China’s Economy is Slowing Down…Again

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It’s quite clear from the data that China’s Economy is slowing down. Copper imports into the Middle Kingdom during April fell 30% month on month, according to the General Administration of Customs.

Copper inventories at the London Metals Exchange are piling up, too. They increased by around 100,000 tonnes last week. Overnight, copper hit its lowest price since early January.

That’s not a disaster, but it bears watching.

Iron ore imports into China also slowed during April. Volumes fell 13% month on month, and were down 2.3% over the past year. Last week, stockpiles at Chinese ports were at a record high of 135 million tonnes.

That compares to a high of 100 million tonnes in 2013, at the start of the last bear market in iron ore.

The cause of the slowdown is a deliberate tightening of credit by the Chinese authorities. According to the Financial Times, broad credit growth in China is now just 15%, down from 25% at the start of 2016.

Now, credit growth of 15% may sound pretty impressive. But it’s the rate of change that is important. And 15% from 25% represents a decent slowing of activity.

This is all pretty standard stuff in China’s centrally planned economy. That is, they turn the credit tap on, then turn it down when things get a little too hot. If the credit slowdown impacts GDP growth too much, they then turn the credit taps back on again.

At least that is the way things have worked in the past. As the Financial Times says:

The authorities’ objective seems to be to rein in surging leverage in the shadow banking sector through a combination of tougher regulation and tighter liquidity provision to that sector, without causing wider systemic risks to the financial sector. They also hope to be able to squeeze the growth of credit between financial entities without restricting credit provision for legitimate economic expansion.

This is not the first time that the PBOC has attempted to slow down the growth of credit by a combination of tighter liquidity and more stringent regulation of financial institutions and this latest episode will probably mean that the period of unexpectedly strong Chinese activity growth, which started in 2016 Q1, is now over. This may take some of the buoyancy out of the global reflation theme for a while, especially if tighter regulation of Chinese wealth management products reduces the speculative demand for commodities.

Will this be another standard Chinese slowdown, or something more sinister? After all, you really have to wonder what capacity China has to increase credit and debt growth even further from today’s already very high levels. It’s not as if they can go on playing this game forever.

Right now, the commodity price downturn isn’t sharp enough or widespread enough to suggest major problems in China’s economy. But that doesn’t mean bigger problems can’t unfold from here.

And if China has problems, so does Australia.

Given China is a huge importer of Australia’s minerals (as well as a consumer of our education, land, wine, vitamins, milk and honey) what happens in China matters to you.

At a very basic level, think of Australia as having two main growth drivers — dirt and debt. We ship dirt to China. We then leverage the income we receive from this dirt to speculate on house prices.

We have to borrow from offshore to do so, but foreigners are happy to lend to us as long as China provides an income by buying our dirt.

If China starts buying less dirt, for a lower price, our income will decline. What will our foreign creditors think then? They might decide to still lend to us, but at a higher price. That might mean our dollar falls (which gives creditors more purchasing power) or they may ask for a higher rate of interest on loans.

And if that happens, the housing market will start to get the wobbles. And if our housing market gets the wobbles, the Australian economy is in real trouble.

I don’t know if this scenario will play out. I can’t tell the future. But it’s something you have to keep in mind as a possibility. If you’re a bull, you have to be prepared to change your view if the facts warrant it.

Right now, the facts don’t warrant it. But that could all change.

Iron ore is the barometer. It’s Australia’s largest export earner. And it’s the fundamental building block for China’s economy. If iron ore continues to slide into the US$50/tonne range, and then into the US$40/tonne range, Australia’s economic expansion is under threat.

If this happens you need to have a strategy to deal with it.

My mate Vern Gowdie (editor of The Gowdie Letter and Gowdie Family Wealth) has written a book about the coming bust in Australia, and what to do about it. It’s not a bad blueprint to have, given the risks we face.

I’ll be honest with you. I don’t agree with everything Vern says. I think he’s too bearish. But that doesn’t mean he’s not worth listening too.

I always read Vern’s work. It gives me perspective. And I highly recommend that you do too. We’re currently running a great deal on Vern’s book, ‘The End of Australia’.

Don’t be put off by the enigmatic title (ha!), it’s a great read full of wisdom and common sense. While markets can ignore wisdom and common sense for years, when things change, it is all that matters.

When they do, you’ll want to have this book in your hands. You can get your copy here.

Regards,

Greg Canavan,
Editor, Money Morning

About Greg Canavan

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

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