We continue our search today for evidence that Australia’s commodity boom is over. Of course we could be totally wrong. But that’s the establishment position anyway. The establishment position is that Chinese economic growth will moderate and commodity prices will return to trend. But other than the natural maturation of Chinese growth, everything will be fine for the next thirty years.
It would be nice if the above scenario was true. But kicking back your heels and accepting that position is remarkable lazy. On top of that, it shows a distinct lack of imagination and a deficit of curiosity. You won’t get anywhere in life taking things at face value as you hoover down calories from processed foods. So let’s push on.
We’ll begin with our moody companion Dr Copper again. But this time, we’ve put him in the same room with the Shanghai Composite for the last seven years to see how they’ve been getting along. Thick as thieves lately, you could say, although it hasn’t always been that way.
Spot Copper and the Shanghai Composite
The start date for the price performance of both is arbitrary. Pick a different date and you get different performance. Our aim here was to see if they are travelling together or separately, and what, if anything, this portends for assets denominated in Australian dollars.
You can see that the Shanghai composite has been in slow-motion decline since mid-2009. The highs are lower and the lows are lower too. Another few quarters of soft industrial production and the index will be back to its 2009 lows.
In fact, those lows could be sooner than you think. Profits at Chinese industrial companies fell for the fourth month in a row, according to Bloomberg. Accordingly, shares in Chinese commodity suppliers fell. Jiangxi Copper was down by 1.5%.
The thought of a harder landing for China’s economy is clearly enough to terrify at least some members of the US Federal Reserve. It’s bad enough that Europe, the US and Japan are mired in their own debt depressions. But if China crashes to earth, you can kiss the US dollar system goodbye.
‘I don’t need to see any more data to know that I think we should have more accommodation,’ said Chicago Fed President Charles Evans from the US Embassy in Beijing. ‘I certainly would applaud anybody who takes action in order to strengthen their economies,’ he added.
Wink wink, nudge nudge, China.
Evans is not alone in wishing to roll out the barrel for new stimulus measures. This is baffling, seeing as how none of the previous ones have done anything to solve the debt problem. Of course, they were not designed to extinguish debt. All previous liquidity and refinancing measures were designed to perpetuate the idea that assets in the banking system are held and priced correctly.
In the event, the Chinese were already on the case. As we reported in Australian Wealth Gameplan last week, major cities like Chongqing and Tianjin have rolled out spending programs that amount to at least $500 billion in investment in a variety of sectors and industries. As far as we could tell, however, there was no mention of where the money would come from.
In the past, local governments and cities have been able to use land as collateral for loans organised by cooperative State-owned banks. Will that work this time around? Or are concerns about the Chinese banking system already causing capital to flee the country and credit to get tighter?
We have just published our latest AWG report, in which we show how Australia could face a balance of payments crisis as a result of a Chinese hard landing. The short version is that Australia could face declining national income in the current account at the same time foreign capital chooses to flee via the capital account. In other words, now that the credit crisis has finally hit China, it will finally hit Australia too.
But we’ll have to leave it there for today. Your editor is on his way to a small conference in South Africa. We’ll be talking about the China/Australia connection and should be able to report back on what we learn next week.
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From the Archives…
The Gold Sub-Standard and the Inflation Cake
24-08-2012 – Greg Canavan
BHP and Rio: Just Following the Followers
23-08-2012 – Greg Canavan
How Media Regulation is Just a Clamp Down on Freedom of Speech
22-08-2012 – Dan Denning
Monarchs, the Masses and Democratic Mayhem
21-08-2012 – Bill Bonner
Why China’s Crack-Economy Needs a New Fix
20-08-2012 – Dan Denning