China is not a one way bet for Australia

March 22, 2012

Australian Economy, FOREX

By Gregory McKenna, Cross posted with MacroBusiness

At MacroBusiness we have been warning about the Australian policymaker love affair with all things Chinese for some time now. It’s not because we are natural contrarians but rather because we see risks in an over indulgence on any one economic theory or belief, be that overly optimistic (perma-bull) or overly pessimistic (perma-bear).

How else did the world end up in this mess of the GFC, Great Recession or whatever you want to call it, if not for the emergence of a grand orthodoxy of thinking which has pervaded policy makers, politicians and most of the markets.

So here we are watching China closely for signs that the never ending story of growth and appetite for rocks and dirt may be approaching what might colloquilly be called, “a dip in appetite”. In a few hours, all eyes will be on the “flash” manufacturing PMI (purchasing manager’s index) emanating from China.

Certainly this week we heard some worrying talk from BHP on flattening iron ore which has both backed up other recent data flow and was backed up by some research from Citbank about the state of the property market and what it means for steel.

So in many ways last nights news from Bloomberg that China was easing reserve requirements again was further confirmation of just how worried they are getting about the state of growth:

…boosted rural credit by cutting reserve requirements for an additional 379 branches of Agricultural Bank of China Ltd. (601288), the nation’s third-biggest lender by market value.

Effective March 25, the ratio falls by 2 percentage points for the branches in the provinces of Heilongjiang, Henan, Hebei and Anhui, the People’s Bank of China said in a statement on its website yesterday. The move expands a trial that previously lowered requirements for 563 branches in eight provinces. The latest move means a total of 23 billion yuan ($3.6 billion) has been freed up, the PBOC said.

I’m an old style banker and I think the tools the Chinese use for monetary policy such as reserve requirements are actually quite effective in either taking money out of circulation or putting it back in. But that is in normal times, because when you have had a run up in property for a long time and the banks are heavily exposed to the sector, there is no guarantee that the freeing up of reserves will flow into the economy and give the support that say a rate cut in Australia might (due to the average householder having a variable rate mortgage).

So I see this move in China as further confirmation of all the tidbits of information that are floating out recently about a weakening Chinese economic profile. Sure the Chinese “grand-bull” might run for decades to come but there is a growing sense that he might knock over a few vases in the China shop and one of those might just be Made in Australia.

The Australian Dollar will be one of the primary markets that will feel the impact of a further slowdown in China or more subtely perceptions of Chinese economic growth as I highlighted yesterday. It has fallen back again overnight but so far has held above the key support zones I have identified. These levels deserve traders respect and the Australian Dollar has actually made a short term double bottom at 1.0420 which was last weeks low further reinforcing the importance of the 1.0380/1.0405 region for traders.

Have a great day

Gregory McKenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If however you do need advice on Investments, Economics, Funding and Liquidity, Interest Rates and Forex and Derivative markets we are happy to help.

Please Email the team at Lighthouse at or Greg directly on

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2 Comments on “China is not a one way bet for Australia”

  1. shane Says:

    I’m not saying I don’t worry abouut China, I do, they have issues, but let’s be clear … China isn’t forecast by anyone that i know of to be slowing down. Its their rate of GROWTH that’s slowing down. As Pascoe pointed out in the SMH yesterday, “it is a healthy and welcome thing that those growth rates cool – they must as the world’s second-biggest economy matures and moves towards greater emphasis on consumer spending and (relatively) less on infrastructure.” And from a mathematical point of view the growth rate has to slow at some point too, compounding up Chinese growth at 10% a year will see them use up all the iron ore on the planet eventually!

    As the Bureau of Resources & Energy Economics pointed out in the FT last night, while prices might fall, volumes are set to keep rising. China is expected to become more reliant on imported ore as domestic reserves decline and port access improves. Then there’s LNG which, if you happen to believe that story, will be another boost to export volumes.


  2. Gregory McKenna Says:

    I don’t disagree on that longer term – not at all. And as you says the maths is irrefutable. What i worry about is that the Australian Domestic economy by my reading is actually not very strong and a reduction in Chinese growth below the 7.5% region which now seems to be the expectation could or would feed into market perceptions, consumers minds and so knock our economy further into the weakening trajectory I feel we are in.

    But, playing Devil’s advocate with myself, i’d say it might be actually a really good thing for China to slow a little more. The RBA can then relieve a bit of pressure on the domestic economy and hopefully households will spend some not save it all. the AUD might fall back toward parity and maybe even the mid 0.90’s giveing a further monetary easing relieveing pressure on some businesses and persuading some tourists that Australian tourist destinations arent somewhere you now fly ove on your way to an overseas holiday.

    So maybe I should be rooting for a China slow down.

    Cheeers Shane – keep well


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