, investment and
consumption, will strengthen, expand and prioritise under the evolving institutional,
policy and operational environment. Our analysis has shown that the dynamism and
energy of the economy, infrastructure invested, interests and value chains built in the
economic activities, and the on-going efforts in reform and restructuring, will see
economic growth continue at a similar pace as seen in the past decade in the next 5-10
years, with small scale fluctuations or permanently slowing down to below 8%.
Consumption expenditure will increase over exports and investment, but not to the
extent as hoped in the broad programme of rebalancing and restructuring of the
economy. Internationalisation of the economy, urbanisation, private investment,
reform in primary and secondary distribution of income, and R&D, technology and
education will be key shaping forces of growth.
The Chinese economy will continue to consolidate and enhance its position as a
leading economy in the world and is transforming itself towards a higher income,
mature and rationalised economy. Moreover, the structure of its growth sources and
contributions will undergo significant change, where there is a momentum for the
economy to grow on greater domestic demand, including public sector investment and
private consumption but also on further and greater scope of internationalisation of
the Chinese economy. Furthermore, on-going and re-energised efforts in structural
rebalancing and growth model reorientation will be a key factor determining the pace
and structure of further economic growth.
Second, Chinese international economic activities in the world have evolved,
developed and expanded, from trade concentration to investment expansion; from
pursuit of bilateral economic relations to participation in global and regional economic
integration, management and governance; and from movements of products, materials
and capital to expansion of business, enterprise, and production networks and
value/supply chains in the world economy. The internationalisation of the Chinese
economy affects the global structure of markets, resources, capital and finance, prices
and consumer demand, supply and values chains and production networks, and
economic governance and organization. The shifting directions and activities of trade,
investment, research and development, brand development and tourist flows, are
reshaping the world economy.
Third, changing conditions and dynamics in the world economic system, with
China, the World Economy and New Zealand | Page 84 of 90
China emerging as an increasingly significant mover and shaper, creates a historical
moment for New Zealand to consider how it strategically positions itself in the world
economic structure for its long-term economic prosperity and social wellbeing. Our
analysis shows that the New Zealand economy has limited impact on overall Chinese
economic growth and its global interests and activities. On the other hand, a dynamic,
competitive, continuously expanding Chinese economy not only provides markets for
New Zealand exports, it becomes a principal platform for New Zealand international
economic activities. More importantly, through its internationalisation, Chinese
economic forces come to New Zealand, and have significant impact on the structure
and performance of the New Zealand economy and its broad economic and social
Important implications can be drawn from the broad conclusions above. First, the
finding on the dynamism and structure of the Chinese economy, and hence the short
and medium term prospects of Chinese economic growth, is largely positive for the
New Zealand economy. It provides a good basis for us to think about our broad
international interests and strategy in the dynamic and evolving global economy, and
our economic relations with China in particular. However, there is also a level of
contingency of prospects in the scope and effectiveness of deeper reforms in structural
rebalancing and growth model reorientation and whether the shift in growth structure
evolves in the direction as expected. This can spell possible risks for New Zealand.
Second, Chinese international activities in the world are systematically related to
the structure and dynamics of Chinese economic growth itself. As such, China‘s
economic impact on New Zealand should be seen as part of the dynamic and evolving
global economy where China has become increasingly a key mover and shaper. Our
policy and strategy toward China is in a very important way our response and strategy
to change and developments in the world economic system.
We need to consider the greater purpose of New Zealand international economic
activities with China and to develop a coordinated policy to promote and support
them. New Zealand needs to push out into the emerging value chains, growth centres
and global capital flows and to make its businesses relevant to new emerging trends. A
coordinated agribusiness policy, for example, might help in promoting New Zealand as
a leading source of agricultural exports, food production, agricultural and food
research, technology and education and for those skills, expertise and resources to be
invested in emerging markets where there is a need for them and large space to grow.
Our trade and investment activities in China, for another example, can serve New
Zealand‘s international economic interests while also becoming an important part of
the working of the Chinese economy, particularly in urbanisation, rural business and
development, and promotion of domestic demand and consumption. Furthermore,
working with China in regional economic cooperation and integration, and in global
China, the World Economy and New Zealand | Page 85 of 90
economic management and governance, is clearly areas to broaden our economic
relations with China beyond bilateral trade, people movement and investment.
Third, New Zealand‘s economic relationship with China is asymmetric. China
matters a lot more to us than we do to China. This suggests that in seeking to adjust to
the dynamic and evolving international economic environment, we need to invest and
nurture our economic relations with China to build up greater stakes of both sides in
the relations. Policymakers should consider what policy instruments they have to
nurture a more balanced structure of incentives and interests for Chinese and New
Zealand economic activities.
Finally, the impact of Chinese economic activities is wide and deep on individual
countries. The breadth and impact of Chinese economic activities is such that even in
sectors where New Zealand businesses or consumers are not directly dealing with
Chinese businesses or consumers, China‘s economic activities will heavily impact, for
better or worse, New Zealand‘s economic interests. Therefore, treating China as a
matter of managing and regulating bilateral exchange is insufficient. New Zealand will
need to think strategically about Chinese economic activities in New Zealand and how
they can be turned into a positive force for the working of our economy both in short
and medium term macroeconomic performance and long-term structural adjustment.
New Zealand, like many other countries experiencing the dynamic and evolving
new global economy, has its own challenge of staying relevant globally and confronting
existing and potential economic imbalances, such as debt to GDP ratios, consumption
levels and export promotion activities. The bilateral and structural impact of Chinese
economic activities presents an opportunity to revisit New Zealand‘s model of political
economy and to incorporate these new dynamics into domestic economic policy and
international strategy.
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China, the World Economy and New Zealand | Page 90 of 90
Professor Xiaoming Huang is Director of the New
Zealand Contemporary China Research Centre.
Dr Jason Young is a Research Fellow at the New
Zealand Contemporary China Research Centre.
The New Zealand Contemporary China Research
Centre provides a national platform for China-related
capability building and knowledge sharing among
tertiary institutions, the business community, and
public sector organizations in New Zealand for
effective engagement with China.
Discussion Papers published by the China Centre
provide a forum for scholars and specialists working
on issues related directly or indirectly to New
Zealand‘s engagement with China. The conclusions
drawn and the opinions expressed in the Discussion
Papers are soley those of the authors and do not
necessarily represent the views of the New Zealand
Contemporary China Research Centre or any other
organisation which the author may be affiliated. For
an e-copy of the paper please visit the website or
New Zealand Contemporary China Research Centre
Victoria University of Wellington
18 Kelburn Parade, PO Box 600, Wellington 6140
New Zealand
Tel: +64 (4) 463 9549
Email: [email protected]

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