New Zealand is likely to feel the impact of a slowdown in China, say economists.
The People's Republic, by far the biggest recipient of New Zealand dairy produce, sheepmeat, logs and wool, and a highly significant market for a raft of other commodities, this week sent shockwaves around the world as economic uncertainty drove its share markets sharply lower.
By the end of the week, the Shanghai Composite was showings signs of stabilising and other world markets, having tanked in sympathy early in the week, had started to settle. In New Zealand, the S&P/NZX50 Index, closed at 5670.48 yesterday - down 1.4 per cent for the week.
HSBC, which has the biggest presence of all the foreign-owned banks in China, said the country's problem centred on a deflating housing construction boom.
While it appeared there was more to play out, HSBC's co-head of Asia economics research, Fred Neumann, doubted China's problems would develop into an action replay of the 1997 Asian financial crisis.
"The trauma of the 1997 crisis still sits deep," he said. However, Neumann said there were three crucial differences between then and now - higher foreign reserves in most countries, relatively robust current account positions in most markets and debt mostly denominated in local, rather than hard, currency.
While markets steadied towards the end of the week, investors were still clearly rattled by the effects of a major shakeout in the world's second-biggest economy.
Economists said a slowdown in China was expected to put more pressure on the Reserve Bank to cut the official interest rate.
"China is the biggest risk to the New Zealand economy over the next 12 months," said ANZ Bank chief economist Cameron Bagrie, who expected to see more downward pressure on interest rates, which would add still more downward impetus on an already weaker NZ dollar.
As it stands, economists expect to see two cuts of 25 basis points apiece by year-end, which would take the official cash rate down to 2.5 per cent.
The commodities markets - iron ore, coal, oil and dairy - had been dogged with issues of oversupply, but there were clearly demand-side issues from China and the other emerging markets, Bagrie said.
China, until this year, had been by far New Zealand's biggest export destination, but a staggering 77 per cent decline in the value of whole milk powder exports put Australia back in the top slot in the year to March.
JBWere investment strategist Bernard Doyle said the full impact of China's slowdown has yet to be seen.
"That is clearly a headwind, but given we have had interest rate cuts and a lower currency, there is already some reasonable offsets under way."
In just a few short years, China had become a hugely important market for New Zealand.
"Clearly we have a significant direct trade exposure to that economy and the downside of that has been illustrated over the past year," he said. "The other areas that we need to be mindful of, with respect to China, is that over the last week it is an economy that can single-handedly rattle the financial markets."
Doyle said the effect of Chinese capital flows could prove pivotal for property prices here and in Australia, where Chinese investment has played a part in the strength of both markets.
"There is no doubt in my mind that if Chinese capital flows were to get crunched, it would have implications for our housing market," he said.
Economists said the week's ructions appeared to be more like speed bumps for the Chinese economy, as it treads an unfamiliar path from a command-style economy towards a more market-led one.
For New Zealand, there remained a picture of a growing economy - but at a slower rate. Banks are now looking at GDP growth of a little under 2 per cent this year, with a slight pickup next year. Net migration remains strong and there are signs of stability returning to the dairy market.
But as investors licked their wounds, attention turned to America - the world's biggest economy, and whether it could assume the mantle as a driver of global economic growth.
Already, the signs are looking favourable.
Department of Commerce data this week showed the US economy grew at an annual rate of 3.7 per cent in the three months to June, up from its estimate of 2.3 per cent.
HSBC's Neumann said slowing growth in China was bound to add pressure to asset markets.
"At the same time, if we are right that a rerun of 1997 - or a financial crisis of similar vein - is unlikely, attractive opportunities will eventually present themselves," he said. "But, first, the dust needs to settle."