The economic confidence exuded by President Xi Jinping may be reassuring for NZ but it's not without risk.

When John Key questioned President Xi Jinping on whether the wheels could come off the Chinese economy as it moves towards a free market, Xi responded confidently. The "invisible hand" (of the market) would simply be constrained by the "visible hand" (of the Chinese Government), he told Key in Beijing a fortnight ago.

It was a particularly Chinese response - oblique, confident and intended to engender confidence in the listener.

But it's not one likely to cut the mustard with the International Monetary Fund (IMF), which this week highlighted a sharp slowdown in growth in China as one of the external risks to what has been termed the New Zealand "rock star" economy.

Key won't be thanking the IMF for taking a little bit of the shine off his new joint goal with Xi for bilateral trade between New Zealand and China to reach $30 billion by 2020.


There's little argument that two-way trade, which is expected to hit $20 billion next year, won't easily reach the new $30 billion goal if the current bilateral growth rate continues apace. That's simply a mathematical progression.

But there are risk factors and the IMF's cautions should be welcomed as injecting some realism into future forecasts. Two-thirds of New Zealand's goods exports go to China, Australia and other parts of Asia.

The shine has already come off the Australian market as Chinese demand for its hard commodities has dampened. But having our economic eggs in the Asian market - predominantly China - enabled our economy to stabilise after the global financial crisis.

Two factors drove this. First, over-leveraged New Zealand companies were able to turn to Chinese companies to inject capital at a time when international markets were still in the grips of the credit crunch. Second, China's demand for New Zealand's soft commodities - particularly milk powder - has continued to soar.

At an Infinz briefing yesterday, leading capital markets participants reflected on how fortunate New Zealand was to have such key market exposures. The real risk in our interconnected world is contagion.

Finance Minister Bill English is fond of pointing out that New Zealand is "a suburb of Australia and Australia is a province of China, and we are dependent on the economic management in both those economies. China has demonstrated an ability to deal with really complex issues, but it is still a command and control economy and there's always the risk it could get it wrong."

Said the IMF: "A sharp slowdown in China could weaken growth prospects in Australia, triggering a broad-based fall in demand for New Zealand's exports, and lead to a sudden decline in house, farm and commercial real estate prices ... this in turn could weaken consumer demand and negatively affect banks' balance sheets and their willingness to lend. The downside macroeconomic impact in a scenario where shocks compound each other could be large."

The problem New Zealand faces is it takes time to de-risk an economy and follow the IMF's prescription and build new markets. Our firms are small. Many do not have the capacity to be exposed to more than one or two markets offshore. They are generally not global players.

The IMF's report does not focus on the counter-factual: how poorly New Zealand would have been placed if it had not been exposed to the Asian growth markets.

As for the future, Key holds to the view that China's thirst for New Zealand's "safe milk products" will continue.

Prime Minister John Key comments on the IMF release stating that the biggest risk New Zealand faces domestically is the Auckland housing market.

But - as with other sectors in China - there is always a risk that a point will be reached when China's visible hand will dampen the market. To some degree this is under way with the consolidation of the dairy industry as Synlait's decreased forecast indicates.

And as research from Coriolis suggests, moving up the value chain in sectors such as dairy is a difficult route for undercapitalised New Zealand companies.

On the positive side, the IMF generally endorsed English's policies: a return to Budget surplus and a sound macroeconomic framework. English can excuse himself some satisfaction on this score. But as Key will make clear today this does not herald a Budget or election spend-up.

New Zealand is still likely to be up there prancing as one of the standouts for economic growth among developed economies this year.

HSBC chief economist for Australia and New Zealand Paul Bloxham will not have to eat his words on that score any time soon. Growth is forecast to increase to about 3.5 per cent of GDP this year.

The IMF noted the relevant drivers: supportive financial conditions, historically high commodity prices, resurgent construction activity related to the Canterbury post-earthquake rebuilding and general housing shortages, and a substantial increase in net immigration.

Not a bad outlook to have.