1.2 Previous studies, scope and outline

Much has been written on the drivers and sustainability of China's growth; from a New Zealand perspective, Buckle (2009) traces China's development in the context of the Asia-Pacific region over the past thirty years leading up to the development of the GFC. In New Zealand and Australia, the Reserve Banks and Treasuries have both undertaken research on the impact of China's development on their respective economies.

In Australia, Lowe (2009) identifies Australia's close trade links with Asia, especially China, as supporting it through the GFC and as a positive for the outlook. Battellino (2010) finds that while previous mining booms had considerable benefits for the Australian economy, they led to higher inflation which the floating exchange rate should help avoid in the current boom. Liu and McDonald (2010) examine trends in China's growth and urbanisation and conclude that because economic convergence is far from complete, China will be a major source of minerals demand for some time to come.

Gruen (2011) traces the impact of the emergence of China on the industrial structure of the Australian economy and expects its continued growth to have a significant impact in the future. McKissack and Xu (2011) conclude that China successfully steered its economy through the GFC, but that it faces growing imbalances, particularly increasing inflation. Parkinson (2011) discusses the opportunities and challenges in China's further development and its impact on Australia.

In September 2012, the Australian Treasury, the Reserve Bank of Australia and the International Monetary Fund (IMF) jointly hosted a conference on structural change and the rise of Asia[11] and in October 2012 the Australian government released a white paper entitled "Australia in the Asian Century" which makes recommendations on how Australia can take advantage of Asia's continuing development.[12] In December 2012, the Australian Treasury released a special issue of its Quarterly Roundup to mark the fortieth anniversary of the establishment of diplomatic relations between Australia and China.[13] Plumb, Kent and Bishop (2013) argue that the Australian economy has adjusted relatively smoothly to the terms of trade shock arising from China's increased demand for resources as changes in relative wages and prices have allowed factors of production to move to the resource sector.

In the New Zealand context, Bollard and Smith (2006) identify the emergence of China as one of the key global developments affecting New Zealand in the new millennium. Borkin (2006) considers that China's development is likely to have a positive effect on New Zealand's terms of trade through both higher export prices and lower manufactured goods import prices. Stevens (2007) places the growth of China in the context of ongoing globalisation and identifies rising incomes in Asia as a source of increased demand for high-quality agricultural products from New Zealand.

Buckle and Cruickshank (2007) point out that China's growth and integration into the world economy have made a major contribution to growth in the APEC region which is an important trading bloc for New Zealand. Sullivan and Aldridge (2011) argue that strong growth in China is the major driver of higher prices for New Zealand's export commodities, although supply constraints and energy policies are also relevant. Briggs et al. (2011) examine developments in the main commodity markets relevant to New Zealand up until 2008, finding that both common and commodity-specific factors were at play.

There has also been a series of IMF Working Papers on the spillovers from China's development, including to Australia and New Zealand.[14] While these papers discuss the impact of China at an aggregate level, they do not examine the impact on the New Zealand economy of the growth in China's demand for specific commodities. This paper addresses that topic; accompanying papers examine the outlook for China's impact on the New Zealand economy (Bowman and Conway, 2013) and quantify the impact of China's growth on the New Zealand economy (Osborn and Vehbi, 2013).

This paper identifies the main features of China's recent economic development and their impact on the New Zealand economy. The analysis concentrates on China's demand for primary commodities, but also refers to services exports and manufactured imports from China. Some other economic impacts are also discussed briefly. It is more concerned with the long-term drivers of China's growth and its impact on the New Zealand economy than with the short-term cyclical forces acting on China's economy, although they are also relevant and may interact with some of the longer-term drivers.

The analysis in this paper is mainly restricted to the direct impacts of increased commodity demand on components of GDP. It does not net out offsetting impacts which are difficult to quantify, for example imported products used to produce exports.[15] In addition, some of the benefits from China may be offset by falls in exports to other countries in cases where New Zealand supply is limited. On the positive side, stronger demand from China for commodity products will have lifted prices in all markets.

The paper is organised as follows. Section 2 traces the nature of China's development over the past three decades. Section 3 examines the impact of China's recent strong growth on the New Zealand economy and the final section draws some conclusions.