Gordon Campbell on New Zealand’s currency deal with China

During Prime Minister John Key’s current visit to China, Key and Chinese premier Li Keqiang agreed to a deal that enables direct trading on the Chinese Foreign Exchange between the NZ dollar and the Chinese renimbi (aka yuan). It is easy to see how New Zealand exporters stand to benefit. Kiwi firms will no longer need to shift payments and earnings back and forth via a third currency, usually the US dollar. Considerable savings will be made on these transactions. New Zealand has become the sixth country to engage in direct currency trading with China, after Australia did so last April. This was the same month that New Zealand - which appeared to have been caught on the wrong foot by the Australian move - initiated its own negotiations with China, for similar status. Japan had clinched a similar deal in mid-2012 and Brazil signed its own direct currency trading deal in March, 2013.

So, what is in it for China? While not significant in itself, the New Zealand deal is part of a world wide push to internationalise China’s currency, and to establish the renimbi as the reserve currency for global trade, eventually displacing the US dollar from that role. In that sense, we are small players in a major and global shift of power. In the 19th century, the British pound sterling was the currency of world trade, only to be gradually supplanted post WWII by the US dollar. This brief history of key currencies indicates the essential requirements for such a shift:

During its heyday as a KC during the 19th century, sterling’s global role was bolstered by all three of these economic factors: confidence in its value, the unique liquidity of London’s financial markets and Britain’s dominant size in the world economy. Sterling’s longevity as a KC well into the twentieth century has prompted to suggest how economic inertia is a fourth factor that can sustain a [currency’s global role.]

Right now, China is lacking in all three of the crucial factors. There is (a) little agreement and confidence in the true value of China’s currency. For years, the US has bitterly accused the Chinese of keeping the renimbi artificially low to boost China’s export drive. There is (b) a well recognised lack of deep liquidity in China’s currency markets and (c) China has yet to surpass the US as the world’s leading economy, although it is on track to do so by 2030. Of late, US has been pressuring China to stop manipulating the value of its currency - and skirmishes on that point have been waged on the edges of the Trans Pacific Partnership trade talks, given that the US Congress wants rules against currency manipulation practices included in the TPP deal, to target both Japan (now) and China (indirectly, and in future.)

The full details of the NZ/China currency deal are yet to emerge. When the Australians did their deal last year, the Australian Reserve Bank agreed to hold 5% of its currency reserves in renimbi - will our Reserve Bank be expected to make a similar gesture? In the short term, our traders will gladly pocket the savings in transaction costs that direct trading will deliver - and nothing much else will change, for now. Some of the advantages and the risks of the wider shift - all symptomatic of China’s desire to eventually become the world’s default currency in trade - were touched on in this speech last year by Philip Lowe, deputy governor of Australia’s Reserve Bank.

The Next Crimea?
Hard to tell which former Russian enclave with a large pro-Russian population will next agitate/vote to being annexed by Russia. Will it be those parts of eastern Ukraine (Donetsk etc) that voted heavily for Ukraine’s ousted ruler Viktor Yanukovych in the last national election? Russian separatists in Donetsk are already calling for Russia to ‘liberate’ them from the control of Kiev. Now, in Ukraine’s near-neighbour Moldova, an autonomous region called Transnistria - numbering some 200,000 people in a country of roughly four million - is also reportedly calling for Russian annexation.

[Transnistria] appealed to the Russian Federation leadership to examine the possibility of extending to Transnistria the [Crimea] legislation, currently under discussion in the State Duma, on granting Russian citizenship and admitting new subjects into Russia,” Irina Kubanskikh, a spokeswoman for the Transnistria parliament, said, as reported by Russia's Itar-Tass news agency.

One difference between Crimea (at the outset) and Transnistria, now? In Transnistria, the Russian troops are already there. Back in 1992, Moldova’s rulers and ethnic Russians fought over then issue of separatism and some 300 people died. In the wake of a cease-fire, the Russian army moved in 2,000 troops to police the peace, and to guard bases containing weapons and ammunition stockpiles. Annexation of Transnistria would be so much easier even, than in Crimea. Vladimir Putin must be feeling well-loved.

ENDS

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