Free trade deal significant: bank   14 Dec 2004

By Kent Atkinson

New Zealand’s economy is in a strong position to benefit as China becomes a dominant influence in the world, an Australian bank said.

"The China dynamic will be the overriding structural economic element of our lifetime,’’ Westpac chief economist Brendan O’Donovan said. "We expect that eventually China will become the biggest show in town." In the bank’s latest quarterly rural newsletter, Agribiz, O’Donovan said China – already the second largest economy in the world behind America – was facing enormous further growth and development. "More importantly, New Zealand is in a strong position to benefit," he said. Negotiations began in Beijing last week for a China-New Zealand free trade agreement (FTA). Trade Negotiations Minister Jim Sutton has predicted the trade deal has the potential to boost New Zealand exports of goods and services to China between $260 million and $400 million a year. Although the average income of Chinese households is around one eighth of the households in the US, if China’s economy keeps growing at its recent pace of around 8 per cent, by 2020 the top 100 million households would have an average income equivalent to western Europe’s current average, O’Donovan said. Growth in the Chinese economy would influence the world’s trade linkages and commodity markets: "Looking at China’s import growth highlights the importance of trade linkages." Imports into China had grown 40 per cent during the past year, while accounting for one-third of the global growth in imports during the past three years. Similarly, China’s growth in industrial production had a huge spin-off for commodity prices worldwide. This meant that any speed-up or slowdown in China’s economic activity would have immediate knock-on effects for the rest of the world, he said. The effect would be particularly strong in Asia, where China – an important driver of current growth – last year accounted for 43 per cent of Japan’s growth. O’Donovan said commodity prices were notoriously cyclical and although China was likely to give a solid underpinning to commodity prices over the next couple of decades, it was likely to be a volatile ride. Strong growth in the Chinese economy had been a major determinant of rampant world shipping prices and rising commodity prices, which had lifted 50 per cent over the past two years. China was already New Zealand’s fourth most important export market – eclipsing Britain – and was the fastest growing export destination (up 17 per cent during the past year) on the back of products in the dairy, meat, forestry and other sectors. It is also the fourth largest market for Fonterra – the world’s largest dairy exporter, and the largest exporter of dairy products to China. Fonterra dominates China’s dairy import sector with an average market share of 65-70 per cent in key product groups, such as dairy ingredients and Anlene calcium-enriched milk powder, particularly targeted to Asian women facing bone mineral loss and osteoporosis. The company opened a plant in Guangzhou, the capital of southern China’s Guangdong province, in 1997 to produce cheese and to pack Anlene and other milk powder imported from New Zealand. The benefit of China’s growth bonanza to New Zealand would accrue more gradually than to some other exporters, and would be driven by increased income and wealth in China. "But the prospects are huge," he said. "Given the potential that China offers, the free-trade agreement currently being negotiated is definitely the way to go.

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