The growing strength of China

April 9th, 2013 at 10:00 am by David Farrar

Audrey Young reports:

New Zealand’s ambassador to Beijing, Carl Worker, passed on a salient fact to Prime Minister while they were waiting for President Xi to welcome them into the meeting room at the stately Bo’ao guest house.

If the southern Guangdong province (where Key arrived last night) were to break away from – and there’s no suggestion it ever would – its economic strength is such it would immediately be in the G10, the top 10 economies of the world.

That’s quite extraordinary. That one province would make the G10.

Key recounted the fact on the balcony of his own hotel in Bo’ao before a mad dash to the airport for the next leg of his trip (to Guangdong) because the meeting with Mr Xi had gone well over time.

Mr Key was fizzing about the meeting about the state of relationship so far, the personal rapport between the leaders themselves but mainly because of the readiness of both parties to take it to a new level.

The fact that Key could raise something as serious as direct currency conversion between the Kiwi dollar and the reminbi with a senior minister at lunchtime and have it ticked off by Xi for further work in the talks a few hours later would make any former banker go giddy.

The possibility of direct currency conversion is fascinating. Not so much for what it means for China and NZ, but equally the decline of the US dollar as the global reserve currency. This is what happens when you start to print money because you are spending too much.

The scale of development is huge – Xi said yesterday within five years it is projected that China’s imports could be worth $US10 trillion.

He could see a day when 400 million Chinese a year could be outbound tourists.

I noticed in South Africa that a huge proportion of tourists were Chinese. As a Chinese middle class numbering several hundred million gets wealthier and spends more, the potential economic growth is immense.

Fran O’Sullivan also reports:

Like other leaders Key planned to acknowledge Xi’s recent ascension to the presidency. But his main game was to position New Zealand as a valuable partner to China in developing global supply chains to feed its people. “It makes sense to team up with Chinese capital and use other countries’ land masses to produce food we can’t produce in New Zealand,” Key says.

New Zealand has limited arable land left for developing new farms. If the nation’s agricultural businesses want to expand, they should take their expertise overseas and form partnerships in countries with bigger land masses.

Which is why the Landcorp partnership with Shanghai Pengxin should be seen as a great opportunity, instead of being condemned by xenophobic MPs from the left.

China Exports

 

This graph shows annual exports to China. Readers will recall that the Greens and NZ First railed against the Free Trade Agreement with China signed in 2007.

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33 Responses to “The growing strength of China”

  1. iMP (2,359 comments) says:

    It makes sense to strengthen connections with China; but she is not the strong economy others make out; actually quite fragile and wholly dependent on other economies with whom to trade. She is growing too quickly and the bubble will burst. Also, the growing middle class will demand more say and control of government (still a one-party oppressive state) which will bring in a season of instability and perhaps revolution (China has had several before).

    Some thoughts: http://conzervative.wordpress.com/2012/09/03/is-china-a-threat-pt-1/

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  2. Fletch (6,262 comments) says:

    I posted about an article on GD the other day about how Australia is poised to bypass the U.S dollar and convert straight to the Yuan.

    In what may mark the beginning of a historic shift, Australia appears ready to bypass the U.S. dollar as the world’s reserve currency and allow for the direct convertibility of the Australian dollar into the Chinese yuan.
    “Reserve currency” is the term used to describe a currency that many governments hold significant amounts of in foreign exchange reserves.
    By directly converting its currency into Chinese currency, Australia’s businesses will be able to cut costs and the inconvenience of changing foreign-currency earnings into dollars, thereby encouraging and accelerating even more business with China. 
    Today, Australia is the fifth-largest source of Chinese imports, notes Tyler Durden of Zero Hedge:

    Why is this so very critical? For the simple reason that the free lunch the US has enjoyed ever since the advent of the US dollar as world reserve currency, may be coming to an end as other, more aggressive alternatives – both fiat, and hard-asset based – to the USD appear. And since there is no such thing as a free lunch, all the deferred pain the US Treasury Department has been able to offset thanks to its global currency monopoly status will come crashing down the second the world starts getting doubts about the true nature of just who the real reserve currency will be in the future. 

    http://www.breitbart.com/Big-Peace/2013/04/02/Australia-To-Bypass-U-S-Dollar-And-Convert-Directly-Into-Chinese-Yuan

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  3. wreck1080 (3,865 comments) says:

    Looks like Auckland house prices are set to boom.

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  4. Jack5 (5,030 comments) says:

    What did John Key mean, bypass the US dollar? You can convert NZ currency direct to renminbi or yuan now. What is Audrey Young talking about in the Hooerald?

    Is John Key talking of pegging the Kiwi dollar to the renminbi? If it were a straight peg, rather than having the renminbi as part of a basket, NZ would then have its currency l tied to the whims of the Chinese Communist Party which directly controls the economy and currency of China. There’s no independent reserve bank in Beijing. We would be as vulnerable as Greece, Portugal, Italy, Spain and co. are to the euro.

    As for Government holdings of reserve currency, NZ has fuck all by first world standards, and it’s not an important factor in the NZ economy.

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  5. anonymouse (709 comments) says:

    That’s quite extraordinary. That one province would make the G10.

    Don’t let your eyes pop too far out of their sockets DPF,

    Guangdong’s GDP on a PPP basis is about 1.3Tn, about the same size as Texas, California is still larger, at over 1.9Tn,

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  6. Brian Griffin (22 comments) says:

    Some might veture to suggest that it was fortunate that we had a leader who had the foresight to sign a FTA with China in 2007. She may not have been Thatcher, but she did have some smarts.

    Is that why the current Chinese leader is giving us so much time?

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  7. dime (9,810 comments) says:

    yes Brian. its his love of helen clarke.

    he wasnt president then but he had posters of her on his wall anyway.

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  8. hmmokrightitis (1,585 comments) says:

    Damned good point Brian, we should be.

    Pity the rest of what she did was so fucked up.

    Even a stopped clock is right twice a day…

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  9. Sir Cullen's Sidekick (873 comments) says:

    Unless the Greens are voted out, this country will never grow. They are against every single growth initiative.

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  10. Bob R (1,362 comments) says:

    ***Which is why the Landcorp partnership with Shanghai Pengxin should be seen as a great opportunity, instead of being condemned by xenophobic MPs from the left.***

    @ DPF

    Please spare us the efforts at moral shaming and demonisation with terms like “xenophobic”. Leave that type of poisoning of the well to the Cultural Marxists and their fellow travellers.

    It doesn’t help foster rational debate. Cheers :)

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  11. kowtow (8,220 comments) says:

    I’m with IMP.
    The Chinese bubble will burst ,simply a matter of time.
    It will be ugly for the Chinese and for everyone overly dependant on China as an export market.

    Diversify or die.

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  12. Jack5 (5,030 comments) says:

    DPF says:

    …This is what happens when you start to print money because you are spending too much…

    Most people think America (and Japan and many of the other leading economies) are printing money not because they are spending too much but because they strategically want to lower their exchange rates and boost their economies by export-led recovery.

    From the stance implicit in its inaction, NZ supports a high exchange rate, which hammers our exporters. Time will tell who is on the right course.

    Also, it wasn’t only Left MPs who criticised the Landcorp partnership with Shanghai Pengxin. Many of us on the Right opposed it because of the communist oligarchs involved on the China side, and because of the question of a country selling its limited resource of arable land. And because China does not reciprocally allow foreigners to buy its farm land.

    Minister Maurice William-Sung and NZ’s Beijing lobby and its PRs defended the Landcorp – Pengxin deal by labelling those who opposed it xenophobic.

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  13. Bob R (1,362 comments) says:

    ***Minister Maurice William-Sung and NZ’s Beijing lobby and its PRs defended the Landcorp – Pengxin deal by labelling those who opposed it xenophobic.***

    It’s a disgusting tactic and as noted above does nothing to allow a rational assessment of the competing arguments. It’s simply used, very effectively by some, to shut down debate by shaming opponents into silence.

    I look forward to hearing the likes of Williamson or Fran O’Sullivan explain whether it is also xenophobic of Israeli politicians to not be selling their land to Chinese. Of course, it’s quite normal and legitimate for citizens to have an interest in retaining ownership of property in their country.

    http://en.wikipedia.org/wiki/Israeli_land_and_property_laws

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  14. dime (9,810 comments) says:

    “Diversify or die.” – umm arent we diversifying into the chinese market..

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  15. F E Smith (3,304 comments) says:

    As a Chinese middle class numbering several hundred million gets wealthier and spends more, the potential economic growth is immense.

    And, even better, the wealthier and more powerful the middle class becomes, the more they want a share in the political running of the country.  It will be fascinating to see how the oligarchs that run China accommodate them, because the alternative will be a push for full democracy.

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  16. Alan Johnstone (1,087 comments) says:

    China has appalling demographics as a result of around 35 years of one child policy and imbalance of males to females it caused.

    It’s massive, but don’t be blind to it’s problems, aside form demographics, it’s not blessed with natural resources . India and Brazil will surpass it as the superpowers of the late 21st century.

    Direct conversion is massive, and simply not possible just now due to local laws in china

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  17. Sam Buchanan (501 comments) says:

    “Minister Maurice William-Sung and NZ’s Beijing lobby and its PRs defended the Landcorp – Pengxin deal by labelling those who opposed it xenophobic.”

    Parts of the social democratic left used to have a habit of labeling everything they didn’t like ‘racist’. Nowadays its a characteristic of the free-market right. It would seem the stupid right has adopted the tactics of the stupid left.

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  18. anonymouse (709 comments) says:

    @Jack5, not really,

    What they are talking about is wholesale money market transactions at an investment /major trading company Level,

    The Central Bank of China appoints “market makers” for Forex transactions, these currently only exist for CNY/USD and CNY/JPY pairs.

    So while a customer can directly change NZD or AUD into CNY, on the back end the banks are proxying this through USD and JPY to provide liquidity.

    Until the China Central bank appoint market makers for other currency pairs, everything has to go via USD and JPY to get to CNY….

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  19. Jack5 (5,030 comments) says:

    Thanks for that clarification, Anonymouse (11.50). Will it be very significant for exporters, Anonymouse? Would it be right this change will likely be followed with similar arrangements for China’s other big trading partners: Canada, South Korea, Russia, and so on? Presumably any savings will be for Chinese traders as well as for foreign ones?

    In addition the Sydney Morning Herald reports ANZ Banking Group chief executive Mike Smith as saying likely savings on transaction costs would be “a few basis points”, but the change would save time.

    Presumably, Smith is talking about seconds, given the milliseconds in computer communication, and presumably importers and exporters will share the “few basis points” with the banks.

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  20. tvb (4,334 comments) says:

    John Key is just brilliant. Raising something like direct currency conversion with the top leadership of China and having it being taken seriously is something no other world leader could do as they do not have the technical know how that John Key has.

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  21. Alan Johnstone (1,087 comments) says:

    “John Key is just brilliant. Raising something like direct currency conversion with the top leadership of China and having it being taken seriously is something no other world leader could do as they do not have the technical know how that John Key has.”

    Prepared to be corrected, but didn’t the Aussies do it as well this week and the Russians kick off the process in Jan this year ?

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  22. anonymouse (709 comments) says:

    @Jack5 (12.05)

    On the face of it most NZ exporters would probably not notice much difference, however the big boys might, and certainly ppl like Fonterra who trade and hedge on their own behalf will appreciate it…..

    But it is another step towards the CNY becoming fully convertible ( and possibly free floating), so will be welcomed generally

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  23. Jack5 (5,030 comments) says:

    C’mon TVB (12.05 post). John Key has a strong currency background, but here NZ seems to be on the coat tails of Australia and the Australian-owned trading banks that are so big in the NZ economy. Or do you think John Key initially suggested it to the Australians?

    AND Anonymouse(12.05): thanks for that further response. A free floating currency from an economy fairly tightly controlled by a communist party? Or perhaps an economy that by then was formerly controlled by a communist party.

    And thanks Alan J (12.17) for the information that the Russians were there before us.

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  24. JC (943 comments) says:

    Japan and China have a direct currency agreement going back to mid 2012. They reckon it will save $3 billion a year in transaction costs, ie, peanuts, so the other explanation is more logical that the yuan will become the world’s “reserve” currency.

    With Japan the yuan will be allowed to float up or down by 3% against a set rate so this is also the start of reforms China must make to become a true international currency.

    http://business.inquirer.net/62695/china-and-japan-begin-direct-currency-trading

    China and Australia are also close to an agreement so its imperative NZ gets on board, more on Aussie China below:

    http://www.scmp.com/business/economy/article/1209560/china-looking-direct-yuan-trade-aussie-dollar

    JC

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  25. Fletch (6,262 comments) says:

    “And when I get excited, my little China debt says – ‘Obama, just you shut your mouth'” :D

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  26. Ross12 (1,395 comments) says:

    Jack 5

    In answer to your question about how a direct NZ$/ Yaun conversion would afffect exporters –it would be positive in the big picture. DPF comment above “The possibility of direct currency conversion is fascinating. Not so much for what it means for China and NZ, but equally the decline of the US dollar as the global reserve currency. This is what happens when you start to print money because you are spending too much.” basically answers it.

    An example — the US unemployment figures go up 5% in a month. The reaction would be the US$ weakening so the NZ$ would go UP in relation to the US$. But if we had a direct conversion with the Yaun the US$ reaction to the unemployment blow out would have no effect on NZ exporters dealing with China. ( Currently even if the Chinese buyer paid NZ in Yuan there is a direct effect as explain by anonymouse)

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  27. Tom Jackson (2,553 comments) says:

    And, even better, the wealthier and more powerful the middle class becomes, the more they want a share in the political running of the country.

    This is wishful thinking. Even if it comes to pass, it won’t be through democratic means, because that would mean giving the millions of rural poor a vote, and they would outvote the middle classes. The Chinese middle class comprises a vast number of people, but is relatively small within Chinese society.

    It is unlikely that China will become a democracy. It will just develop as an oligarchy. Any successful oligarchy or tyranny has to be able to buy off the upper middle classes, and the Chinese have proved themselves able to do that. Middle classes only like democracy when it suits them. At other times, they go all authoritarian (see Honduras, Venezuela, the Philippines, Thailand, etc.).

    The truth is that western democracies are becoming more like China rather than the other way around. Voting is becoming increasingly irrelevant, because politics exists largely to serve the interests of the superwealthy, the well connected, and their upper middle class busboys.

    Just watch…

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  28. Jack5 (5,030 comments) says:

    Thanks for the reply Ross12. You posted at 1.09:

    …the US unemployment figures go up 5% in a month. The reaction would be the US$ weakening so the NZ$ would go UP in relation to the US$. But if we had a direct conversion with the Yaun the US$ reaction to the unemployment blow out would have no effect on NZ exporters dealing with China…

    Ross12 ,but if NZ exporters to China get less from China in yuan when the NZ dollar rises against the US dollar, isn’t this because the Chinese renminbi is tied within a narrow margin to a basket of currencies? The last figure I saw, for 2010, indicated the US dollar accounted for about 40 per cent of the basket.

    I thought the posting from Anonymouse showed the agreement that John Key talked about in the Hooerald article would affect transaction costs, rather than the exchange rate. Here’s a quote that may help. It’s from the report on Australia’s agrreement in the Sydney Morning Herald

    Jonathan Cavenagh, a Singapore-based currency strategist at Westpac, said the deal would save exporters money on transaction costs.

    In the longer term, it will also give exporters more opportunity to invest in a range of yuan-denominated products as China opens up its financial system. Exporters who are paid in yuan, for instance, would have the option of investing in ”dim sum bonds” – RMB-denominated products traded in Hong Kong.

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  29. Ross12 (1,395 comments) says:

    Jack

    I maybe misunderstanding what is being talked about here. I thought they were talking about not using the US$ as a reserve currency in this conversion. If I am right this is a major change.
    But if it means that the process of conversion is just changed from Yuan — US$ — NZ$ via the wholesale market to Yuan–NZ$ then yes it is just a savings in transaction costs. Both currencies are still measured relative to the US$ in this instance.
    ( I’m not sure if the Yaun is linked to a basket of currencies like they used to do in Hong Kong, for instance)
    I’ll have to do some more research/ reading to learn what is actually being discussed.

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  30. Reid (16,230 comments) says:

    This is yet another very good reason why Key should have somehow resisted making the utterly unnecessary comment WHILE IN CHINA that NZ would likely go to war against NK if it happened.

    I mean, what was he thinking?

    What’s the bet the MFAT China team have already sat down with their Chinese counterparts and explained how sad it is that NZ’s PM is a complete idiot and just ignore him.

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  31. thor42 (971 comments) says:

    That “exports to China” graph is *stunning*.
    We’ve almost trebled our exports there since the last year of the Clarkbeast in 2008. Excellent stuff!

    I also agree that we should be pushing in a big way for more exports to India and Brazil as well. Both of those countries too offer HUGE potential markets for our exports.

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  32. Ross12 (1,395 comments) says:

    Reid –technically the Korean War did not stop. It was only a ceasefire. So it could be argued that that if it flared up again we are automatically involved.

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  33. Reid (16,230 comments) says:

    Yes I’m sure that assuages the Chinese for their lose of face needlessly inflicted by a visiting PM opening his mouth on a topic he didn’t even need to give any answer whatsoever to, if he’d had any brains at all.

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