Bernard Hickey: The winds of change

China's massive, polluting building boom has had ripple effects throughout the world's economies. Photo / Getty Images

Chaos theory calls it the butterfly effect. It's the idea that a butterfly flapping its wings in the Amazon could cause a tornado in Texas.

The New Zealand economy has plenty of its own butterflies changing the weather for GDP growth, jobs, interest rates, inflation and house prices. Not all cause tornadoes, but there are plenty of head and tailwinds for different parts of the country.

One of the flappiest at the moment is the global iron ore price. It's barely noticed here but it's an indicator of growing trouble inside our largest trading partner, China, and it is knocking our second-largest partner, Australia, for six.

It fell to a 10-year low of almost US$50 a tonne ($67) this week and is down from a peak of more than US$170 a tonne in early 2011. Australia and Brazil are the biggest suppliers of iron ore to China.

China embarked on an infrastructure spree after the global financial crisis. Over the three years to 2013, China poured 6.4 gigatonnes of concrete, which was more than was poured in the US in the entire 20th century.

All that concrete needed reinforcing with steel and China didn't have enough iron ore and coking coal to make it.

That building boom created a glut of apartments and debt, which China now needs to digest. The elevation of President Xi Jingping to China's top leadership post in late 2012 was a key moment in the flapping of those iron ore wings.

He realised China needed to move to a more consumer-friendly economy with cleaner air, water and food. Dirty steel plants have closed and projects mothballed.

Apartment prices have fallen sharply over the past six months and demand from steel foundries has slowed.

At the same time, iron ore production in Australia has only now ramped up to its peak levels. Weak demand met high supply to produce a price slump.

This all may seem irrelevant to New Zealand, but it's not. The Australian dollar has fallen in response to the iron ore crash, while New Zealand's dollar has remained strong because our economy is humming along, thanks to building surges in Christchurch and Auckland and plenty of spending and investment.

That divergence between the Australasian economies drove the New Zealand dollar to a record high of well over A.98 this week. Westpac has started offering $1 for every A$1 sent by telegraphic transfer.

Dollar parity would make all those winter holidays on the Gold Coast and trips to shows in Sydney and Melbourne cheaper and generate a fierce headwind for manufacturing exporters and tourism businesses here that sell to Australians.

President Xi has reinforced the contrasting effects of the changes in China on Australia and New Zealand by encouraging consumers and investors to spend more of China's big trade surpluses overseas.

Tourism from China was up 40 per cent in the first two months of this year from a year ago, and there remains plenty of demand from investors in China for New Zealand assets.

The dark side of this tornado in New Zealand after the flapping of the butterfly's wings in China was felt in Nelson this week.

The region's biggest logging trucking firm, Waimea Contract Carriers, was put into voluntary administration owing $14m, partly because of a slump in log exports to China in the past six months.

That's because New Zealand's logs are now mostly shipped to China to be timber boxing for the concrete being poured in its new "ghost" cities.

The Chinese iron ore butterfly has flapped and now we're seeing Gold Coast winter breaks become cheaper and logging contracts rarer.