By Bernard Hickey
It was the best of times. It was the worst of times.
The fall in the New Zealand dollar to 65 USc from 85 USc a year ago has been both a blessing and a curse, and in several different ways.
Firstly, it's wonderful news for exporters, particularly those selling wine, apples, kiwifruit, beef, lamb and holidays at still-high prices. These farmers and moteliers can thank their neighbours on dairy farms. A 42% slump in the US dollar prices of dairy commodities triggered the New Zealand dollar's 14% fall over the last three months. It was fastest fall for the Kiwi dollar since the Global Financial Crisis. The irony for cow cockies is that just down the road in the orchards and the shearing sheds, it feels as if it's boom time, or at least time for a quiet few celebratory beers after a long dry spell.
Secondly, of course, it's not great news for consumers, Kiwi (overseas) holidaymakers, online shoppers, car buyers and businesses buying imported equipment. It means they're having to pay much higher prices and in effect makes them that little bit poorer, although buyers have had it very good for almost six years. The currency's slump has done some strange things. Sales of goods bought online from offshore websites were up 29% in June from a year ago, largely because of higher prices.
Thirdly, the currency's fall has been helpful for the Reserve Bank and the Government in helping to both cushion the blow of the dairy shock and to try to boost inflation back towards the 2% mark that Governor Graeme Wheeler is supposed to target. The combination of lower interest rates and the lower currency are 'automatic stabilisers' for the economy and are the great benefits of our flexible exchange rate and inflation targeting system. The moves in the Official Cash Rate and the Trade Weighted Index measure of the currency have egged each other on. The faster commodity prices fall, the faster the OCR has to fall, which in turn accelerates the fall in the currency.
Finance Minister Bill English and Prime Minister John Key are even arguing that these automatic stabilisers are enough to soften the blow from dairy crash and there's therefore no reason yet to "hit the panic button" and unleash a Government spending programme to stimulate the economy.
"Given our debt objectives, we'd be reluctant to reach for the fiscal lever rapidly when there's other tools there that can have a more direct affect," Mr English said this week.
"There's still plenty of room for further adjustment that would have a more direct impact, and that's around further depreciation of the exchange rate, further drops in interest rates," he said.
That's all fine when exchange rates are freely floated and responding to movements in commodity prices and the relative fortunes of economies. It hasn't always seemed that way.
Even Mr Wheeler has bemoaned for most of the last two years how the New Zealand dollar was unsustainably and unjustifiably high relative to commodity prices and our foreign debts, particularly last year when dairy prices fell 50% and the currency hardly fell at all. Critics would argue the currency rose in the face of commodity prices because of the very rate hikes Mr Wheeler unleashed in mid 2014, partly to slow Auckland's housing market, and that he is having to unwind now, but he was right about the currency's unfairness.
But now the currency and interest rates are moving in the same direction so the last thing New Zealand needs is for some sort of screwing of the scrum in the world of currency trading.
Yet that is what some argue we saw this week, and from New Zealand's largest trading partner -- China.
The Peoples Bank of China, which tightly manages the yuan (or renminbi as it's often called), allowed (or forced) the currency to drop 4% in two days on Tuesday and Wednesday. This unwound more than half of the yuan's appreciation seen in the last five years. There is debate about whether the Chinese Government is deliberately engineering a devaluation to boost its flagging export sector, or whether it is simply allowing market forces to work, and therefore the deprecation is natural.
Whatever the case, the sharp fall in the yuan against the US dollar shocked financial markets and raised even more fears about the health of the world's second largest economy. For years the Chinese Government has been saying it needed a stronger yuan to help rebalance its economy away from investment in infrastructure and export factories and towards consumption and the services sectors. So the sudden about-face reinforced suspicions that all was not well behind the opaque facade represented by China's economic statistics.
Some feared it would spark a tit-for-tat series of competitive devaluations across Asia as countries worried that China's exports would become more competitive than theirs without an even lower currency. This is often described as a 'beggar thy neighbour' policy leading to 'currency wars'. The early signs were not good. Currencies across Asia slumped, including in Vietnam and Malaysia.
The yuan's sudden also raises fear about capital flight out of China as investors hurry to get their money out and into assets in other currencies such as the Canadian, Australian, US and New Zealand dollars before the yuan falls further. The People's bank said on Tuesday its 1.9% devaluation, which was the biggest one day fall in the yuan's modern history, was a one off. The next day it fell again and by the same amount. Trust in Beijing's edicts is ebbing away fast, particularly after the debacle in China's stock markets.
A full scale currency war across Asia and into the rest of the world would be incredibly damaging for New Zealand's exporters, given we can't realistically fire our own shots and would have to simply live with a higher-than-natural currency. The New Zealand dollar rose 4.4% this week agains the yuan, despite last week's 10.3% fall in milk powder prices.
Any such war should increase the pressure though for the Reserve Bank to cut its OCR faster and harder than it otherwise would have, and for the Government to consider accelerating infrastructure investment into the regions.
The story of the New Zealand economy was a simple one up until this week. It has been a tale of one commodity (dairy) and one city (Auckland). Now there may be a third player -- the People's Bank of China.
* Apologies to the ghost of Mr Dickens.
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A version of this article was first published in the Herald on Sunday. It is here with permission.
21 Comments
The key here is that the PBOC let the currency fall by ONLY 5%. All indications are that if they took their hands off it completely, it would fall by a lot more, driven by the capital flight you allude to, and our exporters would be far worse off.
This isn't yet the beginning of a currency war. But we should be very concerned about what is happening to the Chinese economy. How many fires are they trying to put out at the same time right now? Debt, stock and FX markets are all a mess. Growth is closer to 0 than the offical 7%. The centrally planned market economy is looking very shaky.
This isn't yet the beginning of a currency war. It's been full on for a while, depending on who is counting.
So please, don't fall prey to economic revisionism. The Japanese Yen has fallen ~38% in value against the Chinese Yuan since mid 2012, up until this week's PBOC intervention. Everyone was fine with Japan pumping cheap/deflationary carry trade finance into the global sphere, while the collective "miracle" of central bank monetarism was failing to gain main street traction.
Unfortunately, it proved too much of a hurdle to fill the gap left by the retrenching private wholesale eurodollar credit creation powerhouse post 2007/8.The profitability of such endeavour has been crushed by state intervention in the form of crowding out participation and regulation.
Hence much need substantive US economic growth is always just ahead on the next quarter's horizon, but inexplicably it never materialises.
can you believe this?
How quickly we forget - January 2009
For all the pressure the Bush Administration put on Beijing to increase the value of the renminbi (RMB), which increases the price of Chinese-made goods in export markets and thus in theory should help diminish China's massive trade surplus, the U.S. ....
http://content.time.com/time/business/article/0,8599,1873604,00.html
In December 2009 or December 2010 Paulson and Geithner led a 12 man US Treasury deputation to Beijing to get China to stop pegging the Yuan to the USD and let it rise .... resulting in this cartoon ... beautiful
http://www.members.optusnet.com.au/~iconoklast/chinesedragon.jpg
Instead the US depreciated the USD by 50% with the 2 stimulus packs and 3 QE's
Well China saved the world economy since 2008, now it has broken its back, next please, calling India. Apparently India still has a bit of unencumbered collateral left. Africa has a few unencumbered resources, but they struggle to organise a piss up in a brewery so don't expect much from them.
The world is drowning in unpayable debts on the promise of a prosperous future, while the borrowings themselves guarantee the prosperous future can never arrive.
I posted this elsewhere but is certainly relevant to this discussion and trying to understand what is going on in China today:
"There is an economic and financial trainwreck rumbling through the world economy. Namely, the Great China Ponzi. In all of economic history there has never been anything like it. It is only a matter of time before it ends in a spectacular collapse, leaving the global financial bubble of the last two decades in shambles.
But here’s the Wall Street meme that is stupendously wrong and that engenders blind complacency with respect to the impending upheaval. To wit, the same folks who brought you the myth of the BRICs miracle would now have you believe that China is undergoing a difficult but doable transition——-from an economy driven by booming exports and monumental fixed asset investment to one based on steady as she goes US-style consumption and services.
There may well be some bumps and grinds along the way, we are cautioned, such as the recent stock market and currency turmoil. But do not be troubled—–the great locomotive of the world economy will come out the other side better and stronger. That’s because the wise, pragmatic and powerful leaders and economic managers who deftly guide China’s version of capitalism have the capacity to make it all happen.
No they don’t!
China is not a clone-in-the-making of America’s $18 trillion consume till you drop economy—-even if that model were stable and sustainable, which it is not. China is actually sui generis—–a historical freak accident that has no destination other than a crash landing."
http://davidstockmanscontracorner.com/the-great-china-ponzi-an-economic…
Beijing will have to do the opposite of what it has done for the last 20 years. That is, it will have to shrink the domestic money supply and banking system in order to sell dollars and euros rather expand domestic credit in order to sequester dollar liabilities (i.e. treasury bonds) at the PBOC.
The resulting deflationary spiral will suck the global economy into its vortex. And Wall Street will go down for the count because this time the Fed will be utterly powerless to reverse the tide.
Thx for that Stockman article, that I had missed, and its spot-on summation!
Here's AEP's take on it.
http://www.telegraph.co.uk/finance/economics/11799504/China-cannot-risk…
(IceCap) Those reporting and concluding that what happens in Greece will not affect the rest of the world, really have no idea what is coming down the pipe…..we see global markets being affected by collisions between global interest rates, global growth and global debt crises….Over the last 20 years, China has been viewed as the growth engine of the world, and justifiably so. With annual growth rates between 8% to 15%, China’s economy was literally eating every rock, stalk and barrel of practically every commodity in the world. And naturally, any country or company that produced these commodities made a tonne of money – including Australia. Today, China’s growth rate has slowed to about 3% which is a dramatic slowdown compared to what it achieved in the past. This slowdown, and China’s effort to even maintain these rates, will have significant repercussions around the world. And the first up to bear the brunt of this slowdown is its closest supplier of raw materials – Australia. With dark clouds on the economic horizon, the Australian government and central bank is doing everything possible to prevent the unpreventable recession. Interest rates have been reduced to all-time historical lows, meanwhile the Australian Dollar has plummeted -25% over the last year. Yet – the negative outlook has not improved.
Swap Australia with New Zealand in the above, and assume that the commodity is milk, and what do we get!
http://icecapassetmanagement.com/global-outlook/august-2015-icecap-glob…
Take a look at the commodity cycle we are at the end of a cycle.
Its just pure lies that certain leaders in Govt no nothing about cycles as held by the RSBNZ.
The Leader of Fonterra is not leading he is just taking a very high salary and hope it lasts as long as the fool shareholders stay asleep. My prediction is that the CEO of Fonterra will be gone by Xmas he failed to prepare for the future.
He failed to read the cycles that are avail to everyone.
The game for the CEO and Govt is to keep the people and the shareholders fooled for as long as you can, then when it gets too hard you resign for personal reasons.
Namely to spend the millions of salary saved in the bank and lead the good life while you leave the people who paid the bills behind.
NZ is in a recession it started in June 2014, the recession is gaining momentum as time goes along and the wheels fall off the economy.
Road build and bridge building going on all over NZ a few million has been given out to the west coast to try and keep it from dying since coal died.
Politicians will continue to deny that there is any major problems but the people are not that stupid.
TTP killed itself as there was nothing there for NZ except big business and the destruction of sovereign power.
Ah, China! Don't ya just love it...
"One of the world’s largest banks, China Construction Bank, became the latest victim of an elaborate fake after a local man set up a branch of its bank complete with card readers, passbooks and three teenage girls at the teller counter.... a man, surnamed Zhang, had set up the bank and staffed it with his 15-year-old daughter and two of her classmates..“I just wanted to open a bank,” he said in a television interview from behind bars. “I didn’t think that much about it.."
http://www.ft.com/intl/cms/s/0/9b4b95a4-4256-11e5-9abe-5b335da3a90e.htm…
Meanwhile in the UK milk sells for under 28p a liter (and unsurprisingly their farmers are in crisis too):
http://www.theguardian.com/business/2015/aug/14/milk-row-aldi-morrisons…
Surely New Zealand has no reason to be worried about China? We're best mates. They'll look after us, for sure.
After all, we're now on our way to 'pursuing economic integration' according to China Central Television, July 21st. Here's CCTV's take on it:
"Chinese President Xi Jinping held talks with New Zealand Governor-General Jerry Mateparae on Tuesday in Beijing and the two sides agreed to work hard together to promote their strategic partnership to a higher level.
"Xi said the relationship between China and New Zealand is heading towards a new era of comprehensive cooperation… The President said the two countries should expand their economic and trade cooperation, not just focusing on traditional sectors like agriculture and husbandry. He said the two sides should explore more cooperation fields, including food security, biological medicine, new energy and infrastructure…
"Xi said China and New Zealand are both important countries in the Asia-Pacific region, and the two have many common interests in promoting regional stability and development. China would like to increase exchanges with New Zealand in seeking for regional cooperation mechanism and pursuing economic integration.
"Mateparae said the comprehensive strategic partnership between China and New Zealand is very important, and his government attaches great importance to its relationship with China. He said President Xi's visit to New Zealand last year has pushed the two country's relationship to a higher level. He said his visit to China this time is to further promote the two countries' dialogue and cooperation in political and economic fields. The Governor-General said New Zealand hopes to grasp the opportunities of China's development and to further expand the bilateral cooperation.'
Mateparae never spoke a truer and yet sillier word than that bit at the end, "New Zealand hopes... "
Could it be possible (surely it couldn't be possible?) that China's leaders have taken John Key and the New Zealand government as naive and gullible, as desperate weaklings, as push-overs?
Maybe, just maybe, China is getting what it wants out of our abject and grovelling political leaders. We have thrown every door and window open on the promise of trading riches.
Economic colonisation is interesting. Rarely does the colony do as well out of it as the dominant player. But, as Mateparae puts it, 'New Zealand hopes...'
Bernard, so when the RBNZ coerces the market to collapse the NZD with OCR cuts, to suit its cronies (there was nothing "natural stabilizers" about that), you say that is "helpful" - but when the Chineese rig their exchange rate you paint THEM as villains. They are as bad as each other.
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