Chinese downturn biggest risk to New Zealand, RBNZ’s Wheeler says

Wednesday 13th November 2013

Reserve Bank governor Graeme Wheeler says a potential downturn in the Chinese economy is the biggest risk to New Zealand and is the type of external shock the central bank wants to protect homeowners from with its restrictions on low equity house lending.

China has significant risks around its banking system and around its ability to continue growing at a faster pace than developed nations, Wheeler told Parliament's finance and expenditure committee in Wellington today. If China struggles to deal with those issues, that would threaten New Zealand's economy. The world's second-biggest economy is New Zealand's largest trading partner and has been ramping up purchases of dairy and other primary sector products.

"What could cause an adjustment here, what could do great damage to the economy and to the financial sector and to the housing sector? The biggest risk, my guess, would be around China," Wheeler said. "China's growth slowed from 10 percent on average, what it's been for the last 30 years, and the issue is can it continue to grow at 7 percent or thereabouts."

The Reserve Bank today released its six-monthly financial stability report, and cited a "disorderly slowing" in China as a potential risk to causing stress in the local financial system. That could cause a fall in commodity prices "significantly impacting the indebted parts of the agriculture sector."

The report said New Zealand's dairy industry is still highly indebted, accounting for much of the borrowing build-up in the agriculture sector as farmers converted to milk production in response to record-high prices.

If commodity prices fall, some famers would face a greater debt burden having invested on the expectation of elevated returns.

Deputy governor Grant Spencer told the committee that a Chinese downturn was the type of shock which could put the local economy under pressure, and create stress on a buoyant property market, which the central bank is trying to avoid by limiting low equity home lending.

A shortage of housing supply, particularly in Auckland and Christchurch, rising inbound migration and low interest rates have been fuelling the property market, and the central bank aims to limit that growth with restrictions on the level of mortgage lending banks can write with less 20 percent of a property's value as a deposit, which came into force on Oct. 1.

The central bank is concerned that if households take on too much debt, a fall in house prices could leave them owing more on a property than what it's worth. Interest rate hikes scheduled for next year will put them under pressure servicing interest costs.

Spencer said loan limits are a precautionary move to protect homeowners in the event of a sharp fall in house prices, but that such a drop in property prices isn't immediately on the horizon.

"We don't think there's an imminent likelihood of the housing market falling, we think it would take a significant shock, say an international shock, the China turndown, the impact on our export prices, our asset prices, and generally on New Zealand, which would then potentially generate the situation we're talking about," Spencer said.

The central bank is still assessing the impact of its loan restrictions, and expects to have a clearer idea within three to six months.

Real Estate Institute figures yesterday showed the median house price was up 9.8 percent in October from a year earlier, and while Wheeler was reluctant to give a firm indication on how much he wants to slow annual house price growth, he said he would want to see property inflation closer to consumer price increases.

The consumer price index rose at an annual pace of 1.4 percent in the September quarter, back within the central bank's target band of between 1 percent and 3 percent. Wheeler's mandate seeks to keep future average inflation near the mid-point of that range.

BusinessDesk.co.nz

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