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11 Sep 2015

What Slowing China Means for New Zealand

The New Zealand economy continues to be affected by the slowdown in China, with the NZX and kiwi dollar both falling heavily in recent days as the domestic economy grows by just 2 percent. While New Zealand is more insulated than Australia, the ongoing NZX reaction and third cash rate drop in a row has left little doubt about the increasing influence of China on the New Zealand economy.

With the yuan struggling to stabilise after its surprise devaluations, a 40 percent drop in the Shanghai index since June, and China’s producer price index (PPI) falling 5.9 percent in August, it's no surprise that people are worried about China. The majority of New Zealand's commodity trade is dependent on Chinese markets, with increasing economic and diplomatic ties only helping the relationship between the two countries to strengthen. China is already New Zealand's number one trading partner, with trade between the two countries hitting the $20 billion mark last year.

The New Zealand central bank recently cut interest rates for the third time this year, with the official cash rate falling by 25 basis points to 2.75 percent in a widely expected move. The kiwi fell 2 percent on the news, to a low of $0.6256 at one point, down from $0.6405 prior to the interest rate announcement. While the dollar has been falling sharply for months now, from a high of over US88c in July last year, recent doubts over China have helped to fuel pessimism.

"Concerns about softer growth, particularly in China and East Asia, have led to elevated volatility in financial markets and renewed falls in commodity prices," said RBNZ Governor Graeme Wheeler in his statement, adding "Domestically, the economy is adjusting to the sharp decline in export prices, and the consequent fall in the exchange rate... Activity has also slowed due to the plateauing of construction activity in Canterbury, and a weakening in business and consumer confidence."

China's Premier Li Keqiang is well aware of his nations influence on global markets, recently telling the World Economic Forum that “China is an economy that is closely integrated with the international market... Given the weak growth of the global economy, China cannot stay unaffected and the deep-seated problems that have built up over the years are also being exposed.” The Premier did reassure New Zealand and other emerging countries competing for exports, however, saying the yuan would remain "basically stable at a reasonable and balanced level”.

Mr Wheeler cited conditions in China when making the latest rate decision, while also speaking about the future and leaving the door open to further interest rate cuts: "Some further easing in the official cash rate seems likely... Conditions that probably would be needed to create a recession in New Zealand would be something like China slowing dramatically or perhaps moving into a recession... Also, if the El Nino really took hold and continued into the middle of next year or there abouts, that could have significant effect as well."