RBA’s ‘gentle turning point’ made in China

RBA's 'gentle turning point' made in China

But many of the headwinds that have buffeted the Chinese economy over 2019 look to be receding.

Next week’s signing of phase one deal with the US will provide a ceasefire – if only temporarily – to the trade tensions that have weighed on China’s growth.

The detente should help add momentum to China’s manufacturing recovery, with government and private sector purchasing manager indexes having moved back into expansion territory over the past few months.

Meanwhile, the unpleasant cocktail of elevated consumer price inflation – caused by spiralling pork prices due to African Swine Fever – and producer price deflation also appears to be easing.

Data released on Thursday showed the consumer price index held steady at an annual 4.5 per cent pace in December, while the producer price index fell 0.5 per cent compared to a heftier 1.4 per cent decline in November.

Market-based indicators are also flashing more positive. The Chinese yuan has strengthened to 6.92 against the US dollar, it highest level since August. Chinese stocks, as measured by the CSI300 Index, are up 8 per cent from their December lows and are hovering near two year highs.

But it’s what China has done to bolster growth that bears watching given the administration of President Xi Jinping appears to have stepped back from one of “three tough battles” aimed at producing higher quality growth – deleveraging.

Recent policy moves have shades of the very stop-go policies that Beijing is seeking to avoid given the hangover left by a debt binge used to fund infrastructure and property construction after the global financial crisis.

The People’s Bank of China delivered a new year’s day gift in the form of a cut in the bank’s reserve requirement ratio, which injected 800 billion yuan ($167 billion) of liquidity.

This follows the central bank last year cutting closely followed benchmark lending rates, as the government seeks to lower the cost of funding in an economy that has become accustomed to easy access to loans.

The re-opening of the lending spigot was shown in new loans in November soaring to 1.39 trillion yuan, up from 661.3 billion yuan in October. Consensus forecasts point to new loans of around 1.2 trillion yuan in December, which would deliver a 4 per cent increase in lending for the year to a record 16.9 trillion yuan.

Meanwhile, infrastructure investing is also back on the agenda. In late 2019 Beijing allowed local governments to fast-track 20 per cent of their 2020 bond issuance to help fund infrastructure projects.

That is arguably good news for miners, the RBA and Treasurer Josh Frydenberg.

Iron ore is trading around $US94 a tonne, or around $US87 when the cost of freight is excluded. This is well above the $US55 a tonne assumed in the federal budget.

While China won’t return to the halcyon days of double digit growth, a more modest 6 per cent looks plenty fine to Australian policymakers if it keeps the iron ore carriers sailing, growth ticking over and revenues flowing into government coffers.

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