After more than a decade of double-digit growth, the Chinese economy appears to be slowing at a much faster pace than anticipated. With the S&P 500 index down 12% since July and more than $10tn wiped off global stock markets in recent months, the ripples are being felt across the world.
This year, annual GDP growth was expected to be around 7%, the slowest expansion in 25 years. However, with so much doubt surrounding numbers coming out of China, many are now questioning if 7% is realistic.
The big multinational food companies are beginning to feel the pinch. Nestlé, the world’s largest food company, forecast growth of around 5% this year, it’s slowest growth in five years. It blamed the slowdown in China, its second-largest market, for the weak outlook.
Similarly, Unilever, the makers of Ben and Jerry’s ice-cream, forecast no improvement in China in 2015. Baby food manufacturer Mead Johnson said it was also disappointed with overall sales in China in its latest quarter results.
The factors are many – tightening of credit, a build-up of excess property capacity, decelerating export growth, and a change in government policy.
Exports have declined 8.3% in June, as China’s leaders aim to steer the economy away from export dependence and towards domestic consumption. Then, in an attempt to boost exports, Beijing began devaluing the Yuan.
It is causing problems for developed countries but also two distinct groups of emerging-market economies – the east Asian countries that sell components and finished goods to their big neighbour, and countries that supply China with the fuel and raw materials to keep its industrial machine going.
Fracking in the US has been blamed for the recent slump in oil prices, especially as the Saudis decided to compete and maintain their share of global oil, but the China slowdown may be much more significant in determining the price of oil.
North African countries rich in natural resources, such as Nigeria, which are seen as destinations for the extra milk we will produce, will now need to reinvent their economies. They have become dependent on China’s spectacular growth.
Not unlike Ireland in the past, China built its economy to the world’s second largest through a credit-fuelled construction binge. The wider construction sector now makes up about a quarter of China’s $10tn economy. And this is seen in the second tier cities (similar to our provincial towns) where after nearly a decade of frantic building, massive overcapacity has been created and has left vast belts of empty apartment blocks in these new mega cities. One survey now puts more than one in five homes in China’s urban areas as vacant.
‘Made in China’ is getting expensive
China had a significant role in global trade growth of the last two decades, as it used its abundant and cheap workforce to produce competitively priced goods. But the term “made in China” is getting expensive as the low cost workforce advantage disappears. The average salary in China was €687/month last year compared with €564/month in Romania.
Domestic consumption is growing fast, up 10% year-on-year, but it’s expanding slower than five years ago. Securing enough food for its 1.3bn people is already a difficult task. But food quantity is not China’s only problem — food quality has also become a big issue. Over the last five years, Chinese consumers have had to contend with everything from tainted milk to expired meat, raising serious questions about whether food is safe for consumption.
This has been a benefit to farmers from New Zealand to Newtownmountkennedy as the Chinese consumer has been willing to pay a premium for imported products such as infant formula, which can sell at four times the price of local product.
Despite rising wages, household income growth is showing signs of slowing. The average disposable income in urban households grew at real annual rates above 8% between 2010 and 2012, but at only 6.9% in 2014.
Last year, 5m people moved from the countryside into urban areas, down from 10m in 2012. When they do this, people become more affluent and this can be seen with wine imports, which have increased fourfold since 2008.
This is not good news for countries that have fed the Chinese boom with their own exports and are depending on emerging economies to drive growth. This includes Ireland. Last year, our food and drink exports to China rose 40% to reach €520m. This made it our sixth-largest export market overall and our second-most-important for dairy and pigmeat.
China never promised to be a global factory forever. Its export-driven model worked as it allowed for fast growth, but it also destroyed the country’s environment and made the economy dependent on foreign demand.
China will continue to make policy adjustments in order to ensure a soft landing.
Slowing
What effect China’s slowing economy will have on emerging markets remains to be seen but it would appear it will affect consumer demand for dairy and protein in these regions.
This is something that we must take into account as we aim to grow our exports to €19bn over the next 10 years.
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