As New Zealand’s largest trading partner, the health of the Chinese economy is intrinsically linked to ours. With GDP expected to slow, and the country facing structural challenges, what’s next for China – and us? Milford Portfolio Manager Will Curtayne talks with Ryan Bridge about the key determinants, including demographics, debt, property, interest rates and tariffs – and how collectively they could impact us here.
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Bridge talks Business: 22 July 2025
Episode Transcript
Ryan Bridge
Kia ora and welcome to Episode 42 of Bridge talks Business with Milford. China – it’s our largest trading partner and the health of its economy is intimately linked to our fortunes. This week, we’re taking a deep dive under the hood of the Chinese economy to see how they’re performing, and by extension, how we might perform over the next year or two.
Milford’s Will Curtayne is in the hot seat this morning. But first, here’s your top five business bits.
1. US inflation data last week, while increasing, was slightly softer than expected. For those fearing a tariff driven return of inflation, this was something of a relief. Furthermore, it emboldened the Trump administration to up their attacks on Jerome Powell and the Federal Reserve. They are wanting a rate cut – and they want it yesterday.
2. Looking into the inflation data, there is clear evidence that tariffs are impacting prices. With goods prices accelerating at the fastest pace in a couple of years. This is likely to continue as more tariffs come on and take effect. The Federal Reserve are going to want more information before making a move on interest rates. Investors, by the way, expect those rates to remain unchanged at the next meeting next week.
3. Number three while US retail sales slowed, consumers are still spending, which is good, albeit at a slower pace this year. One area of the economy being impacted by high interest rates is the US housing market. Housing turnover is at a multi decade low, prices starting to flatten out there too.
4. Chinese monthly economic activity data released last week wasn’t as bad as feared, but bigger picture the Chinese economy has some structural headwinds – we’ll get to those in a second with Will.
5. This week is a quiet week for economic data, with global business surveys the only thing of note. US company earnings season is picking up, though, keeping investors busy digesting how companies are navigating the shifting economic landscape.
Right – so, great to have your company. This week, China’s economy is growing at about 5% per annum, which sounds great, but it is expected to slow in the second half of this year. Part of the reason for this is they have some structural issues. They have some underlying issues going on in their economy, which they may need to, in the future, actually start to address.
I’m joined on the podcast today by Will Curtayne, who’s a Portfolio Manager at Milford to talk this through. Just a reminder, this segment is informational only and should not be considered financial advice. Will, welcome back to the podcast.
Will Curtayne
Welcome. Good morning.
Ryan Bridge
Good to see you. So let’s talk about some of these challenges that China’s facing, the structural challenges – demographics. So, not having enough babies and population ageing.
Will Curtayne
Yip, exactly. China’s got a number of challenges, but at first it ball up to that lack of population growth. In fact, the population has been in decline for the last three years. China obviously doesn’t get much immigration like New Zealand and Australia. Your birth rate’s very low as a legacy of that one child policy. And policy changes to try and incentivise higher birth rates, are not meeting with great success at the moment. So from a starting point, if your population is going backwards, clearly that’s got issues for demand for housing and growth in your economy. Among other issues as well.
Ryan Bridge
Housing is another big sore point for them, right? Sort of an overinvestment in stock?
Will Curtayne
Yep. Correct. So, I mean, if we step back and look at China since the 1990s, it’s really been a hugely high-growth economy. They began this urbanisation trend, locating population from rural areas to cities, and they built big apartments. China joined the World Trade Organization in the mid 90s, and that created an export boom. But they ran that model very aggressively and they overbuilt in property and overinvested in property.
And every time there was a slowing in the economy they’d go pump a lot of money in, and take on debt to build more property, which would keep the steel industries and the economy running well. But it got overdone. Debt in China has grown to 312% of GDP, one of the most indebted nations in the world. And, two or three years ago, the property market peaked. Prices were down 23, 25% since then, but new property starts, or investment in new houses, is down to 75%. So, that’s a pretty material collapse in what was a very important industry in China.
Ryan Bridge
Yeah. When you talk about debt, 312% of GDP, who do they owe it to?
Will Curtayne
Most of it, fortunately, is within the Chinese system. So that’s total debt. So that’s government debt, local government debt, business debt and consumer debt. So it’s spread among all those different groups. The good thing for China is they don’t borrow a lot of that debt from overseas. When countries borrow a lot of debt from overseas and they get into trouble, normally the exchange rate will collapse. And then those countries struggle to pay offshore debt. But, China’s debt is within its own system, which does gives them a few policy levers if required down the track, to help deal with that debt burden, mainly doing what the US and the Western world has done in the last 15 years, which is print money and pay off the debt.
Ryan Bridge
Yeah. Pull all the levers. And China still has those up its sleeve, right? Most of those levers?
Will Curtayne
Correct. They seem reluctant to want to use those levers at the moment. Because if you’re going to aggressively cut interest rates and do what we call quantitative easing or money printing, it would likely cause a collapse in their exchange rate. At the moment, while growth is slowing in China, while there are challenges, it’s probably not dire enough for them to want to sort to those sort of measures. And if they were to do that today, then the Chinese currency would likely depreciate 10, 15, 20% or more. That would antagonise the US in trade relations because a weaker currency, makes your exports more competitive. And clearly the Donald Trump administration has got a big bee in their bonnet about a trade deficit with China. And anything China did that the US perceived as currency manipulation, it would be a sign for Donald Trump to go and threaten even higher tariffs in China. So China is probably just going to try and muddle through for the time being. And but if push comes to shove, they have a lever to pull to help shore up growth.
Ryan Bridge
So lots of potential solutions for them to some of the problems. But just coming back to those structural problems that we’re talking about, what do they mean for New Zealand and Australia – because we’re obviously heavily reliant on them for trade.
Will Curtayne
Good question. So yeah, when we go into it, the weakest industry in China is that new housing construction or the property sector. The consumer is cautious, they’re saving a lot. Remember, there’s no social backstops in China in terms of not much child care, pensions, unemployment benefits. So when you’ve got this uncertain economy, a slowing economy, the consumers are saving. So from that lens, New Zealand’s biggest export is clearly dairy products. We’ve seen a decline in the last few years of milk powder exports to China. But you know, more at the head of it, is New Zealand’s second largest export to China is forestry products – and they’ve fallen 12% over the last few years. And they will probably likely decline further because a lot of the forestry exports are used in housing construction or related industries.
So that’s not the end of the world for New Zealand. It’s just a slowing of a portion of our trade. You know, it doesn’t help the overall picture, but it’s not a collapse either. If we look to Australia, Australia exports 37% of its total exports to China. Over half of that is iron ore, which is used in making steel. A lot of that steel goes into the rebar and building big apartments and so on. So volumes of iron ore have held up, but the value has fallen a bit with price. Again, not the end of the world for Australia, but it’s just something that’s been a tailwind for New Zealand and Australia for 15+, 20 years and it’s now not a tailwind. In fact, it’s a marginal headwind to our total trade and economic growth.
Ryan Bridge
So, the question then becomes when will China do something about it? They’re cruising at about 5% growth at the moment. At what point do they start pulling some of those levers which might, as you say, antagonise Trump or have other unintended consequences?
Will Curtayne
Yeah, no, it’s a good question. I think over the second half and into next year, the growth rate will slow a bit, because growth in the first half of this year was actually supported by people front running tariffs that the US was putting on China. So businesses went and tried to purchase as much of the goods in China as they can, and get it to the US before tariff’s hit. That caused a mini boom in manufacturing exports in China. And then they also had some consumer stimulus placed last year, which helped prop up growth in things like appliances and motor vehicles. Those tailwinds are going to fade in the second half. So we expect some minor stimulus measures in China, probably around the consumer, to try and give incentives to the consumer to go out and spend.
That’s probably just going to slow the pace of decline and growth rather than re-accelerate it. And we think China will probably base case next year – 18 months – muddle through before they pull any big levers like printing money and depreciating currency. They’ll be hopeful that they can shore up growth without doing anything major. But if push comes to shove, I think they’ll be forced to at some point in the next couple of years.
The other catalyst could be if relations between the US and China completely fell apart for whatever reason, then China probably has no reason not to go ahead and pull the levers.
Ryan Bridge
And at that point, we’ve all got bigger problems on our hands.
Will Curtayne
Yes.
Ryan Bridge
If their relationship fully fell out.
Will Curtayne
Clearly not the way we want it to go.
Ryan Bridge
No. Can they hope that global growth will help get them through that muddelly year next year that you’re talking about?
Will Curtayne
Yeah, well it’ll help. If global growth picks up, then Chinese exports should pick up to Europe and America – a couple of their key partners. But, to a degree some level of tariffs is going to remain. So that will cause a little bit of a headwind in any kind of growth and trade related to the US.
One benefit for consumers in New Zealand and the rest of the world outside of America, is as China reduces some of their exports to America, they’ll increase their exports to the rest of the world. And we should get some cheaper prices. So it should help inflation in a lot of the countries outside of the US which, you know, fingers crossed, helps us with our interest rates in this part of the world as well.
Ryan Bridge
And just to finish, in terms of investors looking at China, this beast that we’ve been riding on the back of for the last few years, where does this leave investors when you’re looking for places to put your money?
Will Curtayne
A lot of the world doesn’t invest huge amounts of money in Chinese companies, either listed in Hong Kong or listed in China. There’s a bit of that, but fears of relations between China and the US, and China and the Western world have made people a lot more wary investing directly in Chinese companies.
So normally you get it through proxies. So in Australia, the big mining companies like BHP and Rio, have a lot of iron ore exports to China. We’ve got smaller positions in those companies these days because the risks of iron ore prices being subdued due to the collapse in the Chinese property sector. And otherwise, it’s these big, US listed companies like Louis Vuitton and so on, who sell a lot of consumer luxury goods into China. And of course, those have been a bit weaker as well. So we’re a bit more cautious on any listed company that sells too much of their products into China at the moment. Until we see them pull these big levers or increase the kind of policy support to get that economy going.
Ryan Bridge
That was Will Curtayne, a Portfolio Manager here at Milford talking about the health of the Chinese economy, which of course has implications for us all. Now don’t forget you can like, follow, subscribe and rate this podcast wherever you like to listen. Until then, see you next week. Invest in yourselves.
And don’t forget, invest in yourself New Zealand. See you next week.
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