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Bernard Hickey sees NZ betting its economic future on China, a country with which we share little cultural DNA and don't really understand

Posted in Opinion

By Bernard Hickey

I've learnt over my 30 plus years of driving to be very careful about the blind spot behind my right shoulder because the mirrors I usually rely on don't show me everything.

Nowadays it hurts the old bones in my creaky neck a little, but I always swivel and check before changing lanes.

A couple of weeks ago one of New Zealand's most experienced and successful business leaders, Sir Henry van der Heyden, forgot to swivel and check New Zealand's biggest blind spot before commenting.

His now famous comments about 'never, ever' trusting Chinese business people in China sparked quite a storm.

He quickly apologised and put the appropriate context around it about Fonterra's misplaced trust in its joint venture partner Sanlu, but the intensity of the reaction threw a spotlight on a vulnerability in New Zealand's current economic strategy.

Just like the blind spot for a driver, we all know it's there, but we hardly ever talk about it or address it directly. And just like the truck that seems to appear out of nowhere as we turn into the next lane, China is looming very quickly up behind our economy.

New Zealand is betting its economic future on a country we have very few durable cultural or political ties with.

We don't know its history, we don't understand its political system and we don't really know how it 'works'.

Very few New Zealanders speak China's languages and we don't have a single foreign correspondent reporting back to us what is happening inside the many corridors of power there.

This is a new thing and has happened much, much quicker than the previous shifts in our economic and strategic landscapes.

China's share of our trade has more than doubled in the five years of the Free Trade Agreement to over 18% in the March quarter. It has jumped from our 3rd biggest partner to our biggest in less than half a decade.

The last major 'lane change' in New Zealand's economy took 30 years through the 1970s, 80s and 90s. We switched from having Britain as our major trading partner to a Western-mix dominated by Australia and America.

We saw this change coming when Britain joined the EU and we moved into a lane with cars we could see coming and looked a lot like ours.

Australia and America shared New Zealand's cultural DNA with all the institutions we understood such as democratically elected governments, independent judiciaries and free media. We spoke their language and shared their history - literally. We fought beside and died with the people of these countries in at least four wars over a century.

We 'got' them, and vice-versa.

Some would say not having shared history and culture shouldn't stop a good old fashioned trade between a willing buyer and seller, but as we're finding with China, the real opportunities involve much closer connections.

They require shared ownership and integrated supply chains that extend well beyond borders.

And that's where things get tricky.

Shared institutions and culture are the things people fall back on when the going gets tough and things go wrong.

They help smooth troubled waters and resolve disputes without everything going pear-shaped.

Our unease about the lack of these supports explains why we were so sensitive and embarrassed by Sir Henry's comments.

It's why John Key was particularly sensitive this week when refusing to confirm in parliament whether he as GCSB Minister had ordered Chorus to block Huawei because of cyber security fears.

We know in our bones that our largest trading relationship is based on the whims of unknown and unaccountable leaders over whom we have little power to influence.

Getting that FTA was like winning the lottery and we could just as easily lose it.

This is quite different from our last big strategic switch. Remember, New Zealand has never fought a war against Australia, Britain or America. It has fought against China, albeit a limited one 60 years ago on the Korean Peninsular.

China's leaders could change their minds on a whim.

We got a sneak preview of that when the whims of some Chinese customs officials held up our beef and lamb on Chinese ports for weeks.

We are also seeing it now in a tit-for-tat exchange of anti-dumping tariffs between China and Europe. The EU imposed tariffs on subsidised Chinese solar panel exports this week. Within days China reacted with tariffs on French wine exports.

Those watching closely are seeing a new leadership flexing China's now much larger trade and strategic muscles in a variety of touch points with the West, including over disputed islands in the seas between China, Japan, the Philippines and Vietnam, disputed borders with India and in relations with Africa and the Middle East.

China is New Zealand's economic blind spot.

We need to get bigger mirrors and be careful to look over our shoulders early and often.

It may mean we get cricked necks, but it might help us avoid that fast overtaking truck.

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This article first appeared in a shorter version in the Herald on Sunday. This is an extended version, and is used here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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22 Comments

But we do share things...the

But we do share things...the Chinese may well have discovered NZ before Tasman did! and they did migrate here to find gold....and they did play a part in the early economy...and always were a part of the country...and those prepared to learn things will know about Chinese history...and not go round claiming the Europeans invented gunpowder, printing, paper money and a heap of other stuff like how to cast bronze and build crossbows...The list is long.
And surprise surprise...some Maori might not like it but they descend from a Chinese past...not that long ago.

Maori culture is considerbly

Maori culture is considerbly closer to Chinese culture than European with a similar balance of Maslows Heirarchy of Needs. So perhaps this is one area for those doing business with China to explore. Or perhaps when Maori take back the north half of the north island they will quite happily cultivate greater ties with China.

Wolly, i believe you and

Wolly, i believe you and Bernard are at cross purposes.
You are talking about the Chinees people while Bernard is talking about the establishment.
 
Lots of people say they dislike America, but they are not talking about the American people they are talking about the American establisment.
 

Red Alert! China's Minsky

Red Alert! China's Minsky Moment? Albert Edwards is someone I take very seriously:
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013...
 
I posted this earlier but this sounds big and ominous.

It is the moment those who

It is the moment those who are cashed up can expect Roger...when the blood is flowing and prices are rock bottom on solid companies. That is if you can avoid seeing your savings stolen to bail out a bank in NZ....
So study hard Roger...identify the 'gold' from the gloss and the total rubbish....what to plan to buy and when to do it.

O f course any "business"

O f course any "business" runs risks with relations with their major client. What they have to do is work on that relationship whilst trying to reduce "business" risk by expanding the product range and client base. NZ has to take exactly the same strategy and certainly can't walk from a major trading partner jusy because of perceived difficulties.

Last week the Guardian ran an

Last week the Guardian ran an article on how China was going to save Britain.  A few months ago I was in Australia and they were talking about how China was going to save them.  And now New Zealand is betting on that too.  China is going to be very busy trying to save the world.  Do we really think there will be no price to pay.  Doh. Perhaps we should just try and look after ourselves and our own.

 Sir Henry van der Heydens'

 Sir Henry van der Heydens' comments were probably not surprising...  What is surprising is that Fontera is still  "all go"   in China..    ( I wonder if they own the farms or just lease them.?? )
What I don't really understand is why Fonterra is busy creating "super farms" in China.
The flip side of that  is that  we are freely giving the Chinese the benefit of more than 100 yrs of innovation and evolution in our dairy Industry.  ie. intellectual property...  both in knowledge and Cows
Maybe at some point the Chinese Dairy Industry will compete with New Zealand Dairy Farmers.
And then we read stories like this  ...     Maybe Henrys' words will be prophetic...    but then again..  common sense would suggest that it is obvious.
If I was a Dairy Farmer ..I'd be scratching my head about whether Fonterra had my interests at heart..or whether their interest is in themselves and growth as a Multi National..??
China does not have a legal system that upholds or respects.."property rights"...   I suspect they favour their own and move to their own agenda....   ( i suppose I'll be called racist )
Henry would  know..???  ( amazing how much trouble u can get into by saying what u think )

Fonterra leases the land for

Fonterra leases the land for the farms Roelof. Fonterra has been heard to tell shareholders that the farms in China are the 'cost of doing business in China'. Read in to that what you like. ;-)

No point being paranoid about

No point being paranoid about it, get on with it. Yes they do things different in China and they are less flexible with paperwork, to the point of frustration, but looking at their past that is not surprising. 
Henry was correct and should not have been forced to apologize it was not meant in a accusing way, just a statement of fact to be wary. That does not mean that we should not do business with them. They do things differently and as long as we keep that in mind we can survive happily trading with China while it lasts. A better understanding on how things are done in China would help. But we should also remember that other then tax nothing lasts and/or increases forever.
Let us make the most of the opportunities we get.
 

China does not have the Rule

China does not have the Rule of Law or even a unified legal code, the Communist Party  make it up as they go along; just ask an investor in the Macquarie China roads fund. What we saw with Vander was a moment of honesty. As I've said afore re. China, If you're going to sup with the Devil, be sure and use a long spoon.
Ergophobia 

Bernard, you say China's

Bernard, you say
China's share of our trade has more than doubled in the five years of the Free Trade Agreement to over 18% in the March quarter. It has jumped from our 3rd biggest partner to our biggest in less than half a decade.
But there was an article some months back by a bank economist who pointed out that while NZ had increased agricultural trade with china by 18% the rest of the world increast agricultural trade with China by 23%
 
So your further coment
Getting that FTA was like winning the lottery and we could just as easily lose it.
 Maybe we would be better off if we lost it
Further
China will only buy what it wants and when it wants it and from whom it wants it from.
 
 
 

China will only buy what it

China will only buy what it wants and when it wants it and from whom it wants it from
 
As opposed to ...?

NZ wants a FTA with China so

NZ wants a FTA with China so it can sell lots of dairy products to them.
NZ wants a TPP with America and others because it can sell lots of dairy products to them.
NZ wants a FTA with India because it can sell lots of dairy products to them
NZ wants a FTA with the whole world because it can sell dairy products to them.
 
NZ farms can feed the world - Ye Right

Sometimes the right wing

Sometimes the right wing republicans have the right idea.
 
A few years ago i read an article by a right wing republican. Cant remember but was an advisor to one of the presidents (think Regan). Anyway he wanted to set up a global market for democratic countries and to join you had to be or become democratic.
 
No one listened.
 

Living in Mt Eden, with a

Living in Mt Eden, with a large Chinese population in the area, I generally welcome the diverse culture, especially in food, and the obvious work contribution the Chinese make to the City. On trade, there is a lack of balance in our dealings with the rest of the world- not just China, and I've shared some views here many times on how that is in our court to fix through some management of capital flows and the exchange rate. Broadly though the lift in trade mostly seems very positive; we get good quality cheap goods, and they get good quality food; at a profit to both ends apparently.
Where I think we should be cautious is at least in considering and understanding the effect on our way of life in what seems very fast immigration, and with it, apparently large capital flows, from China.
In the 1980s I was lucky enough to spend 3 years working in Malaysia for a large multinational. Malaysia's population then was ~ 40% Chinese (the percentage has since dropped due to higher fertility among the native Malays), as the Chinese had immigrated in vast numbers over the previous 100 years to fulfil mostly labour jobs. By the time I got there, the Chinese owned nearly all of the small to medium businesses and a good number of the large ones (and the other large ones were often major multinationals such as my employer); such that the government had introduced affirmative (and seemingly racist) policies to favour the Malays. 
In our company we had many managers who were both Malay and Chinese; and so I had a good number of friends in both camps. But here is the kicker; they were very different camps indeed. And the Chinese priority absolutely was to family first, and very often to the broader Chinese clan second, with anything else a distant third or nowhere. If anyone cares I had a fascinating (to me anyway) personal management case that reinforced just how strong those links were. Am willing to share that if someone requests.
Democracy in Malaysia meant that each race would virtually certainly vote for a party dominated by their race first; such that a sensible, in my view, coalition structure has evolved that guarantees representation for all, but cements the Malays in charge. 
We seem to be somewhat sleepwalking to a similar outcome. Was it 15 out of 25 Barfoots top sales people were Chinese? An agent friend of mine told me yesterday that "every" auction in his fairly broad West Auckland area, was being won by a Chinese person. 
Apart from any race issues there are in any case questions on housing affordability, employment, capital flows, the exchange rate, and the current account at play, that also are being non managed by omission. 
We should understand the outcomes for all of these things, and in my view there is a case to drop down a gear or two, if not actually put the brakes on.

A microcosm with military

A microcosm with military overtones of what you allude to was played out not so very long ago in Fiji, first with Field-Marshall Sitiveni Rambuka and second by Commodore Frank Bainimarama. The repercussions of which are evident in Auckland today

There are indeed parallels

There are indeed parallels between the racial circumstances of Fiji and Malaysia. I'm not sure of the best answer for Fiji, although it seems to me they could do worse than mirroring the Malaysian coalition model, otherwise you can end up with two wolves and a sheep voting on what's for dinner.

In 1987 the initial New

In 1987 the initial New Zealand response was to invade Fiji. I will never forget being in a room at Harewood with soldiers from No 1 RRF who were prepared & waiting to fly out, a very heavy atmosphere. Trouble was Fiji was at that time a training partner.......

Just like a business should

Just like a business should not rely on one customer to buy all of its goods or services neither should NZ rely on China to buy all of its produce. 
China is an important customer and we should continue to invest in the relationship, we should however progress with a good dose of caution, they like to win and they like others to lose, we have resources that they want and need so we are in a position of power.
I would like to see Fonterra cap it's exposure to China so that we do not become too dependent on one market, when we do become too exposed to China the power will shift from us to them and that can only end badly.
Australia are far too exposed to China i think, they need China to continue to buy large volumes to support the enormous mining infrastructure (fixed cost) that they have established, China know this and can start manipulating the suppliers to their advantage.
Good old diversifaction is the key here, but when demand is high it is very tempting to continue to grow the proportion of your business with China, it takes courage and disciplined risk management to avoid falling into that trap.
 

There is a diplomatic

There is a diplomatic position called agricultural counsellor at Beijing embassy, whose job is to write reports on China.
 
The reports are usually about Chinese markets, consumers, and agri policy changes that will affect NZ's primary trade to China. But (!), the problem is the so what attitude. The reports were written and read, but, nobody is interested in acting upon the valuable information from the reports.
 
One example, alcohol can be adertised on TV in China at prime time and on satilliate channels. This means at least 300 million people will have free access to those ads. Not a single wine company in NZ takes this advantage. They all just produce and export white wine to AUS, EU and US. But, almost none is aware of that China is the only wine market thtat imports much more red wine than white wine (70 and 30) compare with the other 3 --- 95% is white and the rest is red.
 
The info is there and just use it wisely. My short advise is that be careful when dealing with CHN government.

NZ should should not rely to

NZ should should not rely to much on China, but should be well diversified.  If we are looking ahead India is likely to overtake China as the second largest economy, so in the future as we are talking about China today India will become the new China.