Dialogue: Asian grouping makes yuan part of our financial future

By JIM EAGLES

The long-term future of the New Zealand currency probably lies with the Chinese yuan rather than the Australian or US dollars, says Norbert Walter, chief economist of the Frankfurt-based Deutsche Bank Group.

Dr Walter said that for a small country like New Zealand, a decision on the best currency arrangement was not easy and it was not surprising that the issue of a currency union was often raised.

"It is very obvious that if you are very small and are a neighbour of a very big fish, then there is little chance for your own currency to work.

"There are examples to the contrary but not very many."

He said it was by no means clear what currency New Zealand should look towards. Trade was the first factor to be considered.

"If the trade relationship is intense, and if it becomes more and more of an intra-industry nature - that is, if factories of the same company are on both sides of the border - then it becomes more and more obvious that two currencies are a nuisance rather than a help."

From that perspective it was very obvious that Australia was a natural orientation.

But New Zealand also had important trading relationships with the US and Japan.

"And these other two, unfortunately, are much more powerful in terms of international weight and financial markets."

Experience had shown that while trade was important, political and financial realities also carried considerable weight.

"In other words, if you are in the neighbourhood of a very dominant currency it's better to accept this currency.

"At present I fear that it is the US dollar."

While that might be the situation today, it was clear that in the future New Zealand and Australia would more and more become part of Asia, Dr Walter said.

"It's an open question whether the fact that the US is the dominant financial market should forever be the reason to use this third country currency for the intra-Asian activities and I doubt that this is a meaningful concept."

The next question, then, was "What platform should this Asian monetary unit use?"

Unlike the situation in modern Europe, where it was accepted that no country should dominate, several Asian countries felt entitled to a dominant position.

"Today, I believe that Japan still believes there is no alternative to Japan being the hegemon. I don't share that view.

"It could have been the hegemon in the '80s and the '90s but now this is gone.

"I believe the other two candidates are China and potentially India.

"To me factually it is only China, but China could only be a platform for an Asian currency if they accept other views.

"They still think they are the Middle Kingdom and everyone else must adapt and that is not a workable approach.

Dr Walter said his best advice to New Zealand was, "For the next 15 years better plan for the US to be the orientation currency if not the denomination currency."

As for the Kiwi dollar, he said market distrust of complex currency arrangements meant that "for now" there were really only two choices.

"You either have a floating currency or you have the US dollar. Anything in between won't attract many people."

A currency union with Australia "could be useful only if it served as a guide into an Asian arrangement."

He said experience with the Euro showed being part of a currency union did not hamstring a national economy.

On the contrary, it had "helped many European economies, including my own, to get away from unsound fiscal practices.

"We have overspent for too long and we now have a corset. This corset of course implies a temporary reduction in growth rates but that is a cure rather than a problem."

He said the slide in the value of the Euro against the American dollar was "partly because it takes a while for a new currency to be accepted but also because when an exchange rates stays at a certain level for a while, people believe it must be correct."

That was also why the New Zealand dollar seemed to be stuck at a level where, by all the usual criteria, it was undervalued.