Preparing for the crossfire
It’s time for our exporters to take stock of a potential slowdown in China, writes Shamubeel Eaqub.
A weaker exchange rate will make our products more expensive, and a slower economy could reduce demand.
China is in the crosshairs of Trump’s trade war. So far it has been posturing, but the damage could be worse than expected.
If China waged a currency war it could further destabilise relations with the United States. For our exporters, it is time to take careful stock of their exposure to a China slowdown.
China is our top export destination, accounting for
20 per cent of all trade in the year to March 2018. It is a massive consumer of our dairy, tourism, forestry, meat and seafood.
China’s importance has increased enormoulsy in the past decade. Exports of physical goods such as dairy, meat and forestry used to make up 5 per cent of the total a decade ago; now it is
23 per cent.
Exports of services to China, dominated by tourism, have risen from 7 per cent to 13 per cent in the past decade.
This means our exporters and our economy are more exposed to what happens in China than ever before. China’s economic performance, exchange rate and position in global affairs all matter to us.
Following the global financial crisis China played a big role for New Zealand exporters and the Asian economy. China inflated its economy through massive stimulus, particularly through more bank lending. This had the desired effect of increased investment in China, crossborder purchases and economic growth more generally.
Because China is part of complex supply chains that span many countries, its growth also boosted the economic activity of its economic partners.
New Zealand benefited from rapid increases in exports of dairy, meat and forestry – at a time when exports to other countries were shrinking. It sheltered our export sector from the worst ravages of the great recession.
But China’s increase in debt wasn’t without its faults. Some of the lending did not go to good projects, and parts of the economy, such as the property market, were overheating.
In recent years, the Government has been trying to find the delicate balance in choking off some of the lending growth, but not so sharply as to slow the economy too much.
In recent months, it seems growth in the Chinese economy has been moderating. There are growing risks from a trade war with the US. President Donald Trump has threatened tariffs on all US$500 billion (NZ$731b) of China’s exports to the US.
The Chinese government seems to be moving to soften the blow for its export and investment-dependent economy. It has eased monetary conditions, by making it easier for banks to lend, pumped liquidity into the monetary system and appears to be devaluing the currency. It has also announced tax cuts and infrastructure spending – classic Keynesian fiscal stimulus.
The yuan has depreciated by 5 per cent against the US dollar since the beginning of last month. This could stoke further anger from the US, which accuses China of manipulating its currency to favour Chinese exporters.
In a way, currency devaluation buys Chinese authorities time. Tariffs imposed by Trump will hurt; but imposing countermeasures will also hurt. Tariffs are a tax on your own citizens to spite a rival.
Delaying retaliatory tariffs gives China breathing space and a lower currency reduces the sting of Trump’s tariffs.
Our exporters, who are more reliant on China than ever, need to plan for a weaker exchange rate that will make our products more expensive, and a slower economy that could reduce demand for them.
It is not quite the same, but during the Asian financial crisis our exporters were hard hit and tourism took many years to recover.
If China slows, the contagion to the regional economy will be widespread and New Zealand will be in the impact zone.
Chinese authorities are taking steps to guide their economy through uncharted waters. So far, the measures are gradual.
But the risk of trade and currency wars loom larger. Our exporters should prepare their own battle plan, or risk becoming casualties of the US-China tradeand currency-war crossfire.