Bloomberg News

China Bulls in Australia Belie $1.4 Trillion Stock Rout: Economy

February 11, 2014

Port Hedland

Bulk carriers are loaded with iron ore at the ship loading facility at Fortescue Metals Group Ltd.'s Herb Elliott Port in Port Hedland in the Pilbara region. Iron ore sales to China from Port Hedland climbed 27 percent in January from a year earlier as miners increased output and the biggest buyer boosted inventories to the highest level in 16 months. Photographer: Sergio Dionisio/Bloomberg

Australian policy makers see little evidence of a slump in China’s economic growth, defying global pessimism that helped wipe $1.4 trillion from stocks this year.

The Reserve Bank of Australia and the nation’s Treasury forecast the world’s second-largest economy will expand 7.5 percent this year. The view is underpinned by a 21 percent expansion in Australia-China trade to a record A$141.8 billion ($127.7 billion) in 2013, led by shipments of iron ore, a key ingredient of the steel used to build the skyscrapers, subways and bridges transforming China’s cities.

Chinese Premier Li Keqiang has set a “bottom line” of 7 percent growth in gross domestic product as his leadership team seeks to engineer a transition to consumption from investment-led expansion. At the same time, Chinese authorities are stepping up efforts to rein in financial risks and squeeze speculative lending as concerns mount that a surge in borrowing over the last five years will tip the country into crisis.

“We’re really only seeing early signs, but consumption is a somewhat higher share of GDP than it was, and I would expect that trend to continue,” said John Edwards, an RBA board member who described himself as among the optimists. “China is effecting a bit of a transition and that’s also apparent in the shrinkage of its current account surpluses. A somewhat smaller contribution from net exports now than was true two to three years ago.”

Credit Growth

China’s leaders are trying to rein in a debt boom, which may slow growth. Aggregate financing, the government’s broadest measure of new credit, probably fell to 1.9 trillion yuan ($313.5 billion) last month from a near-record 2.54 trillion yuan a year earlier, based on the median estimate of analysts surveyed by Bloomberg News ahead of data due this week.

Trade data to be published tomorrow may show exports rose 0.6 percent in January from a year earlier, compared with 4.3 percent in December, and import gains eased from a five-month high, based on surveys of economists. The comparison with year-earlier figures is distorted because of inflated data in 2013 and the different timing of the weeklong Lunar New Year holiday.

China’s producer prices, a measure of the cost of goods as they leave the factory, probably extended the longest slide since the 1990s with a 1.6 percent drop in January from a year earlier, according to analyst projections. Consumer-price inflation may have slowed to 2.4 percent in January from December’s 2.5 percent.

Goldman’s Take

Goldman Sachs Group Inc. Chairman and Chief Executive Officer Lloyd Blankfein said today China’s growth will have “huge consequences” for global economic prospects.

“The China growth story is going to be the story of the next 30-40 years,” Blankfein said in an interview with Bloomberg Television from Hong Kong while attending the Goldman Sachs Global Macro conference. “The 20th century was the American century, and I’ve said this before in other contexts, it may have been the American century but every year wasn’t the American year. And it’s going to be the same case with China.”

Australia’s trade links and doubts over the accuracy of some Chinese data have encouraged analysts including Citigroup Inc.’s Steven Englander and HSBC Holdings Plc’s Frederic Neumann to use reports and commentary from Australia to help form views on the health of China’s economy.

Australia’s Treasury said in mid-year economic forecasts released Dec. 17 that “continued solid growth is expected for China over the forecast horizon.” Australia avoided the 2009 global recession, boosted by the biggest mining investment boom in a century fueled by Chinese demand for raw materials.

RBA’s View

Even at a slower pace of growth, China is adding the equivalent of a Turkey to its economy each year -- nominal GDP expanded by about $800 billion in 2013.

The RBA, in its quarterly monetary policy statement released Feb. 7, said that while it sees a slight easing of growth in China’s domestic demand, in part reflecting the government’s efforts to moderate the expansion of financing, this is expected to be largely offset by a modest improvement in export demand from China’s major trading partners.

Fortescue Metals Group Ltd. (FMG), Australia’s third-largest iron ore exporter, is boosting capacity to 155 million tons by the end of March. Rio Tinto Group, the world’s second-largest mining company, said last month that iron ore production rose 7 percent to 55.5 million tons last quarter and is seeking to expand its iron ore output capacity to meet Chinese demand.

Yao Wei, China economist at Societe Generale SA in Hong Kong, predicts the world’s most populous nation will expand just 6.9 percent this year as bond yields rise, trust products default, and confidence takes a hit from debt-market turbulence.

Difficult Year

Wu Jinglian, 84, an economist who has advised Chinese leaders including Deng Xiaoping and former President Jiang Zemin, said China’s economy will face a “very difficult” year, the China Securities Journal reported, citing remarks he made yesterday at a forum in Beijing. Wu warned about the handling of companies that are about to “die,” flagging risks to state-owned enterprises with high debt levels that depend on subsidies for survival, according to the report.

Global equity losses in 2014 peaked at $3 trillion on Feb. 4 and have since narrowed to $1.4 trillion, compared with $1.6 trillion as of yesterday, data compiled by Bloomberg show. The MSCI Asia Pacific Index gauge dropped 4.6 percent in January for its worst start to a year since 2009 as concern about the Federal Reserve’s stimulus cuts, China’s slowdown and volatility in developing markets spurred a global rout.

The near-default of a Chinese shadow banking product last month and two cash crunches last year highlight the challenge for policy makers pursuing twin goals of deregulating interest rates and reining in an unprecedented credit boom.

Trust Defaults

Nomura Holdings Inc. last month predicted defaults across companies, local-government financing vehicles and borrowers in the shadow-banking industry, which involves trust companies and wealth-management products. It estimates 3.5 trillion yuan of trust products will mature this year, with the majority coming due in the second half.

Australia’s links with China have tightened as exports to what’s now its largest trading partner almost tripled in five years. The central bank has one of three international offices in Beijing -- solely for economic analysis, rather than for trading, which is the main function of the New York and London locations. The RBA, which has noted the increasing correlation with China, has a team of about 10 analysts to focus on China and India.

In a policy statement on Feb. 4, RBA Governor Glenn Stevens signaled the end of a two-year easing cycle and foreshadowed stronger economic growth in Australia. That was reflected in reports today that showed business confidence climbed in January and house prices jumped last quarter.

Mining Output

Iron ore sales to China from Australia’s Port Hedland climbed 27 percent in January from a year earlier as miners increased output and the biggest buyer boosted inventories to the highest level in 16 months.

Australian Prime Minister Tony Abbott, whose Liberal-National coalition won power on Sept. 7, is balancing close strategic ties with the U.S. and Japan with increasing Chinese trade links. RBA Deputy Governor Philip Lowe in October underscored China’s importance to Australia, noting it accounts for almost a third of his nation’s exports.

“What’s going on there is incredibly important to us,” Lowe said in response to questions after an Oct. 24 address. “What we’re finding out is that the pessimists about China are being proved wrong again.”

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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