Diary of a Financier

Australia: First Derivative of Slowing Chinese Investment

In Economics on Thu 22 Mar 2012 at 11:03

Quick intraday note here.  I wanted to pull together some of my recent StockTwits on Australia, because recent [weak] data out of China has made this all the more relevant:

  • While global equities rally (incl. Brazil & Russia), China & India keep sliding lower. Troubling. $EWZ $ERUS $FXI $INDY $EEM #BRIC
    Mon, March 19
  • Australia agita: fin’l assets/housing rolled over. See decoupling of Official Reserve Assets & Net Foreign Debt since 08. $EWA $AUDUSD
    Tues, March 20

Overnight, China reported a fifth straight month of manufacturing contraction.  This comes atop rumors of a coup in Beijing, following a political purge in which the powerful Bo Xilai–a major opponent of China’s wealth disparity–was removed from his post.  The country has managed 10.5% GDP growth v. 13.5% Investment growth averages over the past decade.  The 3% difference is indicative of overinvestment and stockpiling, which will grind Chinese fixed investment to a halt eventually.

In lieu of investment, consumption could help China maintain its GDP. Given the financialization/leverage of their economy, the escape hatch is closing, but public surpluses could help them manage a soft landing via the timeless exercise of Keynesian stimulus.  Thus far, recent slippage in the Shanghai index is consistent with my analogues to 4q2010-1q2011, so I don’t expect an imminent collapse resonant to American markets.  It’s the same ol’ story with China.  The music will stop eventually.  One can only distort fundamental realities for so long. 

China’s egocentric policies have a tendency to ripple and impair her neighbors.  In that vein, the largest waves from this cyclical slowdown could crash upon Australia’s shores.  The Aussies trudged through the 2008-9 crisis, emerging pretty unscathed because of the commodity supercycle/mining boom (byproducts of Chinese stockpiling).  Aussie housing sales volumes dropped -7.3% to an 11-year low in January.  Household debt/income has risen over 150% (and worsening) now that the government has cut-off stimulus.  The government’s surplus will disappear once metals/mining exports slow, and if you look at rising Net Foreign Debt vs. fallen Official Reserve Assets, you’ll see the mechanics of this slowdown already occurring:

Australian Net Foreign Debt- still accelerating higher.

Australian Official Reserve Assets- wallowing far from 2008 highs.

Hugh Hendry chose to short Japanese steelmakers as his proxy vehicle for a bearish China call.  (He’s owned CDS on names like Nippon Steel for a few years now, under the premise of relative value and a thesis that China represents most of the end-user demand for Japanese steel via other Asian importers.)  I prefer the Australia ETF (EWA) as my first derivative.

–Romeo

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