If you believe the numbers, there is no economic slowdown in China. But don’t tell that to the countries suffering the most from China’s economic slowdown.
Australia and New Zealand are a lot further away from China than the ASEAN countries, all of which stand to suffer as growth in China slows. But economically, Australia and New Zealand are more tightly linked to China than any country that’s much closer geographically. This relationship was highlighted when the Chinese government started devaluing the yuan in August 2015. Both countries’ currencies fell more versus the USD than those of most other ASEAN currencies, as shown below.
With this year’s market volatility in China, the Australian and New Zealand currencies have continued to underperform compared to other countries in the region. In 2016 so far, the Australian and New Zealand dollars have both fallen 5.5% relative to the U.S. dollar.
Why is this happening? Australia and New Zealand depend heavily on exporting commodities – mostly to China. China is by far the largest consumer of Australian exports, and accounted for more than 39% of Australia’s exports over the first eleven months of 2015. Over the same period, 17% of all New Zealand exports were sent to China. Both figures are substantially higher than those of any ASEAN member, as shown below.
A slowing Chinese economy means fewer imports by Chinese companies, and less trade with Australia and New Zealand. This impacts their currencies – both as investor sentiment (that is, the mood of investors towards a market) darkens, and as there is less demand from China for Australian and New Zealand dollars.
China’s pain will continue to strike in places that might not be the first to come to mind. Investors will do well to keep this Chinese relationship in mind when investing in Australian or New Zealand stocks, bonds or anything else denominated in Australian or New Zealand dollars.