A worse scenario for New Zealand would see the Asian banks, which until now largely have been insulated from the Global Financial Crisis, affected by deflating asset prices. Domestic demand could slow, Asian countries turn protectionist, and current account surpluses rise. A material slowing in Chinese growth appears a likely scenario.
After recent extended efforts to moderate this economy, policymakers might need to apply the brakes in response to rising consumer prices. This could be very disruptive, risking loan defaults, poor bank balance sheets, capital controls, exchange rate tensions, import protection and a regional slowdown. One effect would be to hit industrial commodity prices.