Live from China

“We are massively underweight Australia, which is perceived as an economy that is geared to China on the commodity side,” says CSLA chief equity strategist Chris Wood. Wood says, “The impact of tightening is starting to affect other markets such as commodities. Thus, aluminium for three-month delivery down ten percent this month in London metals markets, with zinc off 16% and nickel 18%.

What a great time to introduce a super profits tax, eh? By the way, the miners are advancing the story, via Bloomberg, that the Rudd government has kicked off a global mining tax contagion. Profits normally attract competition. But in this day and age of cash-strapped governments, profits attract mean bearing laws and handcuffs and guns.

But back to China. Chris Wood is not alone. Stephen Joske is the Beijing-based director of the Economist Intelligence Unit’s China forecasting service. According to today’s Australian he’s also and a former Australian Treasury representative in China. He says the “The China forecast [in the Rudd government’s budget] for 2010 looks about right, but for 2011 looks too optimistic.

He adds that, “Trend growth, while high by global standards, will be slowing significantly from now on. China’s growth is now led by the domestic real estate sector, and the cycles are getting shorter, so things may not be clear if we look at China’s prospects through annual figures. We are going to see a moderate slowing of growth in China from now on due to tightening measures in place, including withdrawal of the stimulus, which should register on commodity prices in the second half of this year.”

In point of fact, it looks like its registering on commodity prices and stocks – bar precious metals – right now. But could it accelerate in 2010? “Given a government engineered slowing is already under way, 9.5 per cent is optimistic for 2011,” Joske continues. “We are forecasting around 8 per cent, with a recovery in the property cycle in 2011, but not a return to the boom times although it’s fair to say there is an upside chance in 2011, given China’s propensity to overinvest.”

It is one thing to make it out of Egypt. It is another thing altogether to make it to the Promised Land.

Commodity investors – between the Rudd resource tax, the China bust, and the effect that euro disintegration may have on global growth and resource demand – may feel like they’re lost in the desert at the moment. We suggest they follow the golden rule and seek profit in precious metals.

Granted, the golden calf of the Old Testament was a false idol. The people, impatient for the return of Moses, invented something else to worship. But switching metaphorical gears, the exodus out of paper money is a wealth destroying even of Biblical proportions. But historically, there HAS been one kind of salvation.

You know what we’re talking about. And to be fair, gold or precious metals are not mystical saviours of any sort. To the extent that they have intrinsic value it’s in the fact that they are hard to find, expensive to produce, but have more or less the same physical qualities everywhere at all times. You cannot print them like bank notes, either.

So it is what they’re not – unbacked liabilities of bankrupt governments – that matters more than what they are. We say that because resource investors wish to preserve their capital in 2010 AND find leverage to a rising gold price have the vehicles to do it: listed gold stocks. But which ones?

That’s the question we put to Diggers and Drillers editor Alex Cowie this morning in an hour-long meeting. We’ll tell you next week what he said. You can also check out his essay below about his trip the Melbourne Mining Club earlier this week.

And what about China? Last night we managed to catch up via Skype with travelling troupe of our former colleagues who are checking out the Middle Kingdom first hand. We recorded the video interview in which we asked them about the property bubble, gold, and Chinese capital markets in general. Look for that soon (probably tomorrow). Until then…

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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5 Comments on "Live from China"

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If you buy this argument (and I do) you should be massively long 90 day bill futures. They are still pricing in more tightening when its more likely that the RBA will be slashing rates soon.

Biker Pete

“China continued its rise in the survey, reaching 18th and highlighting that it is no longer dependent on foreign markets buying up its cheap exports.”

World Competitiveness Yearbook, 2010

3rd design

China wants to be the dominant race of the planet because they want to overtop USA.

Everyone likens China to a 1920’s USA, full of economic power and a certain future of economic mite. BUT……………USA had Texas oil.

Where will China get it’s energy from? There isn’t enough energy in the world of today.

Olden days USA had her own oil. Mdern China has none.

China’s future? I reckon they’re in bad trouble.

Biker Pete

“Where will China get it’s energy from? There isn’t enough energy in the world of today.”

China has been actively buying monazite around the globe (even on the internet) almost certainly to use thorium for nuclear power. It’s fast becoming the world centre for not only electric vehicles (buses, trucks, cars and motorcycles) but also for the production of solar panels.

Oil will be critically important for perhaps a couple more decades.

Impressive tag:… Does the budget run to a dictionary? ;)

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