Keith Woodford identifies China’s two economies and assesses what that means for New Zealand’s agri-food sector

Keith Woodford identifies China’s two economies and assesses what that means for New Zealand’s agri-food sector
Four lane highway heading into the Qinghai-Tibetan mountains.

By Keith Woodford*

In recent weeks I have been travelling in Western China. It is just over a year since I was last there, and as with every visit the changes are visible: more fast railways, more four lane highways, and lots more apartment buildings.

This visual perspective contrasts with what we are reading in the media about China’s declining economic growth. Which is correct? Well, both perspectives are valid.

There are many ‘Chinas’ but for simplicity I will divide China into two.  There is the eastern seaboard comprising Beijing, Shanghai, Guangzhou, Tianjin, Zhejiang, Shenzhen and other big seaboard cities. And there is another China west of the seaboard, including Chengdu, Chongqing, Xian, Wuhan, Kunming, and Xining.

The China that is west of the seaboard beats to a different drum.  This China has about 150 cities of more than a million people, and some cities of more than ten million people. It also includes more than 500 million rural folk. In many ways it is at least ten years behind the seaboard China.

First of all, what is happening on the seaboard? Nothing in China is simple, but there is little doubt that on the seaboard there are signs of a confidence crisis. 

The rapid decline of Chinese share markets does not in itself spell gloom. After all, the decline has done little more than wipe out the crazy share market gains of earlier this year.   But the impact will be pervasive in terms of how people think.  People are asking: are the good times over? They are asking themselves as to whether they should be more careful in what they spend.

In recent years, one of the things I have learned about China is that the people are ‘hardwired’ to focus on survival. Many generations have had the realities of poverty ingrained into them as the normal and expected state. The key survival strategy is to save whenever possible and look after oneself and family. Outside the family, no-one can be relied upon.  Those cultural essentials are now being reinforced.

If economic growth is to continue on the seaboard, then people have to spend. Currently, Chinese save about half their wages and salaries. Those savings have fuelled the infrastructure development of the last 20 years. But on the seaboard, there are now less big infrastructure projects. The last thing that China now needs is for seaboard consumers to go into survival mode.

Out in the west, things are different. The Shanghai share market has no meaning. It is something one reads about in the newspaper, but that is all.

One of the western cities I visit regularly is Xining in Qinghai Province. Xining is the gateway to the Qinghai-Tibetan plateau. The reason I go there is because, together with Lincoln University and Qinghai University colleagues, I am part of  a grassland sustainability project on the Qinghai-Tibetan Plateau at an altitude of 3600 metres.  I will write more about that project at another time.

Xining lies at intermediate altitudes – about 2200 metres – at the interface between the plains and the plateau. Tributaries of the Yellow River tumble down from the plateau through winding gorges and narrow valleys.

In winter, Xining is desperately cold, but in late August the temperatures there are mild. In contrast, down on the plains it is like being in a furnace. Those who can afford it retreat to Xining for some sanity.

The permanent population of Xining is about 2 million, but in summer that increases. I have been coming here for four years and the changes are stark. There are hundreds of new apartment buildings, typically of about 20 floors. There is a new airport of international standard. The rail journey from Lanzhou, 253 km to the east, now takes only one hour and six minutes.

And raising my eyes to the hills, I see precipitous and arid slopes that are slowly turning green from millions of trees planted in recent years. No-one should make the mistake of thinking that China is not taking environmental matters seriously. The problem is that most of the answers are not easy.

Up on the plateau, the people are mainly Tibetan pastoralists, but down in the city the population is predominantly a mix of Han and Hui people. The Han are the predominant ethnic group of China. The Hui are of similar ethnicity but they are followers of the Muslim religion, with historical religious links to Iran.

Commercial life in Xining is dominated by the Han, but there are lots of Muslim restaurants, and one of my earliest acquaintances there is a Muslim official who has also represented China abroad.   In Xining, there is religious freedom and religious tolerance. At the risk of being repetitive: nothing is simple in China.

Over the years I can only recall seeing one Westerner in Xining apart from our own group, but no doubt there are lots of Westerners here. In a city of two million, they are easy to miss.

Unlike forty years ago when I first visited China, we attract no attention from the locals. This contrasts with my first visit to China way back in 1973, when even in Shanghai I would have hundreds of children following me in the streets.

One way or another, New Zealand produce is starting to get to Xining. In a city supermarket I saw two one-litre packs of Fonterra’s ‘Country Goodness’ UHT milk, seriously over-priced at 29 RMB (almost $NZ7 per litre) and close to its use-by date.

In contrast, Murray Goulburn’s ‘Devondale’ UHT milk from Australia was selling well, with comprehensive shelf space, at 15 RMB (about $NZ3.50) per litre. I have been watching the development of the Devondale brand in China for several years. Fonterra needs to take a look.

In the same supermarket there was a small but diverse offering of ‘Mainland ‘cheese from Fonterra. It was selling in packs of 200g to 400g for between $NZ40 and $NZ60 per kg. It was nicely presented.

Zespri Sungold kiwifruit were on sale alongside Chinese kiwifruit from Hainan, all at the same price of 58 RMB per 500g (about $NZ27per kg). Zespri kiwifruit is the premium brand in China and the temptations of fake branding are considerable. But these looked genuine.

Genuine New Zealand honey (‘Meion’) was also on sale. Prices ranged from $NZ60 for 375 g of 5+UMF (unique manuka factor) to $NZ100 for 350g of 15+ UMF.

There was lots of French wine on sale, and also some Jacobs Creek red wine from Australia at 160 RMB (about $NZ38) per bottle.  But there was no wine from New Zealand. The shop assistant said that purchasers have a strong preference for French wine.  This is consistent with behaviours of our own hosts, who typically supply French or Italain wine, occasionally Chinese wine.

Local sliced lamb flap (frozen) was available at $NZ13 - $NZ15 per kg, and bone-in frozen leg was $15 per kg.

The big message in all of this is that in New Zealand we have to recognise the diversity of China and act accordingly. On the seaboard the competition is incredibly fierce, and as commercial latecomers we are very much at a disadvantage. But out west, there are lots of opportunities and the competition is much less fierce.

Xining is just one example of many large cities and it is not necessarily the place to start. If I were a commercial person wanting to break through into China, I would be giving serious thought to cities like Xi’an, Kunming and Chengdu. 

Taking Kunming as an example, it has a population of about 6 million, and it is the capital of Yunnan which has a population of about 50 million. It is one of my favourite Chinese cities, with mild year-round temperatures, sunny skies, and a diverse ethnic mix of minority peoples. As for Xi’an, it and surrounding areas have an urban population of about 13 million (plus terracotta warriors) and this is the centre of China’s aerospace industry. 

As the Americans said of their own country more than a hundred years ago: go West, young man!


Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. This a regular column here. His archived writings are available at http://keithwoodford.wordpress.com

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Well said, Keith. It's always a mistake to think of large entities as singular. What you describe is much more a Federation, though I doubt the authorities would thank you for using That Word....

Hope you have enjoyed hospitality, good Bai Jiu and food there.

I am sure ppl asked you to do several bottom ups.

google "Flourishing Cities Offer Beijing a Lesson in Thinking Small"

todays WSJ article tells similar story.. smaller is doing better then badly managed big cities, funny that.

yes the product mix may well be changing.. from 3 weeks ago.

China's nursing mothers, slower growth add to Mead Johnson woes
August 13, 2015

(Bloomberg) — China is causing trouble for baby formula maker Mead Johnson Nutrition Co., which is getting a lesson in the risks of depending heavily on the nation's developing consumer class.

Two decades after opening a manufacturing facility in China, the company's operations there are stumbling. Slowing economic growth led the country to devalue its currency this week. Baby formula competition is stiffening as global dairy prices sink. And the Chinese government is throwing its weight behind a movement to encourage breastfeeding, which had fallen out of favor.

Mead Johnson is especially vulnerable to China's economic and cultural shifts. The Glenview-based maker of Enfamil relies on the world's most populous country for almost a third of its annual sales. When Mead Johnson lowered its 2015 profit and sales forecasts last month, Chief Executive Officer Kasper Jakobsen said the company was like many others with operations in the country that held “an overly optimistic view of what they could achieve in China.”

Mead Johnson shares dropped to a 16-month low Wednesday, falling 5.1 percent over the two trading days since the yuan devaluation.

“Their model worked well in the past, but obviously the China market is changing rapidly,” said Warren Ackerman, an analyst at Societe Generale.

DAIRY DECLINE

China accounts for about $19 billion in annual baby formula sales, according to researcher Euromonitor International. The other big international brands in the market, Danone and Nestle SA, have a more diverse set of products and significantly less exposure to China than Mead Johnson.

“Even with the current economic slowdown, China represents a great commercial opportunity for our business, and we are committed to ongoing investments in support of our growth,” Mead Johnson said in an e-mail.

Through the first half of 2015, Mead Johnson reported a 6.3 percent decline from a year earlier in total Asian sales, including Enfamil and the Enfagrow line of milk-based drinks for toddlers. The company only reports Chinese sales separately once a year.

China, the world's largest dairy importer, is now making more milk domestically and reducing the amount it brings in from abroad. The U.S. Department of Agriculture reduced its 2015 import forecast for whole milk powder in China to 400,000 tons, or about 40 percent less than last year.

SUPPLY GLUT

The reduction has contributed to a global supply glut of milk powder, making it cheaper to produce baby formula for Mead Johnson -- and its competitors. Profit margins are up because formula is cheaper to make, but the lower cost has created an opening for rivals to cut prices in China, threatening Mead Johnson's market share.

Mead Johnson didn't start taking steps to compete on price until late in the second quarter, Jakobsen said. It's too early to determine the impact of those price cuts on Mead Johnson's results, said Erin Lash, an analyst at Morningstar Inc.

The company has to be careful with pricing decisions. In 2013, Chinese regulators fined Mead Johnson and five other baby formula companies, including Abbott Laboratories and Danone, a combined $109 million for price-fixing. Mead Johnson didn't contest the findings and paid a $33 million penalty.

IMPORTANCE OF IMPORTS

Market share is hard-fought in the baby formula business, where brands bank on loyalty. “If something works, you don't want to switch,” Lash said.

That steadfastness may be even greater in China, where contamination scandals have led parents to shop exclusively for imported brands like Enfamil. In 2008, formula made by Chinese producers was found to be contaminated with the chemical compound melamine, which is used in plastics and dishware. The contamination resulted in at least six deaths and about 300,000 reported illness.

Mead Johnson is taking advantage of that lingering concern as part of its plan to regain market share. In April, the company introduced its first fully imported product in China, finished at its manufacturing facility in the Netherlands. The new line accounted for 20 percent of the company's Chinese second-quarter sales. Mead Johnson's other imported products are finished in China.

“Mothers want more product that's not touched in China at all,” Ackerman said.

BREASTFEEDING

Still, threats to growth in the Chinese market keep emerging, such as the government's two-year-old plan to encourage mothers to nurse their children.

In rural China, about 30 percent of babies six months old or younger are breastfed, compared with 16 percent in urban areas, according to the country's National Health and Family Planning Commission. The government wants the overall rate to rise to 50 percent by 2020.

Formula makers in China aren't allowed to market the products in hospitals or hand out free samples, and Mead Johnson agreed last month to pay $12 million to settle U.S. Securities and Exchange Commission allegations that the company paid Chinese health-care professionals at state-owned hospitals in exchange for recommending its baby formula. Mead Johnson didn't admit or deny the allegations.

Until a baby turns 1, Chinese employers must provide its mother with at least an hour a day for lactation. But there are cultural traditions that may help Mead Johnson remain strong in China. Especially in cities, it's common in a baby's first month of life for Chinese families to hire a postnatal worker, sometimes known as a confinement nurse or yue sao, while the mother rests.

“It's hard to undo the idea that formula is better overnight,” said Louise Roy, a Shanghai-based lactation consultant.

http://www.chicagobusiness.com/article/20150813/NEWS03/150819908?templat...
http://www.chicagobusiness.com/article/20150813/NEWS03/150819908?

and policy makers busy in the fore and background
giving meaning to moves we see on the ground....

Minister Han explained that the government's strategy is to let companies play the main role as self-regulators with the government playing a secondary role. The "D20" summit was attended by Chinese companies who are expected to form the industry's core: Yili, Mengniu, Modern Dairy, Guangming (Bright), Liaoning Huishan Dairy, Shengmu, Sanyuan Foods, Zhongken Dairy, Wandashan, Shijiazhuang Junlebao, New Hope Dairy Holdings, Heilongjiang Feihe (Firmus), Beingmate, Nanjing Weigang, Tianjin Jialihe Muye, Xinjiang West Region Spring, Fujian Changfu, Henan Huahua Niu, Jinan Jiabao Milk, and Xi’an Yinqiao (Silver Bridge). It's not clear who drew up the guest list. Presumably, no foreign-invested companies were invited.

The unspoken theme of the Beijing dairy summit was voiced by the commentary. The government's vision is to drive small, unreliable companies out of business while creating 3-to-5 big Chinese companies. Foreign-invested companies will be forced to "obey China's monopoly law." Breaking the "monopoly" of foreign milk suppliers is a chief objective. Chinese companies hope to "overcome foreign companies like Mead Johnson, Abbott Labs, and Dumex that have dominated the market for so long."

http://dimsums.blogspot.com.au/2015/08/chinese-dairy-industry-chosen-20....

we didn't seen Dakang on the list...

and in regard policy thoughts see
here
http://dimsums.blogspot.com.au/2015/05/chinese-dairy-balance-or-wipe-out...

and then here
http://dimsums.blogspot.com.au/2015/06/a-silk-road-for-agricultural-inve...
note the comment re TPP.

Get your web translators out and work through the original local script sites too.

anyone slightly alarmed by China's " peace day" parade today? Looked like a cold war style show of strength. i wonder if as their economy goes off the boil, they may revert to old tactics to keep control.