Sharechat Logo

Export concentration into China 'a concern', RBNZ’s Wheeler says

Thursday 12th December 2013

Text too small?

Reserve Bank governor Graeme Wheeler has reservations about New Zealand's increasing concentration of exports into China, which now dominates foreign purchases of local agricultural products.

Wheeler told Parliament's finance and expenditure select committee in Wellington that dairy prices have climbed 50 percent this year, describing it as "a massive increase." China takes about 25 percent of New Zealand's dairy exports, putting a "high concentration" in one part of the world, he said.

"One thing that's a concern is how much of our exports are now concentrated with China," Wheeler said.

"China basically accounts for pretty well the largest market for all our agricultural exports except beef where it's number two."

Last month, Wheeler told the same committee that a Chinese downturn was the biggest threat to New Zealand's economy, when appearing before MPs to field questions on the bank's six-monthly financial stability report.

That report cited a "disorderly slowing" in China as a potential risk to the local financial system, which could cause a fall in commodity prices "significantly impacting the indebted parts of the agriculture sector."

Yesterday, Fonterra Cooperative Group chief executive Theo Spierings said Chinese demand for dairy products was largely in milk powder, rather than in typically higher-value cheese and casein.

That created a pricing disparity and causing some headaches for the world's biggest dairy exporter on how to settle its production mix, which is currently about 70 percent of capacity is in milk powder and the remainder in cheese and casein.

New Zealand's exports to China have more than quadrupled to an annual $8.87 billion since signing a free trade agreement with China in 2008, and account for about 19 percent of the country's international sales.

Over the same period, exports to Australia, which is still the biggest market, have crept up about 3.9 percent to an annual $9.53 billion in the year ended Oct. 30, and sales into the US, New Zealand's third-biggest destination, have been largely static at $4.12 billion in the latest period.

New Zealand's terms of trade, which measure the quantity of imports the country can buy with a set amount of exports, reached a 40-year high 7.5 percent in the September quarter bolstered by surging dairy prices, and if that strength persists could force more aggressive interest rate hikes, the Reserve Bank said today in its monetary policy statement.

In an alternative scenario, the bank projected a steeper increase in the 90-day bank bill rate, a proxy for the benchmark official cash rate, if strong commodity prices led to a higher terms of trade for an extended period.

The bank predicted that outcome could be driven by stronger Chinese consumption for commodities such as dairy, lamb and beef, and that potential reforms in the world's most populous nation could benefit New Zealand exports for the next decade.

Chief economist John McDermott told reporters this morning the chance of the scenario occurring was probably less than 50 percent, but was a material risk.

At the select committee, McDermott said the near-term outlook for commodity prices was upbeat, but that exporters can't rely on that lasting forever.

"Our export prices are very strong at the moment, 40-year highs, every time you get to that point you wonder, how long can it last?" McDermott said. "For the moment the near term looks very positive, the dairy auctions look good, but you can't plan on always sunshine."

BusinessDesk.co.nz

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comment:
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

NZ dollar eases as market eyes pending GDP data
Evolve shareholders demand answers
Strong tourism, low rates keep lid on NZ current account deficit
Refining NZ margins jump to 18-month high
Goodman opts for underwritten $150m placement to raise capital
Kathmandu shares rise 9.3% on strong FY result, solid US performance
FMA seeks greater powers from the government
Goodman opts for underwritten $150m placement to raise capital
NZ dollar opens higher as dairy prices lift, oil eases
Napster's Sean Parker yet to seek OIO approval for Weta Digital stake

IRG See IRG research reports