As China’s currency takes the down elevator towards the basement – and after two days of decline no one knows how far down it will eventually go – its hard to see any good news for New Zealand. Our main export commodity (dairy powder) has already lost 70 % of its value over the past 18 months – and now everything we sell into our biggest export market (China) will cost more. Top use the ruling cliche, it’s a headwind. Demand will inevitably diminish, given that those much-prized customers in China’s emerging middle class will now have to pay more for New Zealand goods. Similarly, tourism from China – a recent bright spot for us – will also come under pressure, as Chinese tourists discover the bad news that their money will buy less, abroad.
Supposedly, two main reasons have been driving this devaluation. The obvious one is that China’s economy is even weaker than suspected. Therefore, the devaluations are a method of shoring up sales abroad, thus keeping the factories and jobs at home alive, and staving off the social unrest that might ensue from sudden, mass unemployment. The dangerous outcome for the global economy is that this solution is basically a reversion to pre-GFC conditions. We’re all headed back to the time when everyone, including China and its export-oriented currency, were hitching a ride on the US economy as the global consumer of last resort, even if that role is itself reliant on unsustainable levels of debt. (But that’s another story.)
The second reason for China’s devaluation is longer term, and involves letting market forces play a bigger role in the setting of the currency, thus furthering China’s ambitions that the yuan/renminbi should become a reserve currency in the global economy. This has put China’s critics in something of a bind. Having complained for years about Beijing’s politically-driven manipulation of its currency to boost its exports, those critics can hardly complain when China steps back, and lets market forces achieve the same result. True, as the New York Times pointed out yesterday, China’s new enthusiasm for market mechanisms probably wouldn’t last five minutes if the traffic started going the other way, and its currency (and related prices for its exports) began appreciating at the rate of 2% a day. (That also is a story for another day.)
Right now, a crash landing for China’s currency is not a pleasant prospect for anyone – and the devaluations have already put downward pressure on every other currency in the Asian region. In Europe, the soft, export led recovery will also be put at jeopardy by China’s move, and will encourage the euro to join the race to the bottom. The US Federal Reserve, which was looking to raise its interest rates in September in response to a strengthening US economy will now (reportedly) almost certainly put that planned rate rise on hold, lest that should damage US exports and the tentative US recovery on which ( as mentioned) the rest of the global economy now depends. Truth be told, China could easily minimize the carnage it is causing – mainly, by using its massive $3.5 trillion foreign exchange reserves to buy back some of its currency and engineer a softer landing. If the devaluations continue for much longer, one can expect that the Peoples Bank of China will be forced to intervene along those lines.
As a side issue, China’s devaluation has already revived criticism among US politicians – such as House Ways and Means Committee chairman Sander Levin – that the Trans Pacific Partnership trade deal should include provisions that penalise trade-skewing currency manipulations of the sort that China routinely practices.
Unfortunately, as China pursues these beggar-its neighbour policies in order to boost its exports – much as Germany has done BTW, by different means within in the Eurozone – its campaign to get its currency accepted as a global reserve currency probably isn’t going anywhere fast. Again, the NYT yesterday hit that particular nail on the head:
The I.M.F., in particular, wants to see more evidence that the renminbi is being used outside China, notably for central bank reserves or bonds. The appetite among overseas central banks and bond investors for renminbi-denominated assets has gradually increased. But part of the demand has been a speculative bet that the renminbi will continue to rise against the dollar. Even small, occasional hints in the last 18 months that the renminbi might weaken have tended to erode such players’ enthusiasm. So Tuesday’s devaluation could damage China’s bid to bolster international use of its currency.
And as for the weak Kiwi dollar….if 65 cents to the US dollar was the floor before this week’s shenanigans began, then we have to be looking at heading further south, into the low 50s. When the US eventually raises interest rates, this will become a magnet for investors – and the only consolation as our currency declines is that the Aussie dollar will be heading down as well, maybe for them into the low 60s.
Better take that overseas holiday or buy that stuff from Amazon while you still can afford to, folks. And before online purchases attract GST. Because that’s happening, too.
Talking of consumer purchases… North London band Wolf Alice are the latest in a line of good bands with “Wolf” in their names. The band and lead singer Ellie Rowsell really do deliver on stage, and pretty much throughout their new album My Love Is Cool. In January, lets hope they make it to Laneways…