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Introduction
Following decades of rapid economic growth, China became the world’s second largest economy and New Zealand’s largest trading partner. But, in the years prior to the pandemic, and subsequently, the pace of growth has been notably slower, and the outlook is for further declines. Underlying the slowdown are shifts in the structural drivers of the economy – in particular, population ageing and lower productivity – that are posing challenges for economic policy in China.
This note discusses the impact of China’s growth on New Zealand over the past 25 years and considers how the shift to lower trend growth could affect the outlook. On the positive side, population ageing could increase consumption spending and support demand for New Zealand’s agricultural exports and tourism. On the other hand, China faces many obstacles including financial fragility and rising barriers to trade that could undermine growth.
Context
China is New Zealand’s largest trading partner and is likely to remain so for the foreseeable future. In both values and volumes, trade with China has outstripped that of all other trading partners since the early 2000s. Bilateral trade was initially dominated by exports of primary commodities – dairy, meat, forestry - but has broadened to include tourism and education (Figure 1).
The growth in China’s demand for New Zealand’s exports reflects China’s increasing global trade presence, rising incomes, prices, preferences and government policies.
China’s trade with the rest of the world increased rapidly after it joined the World Trade Organization (WTO) in 2001. WTO entry required China to remove many restrictions on exports, imports and foreign investment, which gave exporters greater access to China’s economy and underpinned growth in global trade for much of the 2000s.
New Zealand’s free trade agreement (FTA) with China led to a further surge in exports after 2008, and in 2016 China overtook Australia as the largest market. Strong growth in prices saw that share continue to climb, although international travel collapsed when the pandemic arrived.
China is also New Zealand’s largest source of goods imports, accounting for 23% of all goods imports, compared to 10% from the US, the next largest. Since 2018, the goods trade balance with China has been in surplus, in contrast to the overall deficit on goods trade. The services surplus withered when the pandemic hit and has only partly recovered.
Figure 1: China’s share of New Zealand exports

Source: Stats NZ, Treasury
The strength of China’s demand, coupled with New Zealand’s trading advantage, supported national income growth and government tax revenue (for example from higher farm profits). Meanwhile, expansion of China’s industrial sector put downward pressure on import prices, further improving the terms of trade – the ratio of export prices to import prices – and real incomes1. However, to the extent that these gains arose from the FTA, they are not able to be repeated.
The rise of China had an even more marked impact on the Australian economy. China’s demand for basic resources outstripped supply and underpinned large price increases that stimulated massive investment in Australia’s mining sector, supporting income growth and the movement of workers into mining and related industries, including many emigrants from New Zealand.
The significance of these linkages means that the potential for China’s economy to slow further, either gradually or sharply, is a significant risk factor for the New Zealand economy.
China’s long-run growth trajectory
Reforms initiated by the Chinese authorities in late 1978 opened the door to decades of rapid economic development and remarkable gains in living standards. Output increased by over 10% per year, on average, in the thirty-two years to 2011 when China emerged as the world’s second largest economy. Despite slowing down subsequently, China’s growth still averaged 8% in the decade before the pandemic.
As a result, per capita GDP rose to 15.8% of the US level or US$10,276 from 1.5% or US$156 in 1978, lifting hundreds of millions of people out of poverty.
Clearly, there remains considerable scope for China’s income to continue to catch up with the US. How quickly it can do so depends heavily on its ability to raise productivity growth. Many of the factors that drove growth in the past have faded, including industrialisation, urbanisation, labour force growth and privatisation.
Politically too, the focus has shifted. Under Xi Jinping’s leadership, the country’s main development challenge evolved from meeting people’s basic needs to improving their quality of life. Policy objectives include reduced reliance on investment as a source of growth and an increasing role for domestic consumption. But the transition has not been smooth, rapid credit growth has led to high debt and financial fragility, global trade has slowed, and some countries have become more concerned at the impacts of China’s industrial policies and restrictions on market access, as reflected in trade frictions between China and the US.
Growth has slowed
One framework for studying long-term growth divides GDP into contributions from labour, capital, and improvements in technology or efficiency, known as total factor productivity. Researchers attribute most of China’s slowdown to a decline in total factor productivity, although other forces also contribute (Figure 2).
Figure 2: Potential growth

Source: IMF Country Report No.23/81, People’s Republic of China, Selected Issues, February 2023
Growth in labour hours worked has stalled, reflecting population ageing, but improvements in labour quality have provided an offset. Capital accumulation has made the largest contribution throughout the period but has fallen from a peak of around 5% to 3%. This decline has occurred despite a relatively steady share of investment spending in GDP, pointing to a decline in the marginal contribution to output from increases in the capital stock. It also reflects the pattern of investment, including the large proportion devoted to the real estate sector, which tends to be relatively less growth enhancing.
Total factor productivity is calculated as the residual, the difference between GDP growth after accounting for capital and labour inputs and has slowed to around 1% from earlier growth of around 4%.
…and is expected to slow further…
The IMF, World Bank and private sector forecasters expect China’s potential growth will continue to slow (Table 1). The demographic dividend of rapid population growth is giving way to a demographic tax, and the impact of policies to support productivity growth are uncertain.
Table 1: Real GDP growth
10-year averages | IMF forecasts | ||||
---|---|---|---|---|---|
1992-01 | 2002-11 | 2012-21 | 2026 | 2029 | 2037 |
10.4 | 10.6 | 6.4 | 4.1 | 3.3 | 2.4 |
Source: IMF
China’s population is ageing rapidly and shrinking, driven by falling birth rates and rising life expectancy. China’s population peaked at 1.41 billion in 2021 and has subsequently declined (Figure 3). The population aged 65 and over (the old-age population) reached 216 million in 2023, double the number in 2007, or 15.4% as a share of the total population.
Figure 3: China’s population and UN projections

Source: UN
The UN’s population projections show the old-age share rising to over 25% or 315 million by 2050, while the working-age population (15-65) shrinks by nearly 200 million to 60% of the total. Growth in those aged 80+ increases even more strongly, rising to over 115 million in 2050. There are various sources of uncertainty in population projections, but they are largely based on cohorts already born and these fundamental and profound shifts in the population will create challenges and opportunities for China and its trading partners.
…but will continue to present opportunities for export growth…
In terms of opportunities, although fertility will likely remain low, and demand for infant nutrition might be static, growth of the old-age demographic will create new opportunities in areas such as food, nutrition, medicines, healthcare products, and leisure including travel and tourism. In addition, government policy may respond with measures to arrest falling birth rates and slow the ageing process, which could boost demand in the early-age sector. Moreover, within market segments, demand is shaped by preferences, including perceptions of quality, that can shift as incomes grow and potentially add to demand. In a market the size of China, small changes could have a large impact on export demand.
Ageing could also lower household savings. China has one of the highest national savings rates in the world, with households the main contributor. Household saving rose through the 2000s, peaking at 42% of disposable income in 2010. Saving then moderated but rose again as the pandemic added to future income uncertainty and remains high. The IMF estimates that demographic shifts, through reduced child-care spending and expectations of less family support in old-age, accounted for around half of the increase in household savings in the 2000s.
The flip-side of lower household saving is higher household consumption. According to the IMF, China has a similar level of GDP per capita to Brazil but only half the consumption per capita, so there is plenty of scope for consumption to increase. Although greater consumption may not prevent a slowdown in GDP growth, it can help shift demand to sectors and products that could benefit exporters, and it will help to ensure that growth is sustainable and reduce financial risks.
…and technological advances…
In the industrial sector, firms have sought to offset the effects of labour force declines and rising labour costs with investment in labour-saving technology and more capital- intensive production. China has been the world’s largest market for industrial robots since 2013, accounting for up to one-third of global installations. Nonetheless, the intensity of robot use is low relative to economies such as Germany or Korea, implying that China will likely remain a leader in robot adoption, which will help maintain its manufacturing competitiveness.
China’s demographic transition may also have implications for industrial prices. Shifts in patterns of consumption and declining investment will likely see demand decline in some industries, but increased automation and capital intensity may slow supply-side adjustment, keeping prices low.
In recent years, China’s government has implemented several initiatives to boost productivity growth, including investment in future technologies, such as artificial intelligence, and research and development more generally. These efforts will support productivity growth and may also contribute to downward price pressures. However, technology has become a key source of tension between the US and China, which could slow development in some industries. On the other hand, efforts to achieve self-sufficiency in key technologies have intensified.
…but high debt is a constraint
Slower growth in real GDP also poses challenges for government policy. Strong nominal GDP growth powered government revenue throughout the 2000s and helped to prevent the debt share of GDP from escalating (Figure 4).
Figure 4: Nominal GDP and debt

Source: Haver
However, credit driven investment since the GFC, combined with slowing GDP growth, has seen the debt-to-GDP ratio rise sharply, posing risks to financial stability. The quality of debt issued is also a concern. In the property sector, financial fragilities have been exposed, and the IMF continues to warn of the need to mitigate financial risks across the economy. Moreover, slower income growth means that growth in debt must slow to limit further increases in the debt ratio and avoid adding to financial vulnerabilities, which complicates the government’s efforts to shift the economy onto its desired trajectory while also supporting overall GDP growth.
Conclusion
China’s emergence as one of the world’s largest and fastest growing economies lifted demand for New Zealand’s exports and helped to lower the price of imports. The driving forces of China’s growth – industrialisation, an expanding labour force, urbanisation and privatisation – have shifted and some have reversed.
China’s policy makers are navigating their way through the next phase of development, while managing the risks from high debt levels. Although that path involves a slower pace of growth than in the past, it also opens up new opportunities for China’s trading partners. The route China takes, and how other trading partners respond to those developments, will have significant implications for the New Zealand economy in the years ahead.