Friday, August 30, 2013

Is 'stabilization' good enough for the Chinese economy?

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A report from Reuters seems to indicate that the “Chinese economy is stabilizing”. This news gave a fillip to Australian stocks overnight (European time). But buried in the Reuter’s report is the following:

“Beijing has said it is willing to tolerate slower growth as it pushes reforms designed to reduce pollution, social inequity and an economic growth model which has an over-reliance on debt-financed construction and exports.”

We suggest that this indicates only that Beijing has nothing to learn from the West about Public Relations spin. The fact of the matter is that China has no option but to work to be able to survive in a period of reduced growth, for the simple reason that a 7 – 8% rise in GDP is unsustainable, and this would be true even if the country had the most advanced social, economic and fiscal structures on the planet, which it does not.

The law of large numbers, which says, among other things, that such growth is only possible in the short term, is now kicking in.

All this is having an effect on AustraliaChina is a major consumer of Iron Ore from Oz but it also has its own supplies, to the extent that it produces some 75% of its own requirements. That means roughly one quarter of Chinese needs comes from imports, mainly but not exclusively from Australia. In the event that there is a slowdown in demand it is not difficult to see which suppliers it will stop using first.

OmicronFX believes that the Australian dollar has some way to go before it reaches its natural level in the circumstances of the decline in the mining economy there. Given the nature of these things, it may even overshoot to the downside. We will not be going long any time soon.

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