If you thought Fortescue Metals Twiggy Forrest’s bank account could fill up fast, check out the People’s Bank of China. Data revealed this week that China’s foreign exchange reserves increased $US160 billion to hit US$3.7 trillion. That’s some serious money.
The first consequence was for Beijing to step in and blunt the rise of the Chinese currency, the yuan. The second is confirmation that international investors haven’t fled China like they have other emerging markets like India and Turkey.
China has held steady despite recent export data being soft. That’s, of course, if you pay any attention to the statistics. Whether you should at all is the question. The Financial Times reports two Chinese researchers argue that consumption in the Chinese economy is underreported because of flaws in the way data is collected. ‘The two academics calculate that China underestimates consumption by 10-12 percentage points.‘ That’s a lot if they’re right.
If you follow their line of thinking, the flip side means China’s investment spending isn’t as off the scale as the China bears believe. Why do you care? It would show up here in a stronger-for-longer iron ore price. The Aussie dollar would stay up. Phil Anderson’s call on Aussie property wouldn’t be as outlandish as it first appears.
For now iron ore companies are cashing in. Check this out from Bloomberg, ‘Freight traders are hiring record numbers of iron-ore carriers in the spot market as Chinese steel production expands at the fastest pace in three years, spurring the biggest rally in shipping rates since 2009…The jump in chartering reflects average monthly Chinese steel output that’s been about 10 percent higher in 2013, reducing the nation’s ore stockpiles to the lowest for this time of year since 2007. Imports of the raw material into China rose to a record last month.‘
But our resident China bear Greg Canavan isn’t buying it. China pegs its currency at an artificially low rate. According to Greg, editor of Sound Money Sound Investments, one consequence of this cheap currency is that it denies Chinese households an increase in purchasing power (via a stronger currency). Consequently it allows the Chinese credit system to go on subsidising unproductive industries like steel and cement. That sends a false signal to the iron ore miners.
The same Financial Times article pointed out this week that China has more than 1,000 steel mills producing nearly half the output of the world with industry profitability at 0.04%. To make steel you need iron ore, which Twiggy Forrest is more than happy to sell at the healthy current price of over US$130 a tonne. Hmmm…does excess and unprofitable steel production mean we’re producing excess iron ore?
You can see Greg’s answer here.
Of course, the more intriguing story about China this week is the currency. How long before it’s allowed to rise in a big way? The European Central Bank (ECB) announced a bilateral currency swap with the People’s Bank of China (PBOC) last week. Then this week came the news of a deal between Britain and China that will give British investors access to invest directly into China and yuan assets.
The Wall Street Journal took this line: ‘Beijing has long kept a tight grip on the yuan as a way to stem volatility and control capital inflows and outflows. But it has moved to broaden its use since 2011 as it seeks to give the currency a higher global profile and eventually challenge the dollar as the world’s de facto currency.‘
According to the Australian,trading volume in the yuan has risen 113% since January last year and it is now the ninth most traded currency. This follows on from China establishing swap lines with a diverse bunch of central banks, including our own RBA. But not yet with the big boys at the US Fed or the Bank of Japan.
Over at The Denning Report, Dan Denning reckons he’s found an angle. ‘You’ll know that China’s currency is ready for the big time when it has a deep and liquid bond market and Yuan-denominated bonds can be used for collateral. We’re not there yet …The next area you can expect to see more action is in the energy markets. An unstable dollar contributes to high oil prices. And since every country needs oil and energy, getting the dollar out of the oil trade could be the next move. It’s also where you start to find compelling investment opportunities here in Australia.‘
The energy markets are the place to be if the Asian Development Bank (ADB) is right. It’s gone on the record saying Asia faces soaring demand for energy over the next twenty years. The ADB reckons Asian demand will be enough to consume the current output of the Middle East.
That wouldn’t leave much for the rest of the world if new supply isn’t brought online in a big way. The investment required looks giddy. Take this from the Australian: ‘To meet future energy demand, Asian and Pacific nations would require a cumulative investment at home and abroad of about $US11.7 trillion in upstream energy extraction and production, midstream energy transformation, transportation and downstream energy distribution.‘
It’s all part of some historic shifts in world markets. Stay tuned.
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