China: Keep calm and carry on……the future’s still bright
In recent weeks there has been a lot of negative media about economic conditions in China. In particular the slowing
growth, a volatile share market and a decrease in dairy imports. The potential impact of much of this has been
exaggerated. Given the value of China to Westland, indeed the whole of the New Zealand dairy industry, it is important
that we understand what is happening.
The Chinese stock market, for example, has been used as an economic indicator by foreign press. In the 12 months prior
to the downturn in July last year, the Chinese stock market had increased by 147%, largely driven by Government policy.
The Chinese stock market is very different from stock markets in the West. It is 85% retail (mum and dad investors) and
hence is very ‘momentum and sentiment driven’. It gets over-bought and over-sold and is generally more volatile. Western
stock markets, on the other hand, are dominated by institutional investors and tend to be more stable, reflecting
underlying values more accurately. Despite being dominated by retail investors fewer than 6% of Chinese people actually
have money in the share market. Even significant market falls do not impact real consumer purchasing power in any
meaningful way. The bottom line is that, in China, the connection between share market activity and economic
fundamentals is much weaker than in the West. What we saw in the China stock market in 2015 was a correction rather than
a crisis.
GDP growth in China has been slowing, which appears to be causing some anxiety, especially for trade partners of China.
In the last decade GDP growth has slowed from 11% to about 7%. However with GDP now around USD$11 trillion, the Chinese
economy is the second largest in the world. Even at these more modest growth rates of around 7% the actual increase in
economic value is still huge.
Looking at growth in China through the singular lens of GDP is also somewhat misleading. As the second largest economy
in the world it is now much more complex and diverse than it was a decade ago. Some sectors in China are booming while
others are maturing or even in decline. The demand for commodities such as iron ore and copper are falling, but the
demand for agricultural imports, particularly at the premium end, is rising rapidly.
It is consumer behavior that is most relevant to Westland and our value-add strategy. At the consumer end most of the
growth is now in value rather than volume. The lower middle class has already formed, and now we are seeing the
development of a much larger middle and upper middle class. This group of consumers will likely double in the next five
years. The growth is therefore shifting from ‘staples’ to more discretionary spending and higher value products.
Consequently we are seeing a very strong trend toward premium products. Most of the big international players in China
are reporting a slow decline in their older more mainstream products, but strong growth in newer and higher value
products.
On the dairy commodity side it is true that there has been a fall in the demand for imported powder. Again, there are a
few reasons for this. Firstly there was a build- up of inventory during 2014 that, to some extent, was milk supply
driven. Secondly, changes in consumer demand are reflected in value growing faster than volume. Lower value dairy
beverage products, which use a lot of imported powders, are declining. Demand for premium dairy products, such as UHT
milk, UHT Cream and Infant Formula, continue to enjoy growth rates between 10 and 30%.
While dairy farming productivity has increased in China, it will never be self-sufficient. Land and water constraints
mean China will become increasingly less self-sufficient over time. Food security is a critical political issue for
China's leadership and food safety is critical to the people.
Westland Milk Products has invested in a growth strategy of value added products that are largely destined for China.
Irrespective of what New Zealand media is telling us about the China economy, we need to focus on what Chinese consumers
are telling us. Right now, consumers want premium products and are willing to pay premium prices for them. This was true
when we built the China strategy, it is true today, and will be just as true tomorrow.
ENDS