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Never Mind the Prices, Check the Volumes

As Australia records the biggest annual percentage decline in Australian dollar export prices since comparable data began in 1974, Stephen Green predicts ‘enormous’ Chinese demand for Australian iron ore next year.

I discuss the relationship between Australian export prices and volumes in this article.

posted on 23 October 2009 by skirchner in Economics, Financial Markets

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Don’t have time to listen right now.  There is massive overcapacity in the Chinese steel sector.  What does Stephen Green think the Chinese will be doing with all that iron ore?  Stockpiling?  Building bridges to nowhere?  More apartments and shopping malls? 

I doubt they’ll be using it to manufacture widgets for export.

I’d love your notion that “commodity production makes a relatively small contribution to overall economic growth in Australia”.  Can you please tell the FX markets, because I could do with 30-40% knocked off the value of the AUD.

Posted by .(JavaScript must be enabled to view this email address)  on  10/23  at  06:22 AM


[url=“http://www.dailyreckoning.com.au/the-dark-underbelly-of-australias-resource-boom-chinese-resource-demand/2009/10/23/”]The Dark Underbelly of Australia’s Resource Boom: Chinese Resource Demand<a>

Read from here…

China’s GDP chugged along at 8.9% in the third quarter. The big driver for GDP growth was massive growth in fixed asset investment. It grew by 33.4% in the first nine months of the year, according to China’s National Bureau of Statistics.

But the meat of the story is that urban fixed asset investment in primary industry - the kind that consumes huge quantities of Aussie exports - was up a whopping 54.8% in the period. This is China’s vaunted stimulus in action. And as you can see from the chart below, China’s import volumes are headed off the charts this year, although the effects of the stimulus are petering out (which could be ominous).
China’s Import Volumes

The Chinese government unleashed a $600 billion stimulus spending spree on shovel-ready projects last November. That alone would lead to soaring commodity imports. But because China pegs its currency to the U.S. dollar, its monetary policy must match the Fed’s. That means China’s monetary policy has been every bit as loose and stimulative as Ben Bernanke’s in the last year.

For example, UBS reports that new lending in China reached a record US$1.27 trillion in the first nine months of this year. This kicked off rallies in Chinese stocks, real estate prices, and construction. It also alarmed at least some Chinese officials that their dollar peg forces them to import inflation from the U.S., which can be politically destabilising. So now, they are walking themselves back from the ledge.

In yesterday’s Financial Times, Qin Xiao, the Chairman of the China Merchants Bank (the country’s sixth-largest bank) wrote that the government should not be afraid of a moderate slowdown in the economy. He wrote that, “Monetary policy must not neglect asset-price movements,” he writes. “Therefore it is urgent that China shifts from a loose monetary policy stance to a neutral one.”

Just how Chinese central planners aim to do this is unknown. Can they be neutral as long as they peg? When you peg your currency to keep your exports cheap - because industrial production and exports drive your growth which keeps employment full and the population from getting restless - it’s hard to be neutral when the Fed is anything but. But that subject - when it’s in China’s interests to allow its currency to appreciate - is a whole other subject for another week.

For today we’d only like to make the point, or raise the possibility, that this decades-long China boom Ken Henry is counting on may be a lot more fragile than he thinks. Is there any reason to believe economic authorities in China are smarter than their buddies in Europe and America? All of them seem to be reading from the same play book. Inflate, stimulate, spend, build…and leave the bill for later

<a href=“http://www.dailyreckoning.com.au/the-dark-underbelly-of-australias-resource-boom-chinese-resource-demand/2009/10/23/”>There’s more here[/url]

Posted by .(JavaScript must be enabled to view this email address)  on  10/24  at  02:16 AM


Grrrrr.  A comment preview please!

The Dark Underbelly of Australia’s Resource Boom: Chinese Resource Demand

Read from here…

China’s GDP chugged along at 8.9% in the third quarter. The big driver for GDP growth was massive growth in fixed asset investment. It grew by 33.4% in the first nine months of the year, according to China’s National Bureau of Statistics.

But the meat of the story is that urban fixed asset investment in primary industry - the kind that consumes huge quantities of Aussie exports - was up a whopping 54.8% in the period. This is China’s vaunted stimulus in action. And as you can see from the chart below, China’s import volumes are headed off the charts this year, although the effects of the stimulus are petering out (which could be ominous).

The Chinese government unleashed a $600 billion stimulus spending spree on shovel-ready projects last November. That alone would lead to soaring commodity imports. But because China pegs its currency to the U.S. dollar, its monetary policy must match the Fed’s. That means China’s monetary policy has been every bit as loose and stimulative as Ben Bernanke’s in the last year.

For example, UBS reports that new lending in China reached a record US$1.27 trillion in the first nine months of this year. This kicked off rallies in Chinese stocks, real estate prices, and construction. It also alarmed at least some Chinese officials that their dollar peg forces them to import inflation from the U.S., which can be politically destabilising. So now, they are walking themselves back from the ledge.

In yesterday’s Financial Times, Qin Xiao, the Chairman of the China Merchants Bank (the country’s sixth-largest bank) wrote that the government should not be afraid of a moderate slowdown in the economy. He wrote that, “Monetary policy must not neglect asset-price movements,” he writes. “Therefore it is urgent that China shifts from a loose monetary policy stance to a neutral one.”

Just how Chinese central planners aim to do this is unknown. Can they be neutral as long as they peg? When you peg your currency to keep your exports cheap - because industrial production and exports drive your growth which keeps employment full and the population from getting restless - it’s hard to be neutral when the Fed is anything but. But that subject - when it’s in China’s interests to allow its currency to appreciate - is a whole other subject for another week.

For today we’d only like to make the point, or raise the possibility, that this decades-long China boom Ken Henry is counting on may be a lot more fragile than he thinks. Is there any reason to believe economic authorities in China are smarter than their buddies in Europe and America? All of them seem to be reading from the same play book. Inflate, stimulate, spend, build…and leave the bill for later

...

Ken Henry concludes that, “The Australian economy has just demonstrated to the rest of the world that, for some time now, it has quite possibly been the best governed, most flexible, most resilient of all industrialised economies.”

Extraordinary triumphalism.

There’s more here

Posted by .(JavaScript must be enabled to view this email address)  on  10/24  at  02:52 AM


Infrastructure according to Green.

Henry is right about Australia being the best governed, but this only points to just how bad things are abroad.

China has plenty of problems, but there’s always India!  Our exports are mostly completely fungible.

Posted by skirchner  on  10/24  at  06:09 AM


Ok, lets say Green is right and there’s enormous demand for iron ore next year from China due to a government sponsored infrastructure build.  Inevitably the AUD will spike up above parity, and non-resource exporters and import-competing industries will get smashed.

How is this rational?  Our economy will be forced to restructure not by our own government interfering but by China’s!  Surely that’s worse.

Posted by .(JavaScript must be enabled to view this email address)  on  10/25  at  10:47 AM


THE DISTILLERY: Prosperity prophets

Two other pieces today explore several reasons why the flow of hot money could suddenly reverse. The first is by John Garnaut at The Sydney Morning Herald who asks the prickly question: “How much of China’s spectacular retail sales growth – 17 per cent after adjusting for falls in prices – was simply the bureaucracy taking advantage of the fiscal stimulus to spend more money on itself?” The answer comes from, “Huang Yasheng, a professor at Massachusetts Institute of Technology and the author of a seminal book published last year on China’s economic model called Capitalism with Chinese Characteristics, [who] estimates that government and corporate consumption may have jumped from 10 per cent of retail sales in the ‘80s to between 25 and 30 per cent since the mid ‘90s…The share of household consumption has fallen accordingly. Between 2000 and 2007 household consumption fell from 47 to 33 per cent of GDP, according to data…But this year the emaciated Chinese household consumer has become more so.”

The second piece, by David Uren of The Australian, looks at the growing trade tensions between China and the world. Whilst trade protection remains a fringe issue, Uren is right in observing that as long as the yuan is pegged to a falling US dollar, pressure will mount on just about everyone else to increase trade subsidies.

For Australia, the point is that any hiccup in the Chinese growth story and the hot money that’s got so many commentators making rapturous forecasts will be gone quicker than you can declare ‘false prophet’.

Posted by .(JavaScript must be enabled to view this email address)  on  10/26  at  02:05 AM


There was a fairly major hiccup in the China growth story in 1998-99, when global commodity prices crashed and BHP was considerad a dog stock - yet Australia still grew at 4-5%.

Posted by skirchner  on  10/26  at  05:18 AM


I know, but then the growth was in very different sectors.  That was when Australia was “old economy” and the dollar bottomed out below 50c.  It was a very different period for Australia’s non-resource exporters.

Besides, China was not considered crucial to Australia (or the world) in 1998-99.

Again, I wonder what purpose it serves to allow our manufacturers to be decimated because China has inflated a commodities bubble?  And if ever there was a bubble this is it.

Posted by .(JavaScript must be enabled to view this email address)  on  10/26  at  08:59 PM



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