Exposure to China market a worry
Lurking quietly on page 17 of the latest Reserve Bank Monetary Policy Statement is the recent history of the New Zealand economy in one easy lesson.
Figure 4.9 demonstrates just how dramatically New Zealand's exports to China have taken off in the past six years, partly because of the ground-breaking free trade agreement with China, and partly thanks to the melamine scandal in 2008, which turned Chinese parents to foreign sources of infant milk formula.
Lucky for us, the Chinese leadership appears to have forgiven Fonterra for last year's monumental blunder over the false alarm on botulism contamination.
And as any disaster manager will tell you: it's the putting right that counts.
The putting right continues. Prime Minister John Key cemented the apologies and got some big gains from his visit to Beijing last week.
But alongside the hairy-chested goal of $30 billion worth of two-way trade by 2020 - it's closing on $20b now - and direct tradeability of the New Zealand dollar and Chinese renminbi, there is a range of initiatives to increase the presence in China of New Zealand primary industries and bio-security protection.
These include a food safety scholarship programme and a brand-new embassy in Beijing.
However, as rocketing demand for primary products feeds the New Zealand economic recovery, a chorus of worriers fear what would happen if the Chinese economic miracle were to flame out.
As a Sydney-based fund manager put it in The Wall Street Journal this month: "China has gone from being the saviour of the world to one of the weakest links in the chain".
ANZ chief economist Cameron Bagrie told the National Business Review yesterday that if China did come off the boil, it would hurt our other biggest export partner, Australia.
But is this all overblown?
Paul Donovan, an economist in London for investment bank UBS, takes a contrary view.
For a start, he suggests recent soft figures from China reflect the fact that the US has slowed temporarily because of severe winter weather. He argues that the underlying trend in the US remains a credible recovery, which should continue to underpin Chinese growth.
Threats to financial system stability inside China do remain and it is no secret that Beijing is trying to manage Chinese growth rates down from close to 10 per cent a year to more like 7.5 per cent. That had to happen as the Chinese economy matured after three decades of headlong growth.
However, Donovan focuses on the fact that, based on 2000-2009 analysis, most economies have manageable levels of exposure to China. Over that period, Taiwan, Malaysia, and Saudi Arabia were most dependent on exports to China, averaging more than 4 per cent of GDP annually.
New Zealand was exporting a little over 1 per cent of GDP annually over that period, and Australia a little over 2 per cent.
The problem with this analysis is that the explosion in New Zealand exports to China began after 2008, at the end of Donovan's sample period. At nearly $8b a year, exports to China are nearing 4 per cent of GDP.
But even if that exposure is high, the elasticity of Chinese demand for high-quality, safe food, which comprises most of New Zealand's export profile, has yet to be tested in a downturn. China might need less coal and iron ore, but its appetite for what New Zealand produces has only grown.
That trend can't be banked.
In the meantime, it only underscores the value of pushing for trade access elsewhere.
This week's unprecedented willingness by the European Union to discuss a free trade deal with New Zealand and to establish a permanent Wellington embassy is welcome news indeed.
The Dominion Post