Kiwi dips as China's GDP misses estimates

The quarterly growth reported this afternoon was China's weakest since the aftermath of the 2008 global crisis. Photo / Bloomberg
The quarterly growth reported this afternoon was China's weakest since the aftermath of the 2008 global crisis. Photo / Bloomberg

The New Zealand dollar fell as China's economic growth came in below expectations, weighing on the Australasian currencies due to their trade exposure to the world's second biggest economy.

The kiwi dipped to 64.34 US cents from 64.47 cents immediately before the data, and down from 64.67 cents yesterday.

The trade-weighted index declined to 71.29 from 71.51 yesterday.China's economic growth missed analysts' estimates last quarter, suggesting more stimulus may be needed to cushion the slowest annual pace of expansion in a generation.

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Gross domestic product in China rose 6.8 percent in the three months through December from a year earlier, the statistics bureau said in Beijing, below the median estimate of 6.9 percent in a Bloomberg survey. The economy expanded 6.9 percent in 2015, the weakest full-year pace since 1990 and in line with the government's target for about 7 percent.

Sam Tuck, senior foreign exchange strategist at ANZ Bank, said China's industrial production and retail sales data was also below expectations.

Concerns about an economic slowdown in China have played a key in driving the currency down from just over US68c at end of 2015 to the low US64s today.

"China is our largest trading partner so weakness in the Chinese economy - particularly in the service sector - does imply lower demand for New Zealand product going forward," he said.

Chinese demand for dairy - New Zealand's biggest export - has been low, going on the most recent GlobalDairyTrade auction on January 6.

Prices at the next auction, due tonight, are expected to be flat or slightly weaker.

After a roller coaster year incorporating yuan devaluation, a record plunge in foreign exchange reserves, and an equity rout that at one stage wiped out $5 trillion in market value, stocks have plunged anew in 2016 on investor concern as to whether policy makers can stem the growth slide. Despite the market setbacks, China gained reserve currency approval for the yuan, established the first new multilateral development bank in a generation, and shifted its growth model further towards services and consumption.

"2015 was a turning point in China's development because it represented a clear break from the old growth model," says James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology in Sydney. "With very little help from fixed-asset investment and exports, household consumption proved resilient and generated enough jobs to stave off any widespread instability."

Industrial production rose 5.9 percent in December from a year earlier, compared with the 6 percent median estimate of analysts and November's 6.2 percent. Retail sales increased 11.1 percent from a year earlier, compared with the 11.3 percent seen by economists.

Fixed-asset investment excluding rural areas expanded 10 percent last year, missing the 10.2 percent median estimate.

Two-speed growth

China's economy is growing at two speeds, with old rust- belt industries from steel to coal and cement in decline while consumption, services and technology do better. Underscoring that shift, services accounted for half of the economy last year, Premier Li Keqiang said Saturday, the first time it's reached that milestone since the nation opened to the outside world in the late 1970s.

"Despite all of the drama, China generated some 40 percent of total world growth, and will do about the same this year," said Kenneth Courtis, former Asia vice chairman at Goldman Sachs Group Inc. and now chairman of Starfort Holdings.

While the economy's growth rate continued its steady grind lower, markets were anything but stable. Global markets were whipsawed in July and August by the stocks crash and ham-fisted rescue attempts and an unexpected yuan devaluation.

Stocks slump

Stocks have slumped again in the first weeks of this year as the central bank unnerved markets by allowing the yuan to weaken further. It has since cracked down on speculators by tightening the supply of yuan in offshore markets with regulatory changes, and intervention that pushed yuan interbank rates in Hong Kong to a record high.

Policy makers are grappling with capital outflows that saw the nation's foreign exchange reserves fall last year for the first time since 1992, ending an ascent that began under former top leader Deng Xiaoping and accelerated under presidents Jiang Zemin and Hu Jintao.

The policy response to last year's slowdown included accelerated monetary easing with six interest-rate cuts since late 2014, increased fiscal spending, and a complex debt swap to make it cheaper for local governments to borrow. Through the turbulence, the central bank forged ahead with interest-rate liberalization by removing a cap on deposit rates and won the International Monetary Fund's approval for the yuan to enter its Special Drawing Rights basket of reserve currencies.

Market forces

"As we look back on 2015, it will mark the year that we really see market forces beginning to have an indelible impact on China's financial system," said Andrew Polk, an economist with the Conference Board in Beijing. "That is ironically despite the fact that regulators were attempting to control outcomes in a more concerted fashion and in more blatant ways than the past."

This year, attention is likely to turn more to a new focus on supply-side reforms such as slashing excess industrial capacity and labor in state enterprises, cutting taxes and boosting productivity. Meantime, leaders must grapple with the debt overhang from past stimulus, curbing their policy options.

"No other country faces such daunting structural challenges," said Stephen Jen, co-founder of London-based hedge fund SLJ Macro Partners LLP. "There may be volatility but the long-term outlook of China remains quite certain. China is taking the short-term pain for long-term gain."

- NZ Herald

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