Monday, August 26, 2013

Asia's hot pot minus US money

If there is one clear message coming out if the 2013 Australian Leadership Retreat at Hayman Island, it is the increased danger of setbacks in China and India in the next year or so. And just as uncertainty is holding back Australian industry in China, consumers can also feel the whiff of uncertainty. It was explained that one of the larger upmarket food chains has seen a 40 per cent fall in its Chinese sales. There have been sharp drops in other industries, although some of the slowdown is related to new officials finding their feet. The government has banned any new government buildings for the next five years.

The Chinese stock market is rating the smaller Chinese banks at a lower rate to deposits than Greek banks, and even the larger Chinese banks are rated on a similar basis to Spain. Those low-bank stock market ratings reflect the belief that, just as in Europe, there are substantial hidden bad loans so China has the same problem in the wake of the enormous increase in credit, which the government engineered during the global financial crisis.

There was agreement in Hayman that the new Chinese government wants to reduce its dependence on exports and investment and to replace that with higher consumer spending. The problem is that when it tries to dampen property stimulation it suddenly sees unemployment rising, so China (nervous about the social implications) turns on the liquidity tap once again. The current rise in factory orders is part of stimulation several months ago. The clear conclusion at Hayman was that this 'stop-start' policy is part of a staged process. The bottom line for Australia is that this development is not good for the price of iron ore, coal or LNG. Few are forecasting the collapse in prices or volumes but nevertheless the higher global production of iron ore, coal and LNG will come at a time when China is restricting demand. Some say the Chinese curbs will start to be serious later this year, others say 2014 is more likely. Australian iron ore miners hope that when China slows and demand and prices fall, China will reduce its own high-cost production to allow the new iron ore output to come into the market. At the same time there are big increases in the global supply of gas and coal. There is a very good chance that Australia's terms of trade will fall, as will our currency (Why the dollar could fall after the election, August 21). BHP believes that any China setback will be temporary and that urbanisation will, in time, once again drive commodity demand.

In the case of India, all the attention is focused on the exodus of the hot money that came into India on the back of the American quantitative easing. The American punters were chasing yield in India but as they now exit, the Indian rupee is falling in value (Indian markets walk over fire, July 17).

India's basic problem is that it has not invested in sufficient infrastructure and too many of its people are living on a subsistence diet with a high infant mortality rate. India buys Australian gold and coal but the world hoped that if China slowed India might take up the slack. I do not think that an Indian revival is likely in the short to medium term. That means many of the regional growth forecasts may be too optimistic. As America tapers its QE bond buying we will see just how disruptive the American hot money has been in Asian economies. A lot of eyes will be on Indonesia.






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