Bernard Hickey: Plan B needed

Prime Minister John Key. Photo / Janna Dixon

Tomorrow is always a brighter day whenever you hear Prime Minister John Key talk about the economy and he was upbeat this week on how China would save us again.

He said New Zealand had the resources China wanted and China would grow into the largest economy. But what happens if China can't rescue the global economy like it did in 2008? What is Key's plan B?

In the wake of this week's warnings of a global downturn and Friday's downgrade of New Zealand's credit rating, he may well need one.

China warned this week it would not bail out Europe and was reluctant to lend more to the US. China has more than US$3 trillion ($3.8 trillion) of foreign reserves but these cannot be redeployed to help Europe and America. They are already stuck in US Treasuries and European bonds.

China is keen to diversify away from America and Europe. That's one reason the China Development Bank announced this week a partnership with PwC to lend billions of dollars for New Zealand projects.

China's sovereign wealth fund was also seen as a likely buyer in the $1 billion sale of NZ government bonds this week. But these moves will not help the global economy, or demand for our exports from China.

In late 2008 and early 2009 China unleashed massive state-funded infrastructure spending to help its economy cope with a slump in demand for its exports.

This drove demand for iron ore, coal and copper through the roof. That powered Australia's mining boom, which helped insulate New Zealand from the worst of the Global Financial Crisis.

But inflation in China took off, which the authorities fear could cause social disruption.

China's Government has cracked down hard on the booming property development sector. There are a number of forecasts that China faces a hard landing that could halve annual GDP growth to 5 per cent

China generated half of global economic growth since 2008, helping to avoid a recession turning into a depression. It may not be able to repeat the trick.

bernard.hickey@interest.co.nz