AUD: Big risk factors infecting sentiment - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that there are big risk factors that continue to lurk in the background for Australia and one of them is the sustainability of the Chinese economic recovery. 

Key Quotes

“The Chinese economic data released this week continued to show modest recovery underway.  However, the strength of that recovery is weak in comparison with the easing in monetary and fiscal policy this year.

The RBA October minutes said, “Members noted that the risks in China associated with the build-up of debt in an environment of slower growth and questions about the sustainability of current policy settings remained a source of concern for economic prospects in China.”

In its Financial Stability Report (FSR) last week, the RBA said, “In China, the level of debt is high and rising despite slower economic growth and signs of excess capacity in some areas; much of the new debt is being extended by the more opaque yet interconnected parts of its financial system. Non-performing loans (NPLs) are increasing, albeit off a relatively low base. While the authorities in China retain levers to support growth, using many of them would likely entail a further increase in debt that could increase the risks to longer-term reform and stability.”

The RBA is certainly not the only one watching with increasing concern over China’s finances. Most private and multilateral institutions are making similar noises.  Some researchers are seeing comments in the Chinese financial press suggesting that they are now starting to re-tighten monetary conditions and tighten rules on property investment.  It may take several months for these efforts to have an impact, but Chinese economic growth may weaken next year.

National debt growth in China (11.2%y/y) continues above nominal GDP growth (7.8%y/y), continually since the global financial crisis in 2009.  This suggests debt dynamics that many consider already excessive, continue to deteriorate at a fairly rapid clip.

However, at the current time, Australia is benefiting from the recovery in Chinese demand for commodities, and a reduction in its production of these commodities. Lifting both volume and value of Australia’s key exports this year.  This should improve the trade balance and fiscal balance. But only so much of this income boost is likely to flow to Australians.  Mining companies are unlikely to re-start investment and jobs in this sector appear to still be declining.”