Tag Archives: China

New Zealand’s export risk exposure to China.

On 7th April 2008 New Zealand became the first OECD country to sign a free trade deal with China, an economy which in the 1970’s was one of the poorest countries in the global economy. Today China is the world’s second largest economy and the fastest growing at a rate around 7% per year. China is now comfortably New Zealand’s largest export market, accounting for the largest share of our exports in all but a few sectors.

Source: Westpac Bank

In 2017, China surpassed Australia and became our largest export market. But as exporters’ focus has switched to China, New Zealand’s exports have become less diversified, exposing exporters to concentration risk.

Westpac Bank reported in their November 2020 Quarterly Overview that while the New Zealand-China trade relationship is strong, China could in the future choose to disrupt New Zealand exports. Recently Australian exports into China had the following restrictions imposed on them:

  • 80% tariff on Australian barley exports
  • ban on Australia’s biggest grain exporter
  • suspension of beef imports from five major meat-processing plants
  • China has also launched an anti-dumping investigation into Australian wine exports
  • Chinese cotton mills were told not to process Australian imports

At a high level, NZ-China trade flows reflect each economy’s comparative advantage and because of this trade relationship New Zealand faces less risk exposure. The risk exposure really depends on how important New Zealand’s export supply is to China and the other markets where the product/service can be sourced which includes other countries as well as domestically.

More Options = More Risk

China exposure risk by export sector

Westpac Bank

High risk
It seems that tourism, seafood, and gold kiwifruit have the highest exposure. For these exports, essentially China has options (including domestically) for alternate supply. Education (universities and English language schools) also faces similarly high risk.

Also kiwifruit as New Zealand only account for 4.5% of China’s total fruit imports. China does have a competitive domestic horticulture industry which has started to grow Zespri’s Sungold kiwifruit variety.

Medium risk
Wood and wider fruit sectors – have medium exposure risk. New Zealand accounts for a relatively significant share of global meat and wood exports, so China is reliant on New Zealand.
Meat – China also recognises New Zealand as a reliable and safe exporter. Looking at the wider fruit sector, exporters remain relatively diversified and thus less reliant on China.

Low risk
Dairy – in a strong position as China imports around 50% of its dairy produce from New Zealand.
Wine – China is a small market for New Zealand, so the sector’s reliance on China is also small.

Overall the complementary nature of the NZ China trade relationship means New Zealand’s risk exposure is less than the outright level of exports would suggest.
China needs New Zealand’s food (and wood) as it cannot produce enough (efficiently) on its own – while New Zealand remains the most competitive supplier. New Zealand needs China’s manufactured goods – while China remains the most competitive supplier.

Source: New Zealand’s exports to China: where is New Zealand most exposed? Westpac Economic Bulletin – 8 October 2020

Is China still influencing the value of the yuan?

I have blogged quite a bit on this topic and refer back to a very good video clip from PBS Newshour on how the Chinese authorities influenced the value of the yuan back in 2010.

Basically at 9.15am the Peoples Bank of China (Central Bank) and the SAFE (State Administration for Foreign Exchange) issues a circular to all the trading banks stating that this is the exchange of the Renminbi to the US$ for today. When companies sell goods overseas the US$ etc that they acquire are then exchanged for Renminbi with the Central Bank – therefore the Central Bank accumulates significant amounts of US$.

Today it could be said that China has done well economically relative to other countries largely due to its large trade surplus. However one would think that with a large trade surplus the yuan would increase in value as there is a greater demand for the currency in order to buy China’s exports. This raises the question as to whether China has been manipulated its currency in order to maintain its competitive edge in the export market.

  • When a country’s currency is getting too strong the governments/central banks sells its own currency and buys foreign currency – usually US$.
  • When a country’s currency is getting too weak the governments/central banks sells its foreign currency – usually US$- and buys its own currency.

For two decades until mid-2014 China’s prodigious accumulation of foreign-exchange reserves was the clear by-product of actions to restrain the yuan, as the central bank bought up cash flowing into the country. A sharp drop in reserves in 2015-16 was evidence of its intervention on the other side, propping up the yuan when investors rushed out. Since then, China’s reserves have been uncannily steady. This year they have risen by just 1%. Taken at face value, the central bank seems to have refrained from intervening. That is certainly what it wants to convey, regularly describing supply and demand for the yuan as “basically balanced”.
Source: The Economist – “Caveat victor” – October 31st 2020

With the surge in China’s trade surplus the yuan has remained fairly stable and with this you would expect that there would be an increase in foreign exchange reserves with Chinese authorities buying foreign exchange with yuan.

A couple reasons why this may not be the case:

  • Commercial banks foreign assets have increased by US$125bn since April. The commercial banks are state owned so it is plausible that the government has used them as a substitute. Adding these foreign reserves to the offical figures suggests invention to keep the yuan at an artificially lower rate. There is the possibility that the central bank has special trading accounts at the state banks. Also exporters have wanted to keep their US$ as they are worried that the disharmony with the US could damage the yuan.
  • The central bank made it cheaper to short the yuan in forward trades – shorting a currency means that the trader believes that the currency will go down compared to another currency.
  • Chinese officials want the yuan to be volatile but within a narrow range in order to convince other countries that they are not intervening whilst persuading people in the market that they will intervene if necessary.

Caught between a rock and a hard place

The Peoples Bank of China (PBOC) are trying to protect domestic producers by keeping a weak yuan so to make Chinese products attractive to overseas buyers. At the same time they are trying to prevent domestic capital from flowing too quickly out of China to stronger currencies. However a longer term scenario is that China would like the yuan to be more prevalent as a currency in the global market. The yuan currently accounts for approximately 2% of global foreign exchange reserves, although by 2030 it is estimated that it will account for 5% to 10% of global foreign exchange reserve assets.

Source: The Economist – “Caveat victor” – October 31st 2020

China looking to domestic sector to maintain growth.

Neoliberal policies of the last 30 years have seen income inequality grow and the collapse of consumer spending (C) the main driver of any domestic economy. There has been an increase in the proportion of income accruing to assets which worsens inequality in many countries. While China’s economy is synonymous with exports, private consumption has been the largest component of Chinese GDP growth since 2014. With household spending at 39% of GDP in 2018, compared with nearer 70% for more developed economies such as the U.S. and the U.K., it also has considerable potential for further growth. Remember that Aggregate Demand = C+I+G+(X-M).

S&P Global

At the annual planning meeting last month China decided to focus on expanding domestic demand and achieving a major breakthroughs in core technologies. President Xi Jinping’s administration is looking at being self-sufficient in a range of technologies that have in the past been dominated by US firms. An obvious reason for the switch to domestic consumers is that with COVID-19 there is increasing instability and uncertainty around the international environment. A temporarily suspended trade war with the US has emphasised the importance of ending its dependence on foreign technology supplies. President Xi Jinping outlined a new dual circulation economic strategy which came about with the potential decoupling with the US and deglobalisation which would negatively impact the demand for Chinese exports. The dual circulation economic strategy consists of:

  • The importance of strengthening domestic demand
  • Technological innovation over closer integration with the outside world

Growth targets
China has set targets for economic growth in its 5 year plans – this is its 14th 5 year plan. It is expected that annual average growth to be around 5% down from previous years where it was expected to be 6.5% – 7.5%.

Final thought
China needs a lot more domestic consumption as newly produced goods will just become surplus to requirements. This will also mean increased levels of corporate debt.

China and global energy – it has the wind at its back.

Since 2010 there has been a significant increase in US oil production which has made them much less reliant on other oil producers – oil and gas production has increased over 50% and the US is the biggest producer of both. Being less reliant on oil imports means that the US can now have greater power of nations that they used to import oil from – Iran, Venezuela and Russia. According to The Economist being the biggest producer of gas and oil doesn’t mean as much today for three reasons:

The Economist: – The changing geopolitics of energy. 17th September 2020.
  • There is no longer fossil fuel scarcity as the demand for oil might have already peaked and with an abundance of supply prices have dropped significantly.
  • Countries that are reliant on fossil fuels now realise that for the sake of climate change they need to change their energy source to a more natural option of power.
  • Solar panels and wind turbines generate electricity instantly whilst fossil fuels provide energy to a medium which then generates the electricity.

In considering the above this paradigm shift does more for China than the USA. Even though China is the biggest importer of fossil fuels it is a leading exponent of renewable energy at gigawatt scales. However China is in a very good position to secure oil imports as:

  • The increase in supply from new sources – Brazil, Guyana, Australia (LPG), and shale from the US – has meant a buyers market and this has suited the Chinese.
  • China is also in a very strong position with those struggling oil producing countries in that it has given them oil-backed loans.
  • China Development Bank lent two state-controlled Russian companies, Rosneft, an oil producer, and Transneft, a pipeline builder and operator, $25bn in exchange for developing new fields and building a pipeline which would supply China with 300,000 barrels of oil a day.

China energy sources:

  • Coal-fired – more than 1,000 gigawatts (GW) of generating capacity which makes it the world’s biggest carbon-dioxide emitter. Coal use is set to expand in the years to come.
  • Wind and solar capacity – 445GW, vast though it is by most standards, But China also has Hydropower capacity – 356GW of more than the next four countries combined.
  • Nuclear power – building plants faster than any other country; nuclear, which now produces less than 5% of the country’s electricity, is set to produce more than 15% by 2050.

Wind and Solar

Both wind and solar power require raw materials to be functional – non-ferrous metals like copper. Batteries require zinc, manganese and potassium. Although there is a lot of supply of these commodities it is the difficulty of getting them to the market that is the problem. China has helped here through domestic investment – it now produces 60% of world’s ‘rare earths’. It now looks overseas to Chile to secure lithium on which batteries now depend on.

China – produces more than 70% of the world’s solar modules and can produce over 50% of its production of wind turbines. It dominates the supply chain for lithium-ion batteries – 77% of cell capacity and 60% of component manufacturing. In 2019 China eased restrictions on foreign battery-makers – costs of solar panels and batteries have dropped by more than 85% in the past decade.

To maximise its electrostate power China needs to combine its renewable, and possibly nuclear, manufacturing muscle with deals that let its companies supply electricity in a large number of countries.

Source: The Economist – The changing geopolitics of energy. 17th September 2020

US dollar under pressure as the reserve currency.

In doing most introductory courses in economics you will have come across the four functions of money which are:

  • Medium of exchange
  • Unit of Account
  • Store of Value
  • Means of deferred payment

Since the Bretton Woods Agreement in 1944 the US dollar was nominated as the world’s reserve currency and ranks highly compared to other currencies in the above functions. As a medium of exchange the US dollar is very prevalent:

  • 60% of the world’s currency reserves are in US dollars
  • 50% of cross-border interbank claims
  • After the GFC, purchases of the US dollar increased significantly – store of value.
  • Around 90% of forex trading involves the US dollar
  • Approximately 40% of the world’s debt is issued in dollars
  • n 2018 banks of Germany, France, and the UK held more liabilities in US dollars than in their own domestic currencies.

So why therefore is there pressure on the US dollar as the reserve currency?

The COVID-19 pandemic has closed borders and will inevitably lead to more regionalised trade, migration and money flows which suggests a greater use of local currencies. However China has made its intention clear that the Yuan should become a more universal currency. Some interesting facts:

  • Deposits in yuan = 1trn yuan = US$144bn
  • Yuan transactions have grown in Taiwan, Singapore, Hong Kong and London.
  • Investment by Chinese firms into Belt and Road project = US$3.75bn which was in yuan
  • China settles 15% of its foreign trade in yuan
  • France settles 20% of its trade with China in yuan
  • 2018 – Shanghai sock market launched yuan-denominated oil futures.
  • The IMF suggest that the ‘yuan bloc’ accounts for 30% of Global GDP – the US$ = 40%

However if the past is anything to go by the US economy has gone through some very turbulent times but the US dollar has remained firm. This suggests that how we perceive the US economy doesn’t seem to relate to the value of its currency.

Source: The Economist – China wants to make the yuan a central-bank favourite
7th May 2020

What kind of recovery after coronavirus – L U V W

Like after the GFC in 2008 can China kick start the world economy? The FT’s global China editor James Kynge explains why China’s indebtedness means it is probably both unwilling and unable to launch a stimulus package like that of 2009. A lot depends on how quickly their own economy can bounce back and if it is a L U V W shaped recovery. Also can it act as a locomotive for the rest of the world. The video below contains some excellent graphs concerning China’s debt problem.

Although from 2011 the video below from the PBS Newshour shows reporter Paul Solman and Simon Johnson – former IMF economist and now at MIT. Johnson explains the different types of recoveries – L U V W shapes.

Saudi Arabia and Russia – oil price war

Below is a very good video from the FT outlining the latest disagreement between the USA and Saudi Arabia. Since 2017 both Saudi Arabia and Russia have been working together to prop up oil prices but have had a falling out over Saudi Arabia’s insistence on cutting oil supplies by 1.5 million barrels per day.

China the biggest importer of oil has cut back on oil consumption because of the coronavirus outbreak was bringing the economy to a standstill. Oil prices had their biggest one-day fall since the 1991 Gulf Crisis – some are expecting prices to go to $20 a barrel. What is at the heart of the fallout? Russia’s anger over sanctions targeted at its oil giant, Rosneft Trading. Washington imposed the sanctions last month over its continued support in selling Venezuela’s oil. Moscow was hoping to get Riyadh on its side to inflict economic pain on US shale producers, who Moscow feels have been getting a free ride on the back of OPEC+ production cuts. Shale production has pushed the United States into the number one spot as the world’s biggest producer of oil. Moscow hopes it could lead to the collapse of some of those businesses, if oil prices remain below $40 a barrel.

Source: Al Jazerra- Counting the Cost.

Developing economies growth 2010 – 2019

Below is a graph from the FT site that shows growth rates in leading developing countries and it makes a good comparison with the Eurozone and the World. Some emerging economies have, nevertheless, achieved high economic growth rates in recent years. China has witnessed particularly rapid economic growth and has become the second largest economy in the world behind the US. China’s increase in output has been driven by increases in investment and exports. This has been helped by a fall in the renminbi which makes Chinese exports cheaper. India’s growth rates has also been significant because of an increase in the labour force and advances in IT. Remember that ‘economic development’ is the process of improving people’s economic well-being and quality of life whilst economic growth is an increase in an economy’s output and the economic growth rate is the annual percentage change in output.

China no longer a manipulator of its currency

Here is a very good explanation from the FT on China’s exchange rate and the fact that the US no longer sees China as a manipulator of its currency – the Renminbi.

  • In May 2019 with the threat of US tariffs on Chinese goods the Renminbi depreciated in value – notice the chart is inverted which means that 1 US$ buys more Renminbi and the value of the currency falls. To look at it another way it takes more Renminbi to buy 1US$. This makes Chinese exports cheaper in the US.
  • In August 2019 when the US came good on their threat to impose tariffs the Renminbi fell below 7 Renminbi / US$ in order to protect its exports to the US. Below 7 Renminbi / US$ is seen as a major threshold – the last time this happened was after the GFC.

How do China authorities intervene to manipulate the Renminbi?

The Renminbi is not a floating exchange rate which it is not determined by supply and demand. The government manages its exchange rate in two ways:

  • Peoples Bank of China (Central Bank) can or sell US$ on the foreign exchange market – this depends on what they wish for the value of the Renminbi against the US dollar
  • People’s Bank of China permits the Renminbi to trade 2 per cent on either side of a daily midpoint set by the. Basically at 9.15am the Peoples Bank of China and the SAFE (State Administration for Foreign Exchange) issues a circular to all the trading banks stating that this is the exchange of the Renminbi to the US$. It is then permitted to trade 2 per cent on either side of the midpoint rate.

But is China a currency manipulator? According to the US Treasury a country is a currency manipulator when it does the following 3 things:

  • A significant bilateral trade surplus with the US.
  • A material current account surplus of more than 3% of GDP.
  • Persistent one-sided intervention in its currency market.

But in August the Chinese economy was slowing down and the Peoples Bank of China (Central Bank) provided stimulus to the economy which would depreciate the currency anyway. However with more trade talks between the US and China and both agreeing to no more tariffs and phase one of a trade deal, the value of the Renminbi against the dollar starts to appreciate. Although the US has no longer called China a currency manipulator it seems that it didn’t have the grounds to do so. This must be a concern for other trading partners with the US.

Resource Curse – but what about ‘Trade Partner Curse’ – New Zealand’s trade with China.

I have blogged quite a few times about the ‘Resource Curse’ but what about the ‘Trade Partner Curse’? New Zealand has been renowned for its primary exports but is it a concern that a third of every dollar earned in the primary sector comes from China. Dr Robert Hamlin (University of Otago) stated that based on experience no more than 20% of revenue should be earned from one source to ensure a buffer against changes in terms of trade and the economic conditions in the favoured country of destination.

Higher Terms of Trade – would be beneficial because the country needs fewer exports to buy a given number of imports.
Lower Terms of Trade – country must export a greater number of units to purchase the same number of imports.

New Zealand which is traditionally dependant on primary exports usually faces instability which arises from inelastic and unstable global demand especially from China. By relying on the Chinese market, New Zealand exposes itself to greater risk of recessions in that market which may reduce in the demand for New Zealand products. Having numerous export markets means that there isn’t such exposure to economic volatility. Furthermore, countries that are commodity dependent or have a narrow export basket usually faces export instability which arises from inelastic and unstable global demand. The 2018-19 Ministry for Primary Industries’ Situation and Outlook report stated that from the year to June 2019 – total primary exports = $46.3bn but when you look at the breakdown from which country you get the worrying sign that more trade is going to China and less to other countries – essentially China is crowding out other markets:

China – $14.4bn
Australia – $4.5bn
USA – $4.2bn
EU – $3.1bn
Japan – $2.6bn

Source: https://oec.world/en/profile/country/nzl/

In 2017 China accounted for 24% of all New Zealand’s trade exports (see above). China also was the top export destination for New Zealand primary sector – 24% of primary sector exports went to China – by value:
25% of dairy,
43% of forestry,
31% of seafood and
21% of red meat.

China is taking a long-term approach to secure food supplies for its growing population by also buying NZ processing companies, giving it control of the supply chain. The reliance on China comes with risks that its economy remains strong. A downturn in their economy could have implications for New Zealand’s primary sector so it is important to have a diversified portfolio.