Heat at core of global economy

New Zealand still relies heavily on the fortunes of its two largest trading partners, China and Australia, for its success. Business editor Dene Mackenzie talks to Forsyth Barr brokers Suzanne Kinnaird and Peter Young about the economic prospects for those trading partners.

China has been in the forefront of economic activity in the past few weeks. Sliding economic growth has caused mayhem on international sharemarkets.

Even government intervention has failed to stem global volatility. International Monetary Fund managing director Christine Lagarde says what has been demonstrated in the last few weeks is how much Asia is at the core of the global economy.

The disruption in that market had spilled over to the rest of the world.

Forsyth Barr broker Suzanne Kinnaird said China's economy was slowing and probably by more than the official 7% growth rate indicated.

But some measures such as industrial production exaggerated the slowdown because China's economy was shifting to services which were more labour intensive.

The deflation of China's stock bubble should have no more economic impact than its inflation did, she said.

Shares made up just 5% of Chinese household wealth. Share issuance was not a significant funding source for Chinese companies.

Property prices were far more important to household wealth and as collateral for bank loans. House prices and sales had rebounded recently because of lower interest rates and fewer restrictions on purchases.

The decision of the People's Bank of China to devalue the yuan was a net negative for the rest of the world since it would grab exports from countries competing with China, Ms Kinnaird said.

The offset should be a net gain for Chinese exporters but, at 3% to date, it was not a game-changer.

''The turmoil around the devaluation looks largely due to outsiders being divided on whether the move was a genuine effort to align the currency with market forces or a panicked response by Chinese political leaders to an economy slowing more quickly than they realised.''

Chinese law-makers had placed a 16 trillion yuan ($NZ4 billion) cap on local government debt as Beijing looked for ways to address one of the major impediments in the economy. The new limits came as China grappled with the high levels of local government debt, she said.

Much of the debt was a hangover from China's efforts to reinvigorate growth following the 2008 financial crisis, which succeeded in keeping the economy humming but saddled state-run banks and local governments with heavy liabilities.

Now growth was slowing again, China's heavy local debt risked further weakening the economy and gave Beijing fewer options as it looked for ways to spur activity again, Ms Kinnaird said.

Beijing had expanded a local debt refinancing plan. Under the plan, local governments could swap new bonds for high-interest local debt, giving them more breathing room to meet obligations.

''With regards to Chinese equities, prices will sink or swim based on their own fundamentals. Contrary to popular opinion, earnings and dividends have grown much more quickly since 2007 than in the United States. If the yuan falls further, Chinese equities may rally strongly.''

 


Key risks to the Chinese economy
- Stronger European and US economies would boost trade surpluses and increase demand for manufactured goods.
- Surplus capacity driving prices lower and feeding into slowing domestic consumption.
- Hard landing in the housing market.
- Credit-related defaults and bankruptcies.

 

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