Chinese currency move good for New Zealand, say economists

Financial markets are poised to see how the move to liberalise the Chinese currency is received when the markets open later today.

The Chinese central bank announced at the weekend it would expand the daily yuan trading band against the US currency from 0.5% to 1%, a move which will allow more trading of the Chinese currency.

The move has been expected for a while but the timing was always in question – any liberalisation would not have occurred if Chinese officials were concerned about a marked slowdown in the economy.

The change is seen as a signal the Chinse government believes the risk of a “hard landing” of the Chinese economy has been averted.

“You could infer that if they are willing to subject their currency to more volatility then that implies they are reasonably confidence the economy is not going to have the hard landing that was expected,” says Westpac Bank currency strategist Imre Speizer.

There could be a positive market reaction when the Asian markets open just after 1pm New Zealand time today, he says.

“I wouldn’t get too carried away about it at this stage, there’s only a small bounce on the New Zealand market so far, but there could be more of a move when the Asian markets open.

“The significance of the move is it’s a sign towards liberalisation, and possible further opening op of other capital markets in the region – equity markets and bond markets might be liberalised further.”

The confidence the Chinese economic slowdown is over is in turn is good news for New Zealand’s exporters into China, says Bank of New Zealand currency strategist Mike Jones.

“It’s a tilt by the Chinese away from export and towards domestic demand, and that will probably push up commodity prices, which is where we come in. It is going to increase the purchasing power of the Chinese consumer.”

The New Zealand currency could respond in either direction, he says. On the one hand it is a sign demand and prices for New Zealand’s exports to China is likely to remain strong, but on the other more technical side it could see the New Zealand dollar move downwards somewhat, although probably not immediately.

One of the factors keeping the New Zealand currency high over the last year was increased demand for New Zealand dollars from other countries’ central banks.

“The other implication of this is there will be lower Chinese reserve recycling, and we know some of that was financed into New Zealand. So there’s possibly going to be less demand for the Kiwi dollar.”