If embattled Treasurer Joe Hockey is betting on China to deliver him from a fresh round of budget hell, new data from Australia’s biggest trading partner released yesterday showed he might have backed the wrong horse.
“Solid and sustained growth in China will be underpinned by the transition to a pattern of growth that is more reliant on consumption. A broader-based model of growth will enhance the resilience of the Chinese economy as the market plays a more decisive role and institutional settings are reformed,” was Treasury’s budget-night view.
Yet just one day later came the sobering news that only weeks after posting the lowest quarterly GDP growth for six years, every indicator in China’s April data missed market expectations. This was far from a one-off — it’s been happening regularly for the past 18 months.
Loan growth was lower than expected, and fixed-asset investment — underpinning China’s steel sectors, which are the main destination for Australia’s biggest exports, iron ore and metallurgical coal — continued its relentless decline to hit a new 14-year low of just 12% growth in the year to April, down from 13.5% a month earlier.
Retail sales, while a notoriously rubbery measure in China, had growth of just 10% — the worst effort since back in mid-2006. Chinese people are not spending. The domestic demand that was supposed to replace property and infrastructure has not appeared, and there is no sign of it showing up anytime soon. Chinese people are saving more, not less, and the price of their main assets — their houses — also slumped.
To add to the gloom, last week’s trade data was weaker than forecast on both the exports and, more importantly, imports side — which reflects domestic demand.
At Crikey, we have long questioned the actual numbers that are issued by China’s National Bureau of Statistics, but right now, all the trends are pointing only one way. The glass-half-full crowd is struggling to point to any indications of how the would Chinese economy even stabilise, let alone rebound, in the second half of this year.
It’s now clear why China cut interest rates for the third time in six months on Sunday — the first two cuts have struggled to get traction, and the People’s Bank of China is now behind the economic curve.
The Chinese data came less than 24 hours after Australian Treasury gave Australian taxpayers its bizarrely upbeat view of the economy, based on not much more than a bullish view of China and a vague promise of a better global economy only days after the Reserve Bank had ratcheted its own outlook down for the Australian economy for the next three years — again. People in Canberra clearly don’t talk to each other.
“If the Chinese slowdown is sharper than Treasury expects … a recession is not out of the question.”
China’s attempts at a minimal stimulus are not producing the desired effect. New loan growth in April was only about 700 million yuan, far less than the 900 million yuan that markets had expected. In fact, money supply growth (known as M2) fell to 10% compared to the following year. This is a historic low. Put simply, it’s getting harder and harder to get businesses to accept new loans, except to roll over existing ones — because the demand is not there.
Rather amusingly — in a clumsy attempt to create some sort of credible narrative on China — on budget night, Hockey waxed lyrical about his “first trip to China”. He was 13, he said and then preceded to trot out the usual cliches of remembering people in blue suits and riding bicycles that, these days, have been replaced. These, of course, are just the sort of searing insights we have come to expect from the member for North Sydney. The purpose of the anecdote was, no doubt, to give the audience the impression that Hockey is a keen and interested observer of China, and that his view that “China will keep growing” (more breathtaking analysis) is based on something that the rest of us don’t know.
Hockey may well have tooled around China as a kid, but as a minister in the Howard government and then as Abbott’s shadow treasurer, he seems to have lost interest in the place, visiting in 2001 and not returning even once during his five years on the opposition frontbench, waiting until 2014 to return to China. Yes folks, all Hockey knows about China is what his advisers at Treasury tell him, and they have a storied history of getting it wrong in the face of plenty of other evidence. Hockey clearly didn’t consult his mate, Fortescue chairman Andrew Forrest, before he gave his upbeat commentary on China.
And let’s get real. China has a massive oversupply of housing inventory, one that on-the-ground analysts reckon will take three to five years to clear. Housing makes up the single biggest component of steel demand in China.
Still, Treasury did, for once, base its forecast for the iron ore price — the widely accepted proxy in Australia for how well China (or at least the part that the Australian economy is linked to) is doing — on available evidence and set it at a rational level of US$48 per tonne plus freight, so about US$53 per tonne. Yet that is now at the mid-to-high end of forecasts, so the risk is still on the downside.
Granted, after hitting a 10-year low of US$47.60 last month, the price has rebounded. Last night, it was US$62 per tonne. That’s an OK level for now, but it’s also the peak of the summer construction season. Let’s see where it’s at in September, as things start to wind down and Gina Rinehart’s new mine is up and running.
And gone are the days when FMG was talking about a permanent rebound to these levels and higher. Instead, the company, which is making money at these prices, has been shoring up its balance sheet to defer interest payments due in two and three years’ time. That’s a sign of a company that knows the price is going to stay lower for longer.
Forrest’s uncertainty about the future has been demonstrated in his intemperate, extraordinary attacks on his larger, lower-cost Australian competitors — Rio Tinto and BHP Billiton — and demanding a Senate inquiry, no less, into a market-driven sector. Rent-seeking does not even begin to describe this behaviour. Forrest appears to think he has some sort of right to make money. Well, he’s made plenty; if FMG were to collapse tomorrow he would remain a very, very rich man — and the iron ore price would certainly not fall as far, helping the Australian taxpayer.
But with Australian big miners including FMG getting China’s steel-demand equation wrong and commissioning too much new supply, China — which can keep state-owned iron ore mines opened, even if they run at a loss — is now firmly in charge of the iron ore price, not the Australian government. But more telling about the real sentiment at FMG is that it is shedding jobs at the rate of about 100 per day as it moves to ratchet down costs. While the miners got Chinese steel demand wrong — a fact that they are still too arrogant to admit — they at least know what’s going on right now.
Treasury has been forced to take a more realistic view on China in the past 12 months, in the face of collapsing commodity prices, but its commentary still appeared oddly upbeat and the boffins in Canberra are still taking China’s data at face value. It’s time that Treasury and Hockey took off their rose-tinted glasses and admitted that things in China are worse then they had thought.
Talk of slightly better growth in India and Japan is only playing around the edges — China takes 35% of Australia exports, so it’s still the only game in town.
Construction growth will only get Australia so far. Make no mistake: if the Chinese slowdown is sharper than Treasury expects, and the signs are that this may already be happening, a recession is not out of the question.
Maybe Australia has to have one to shake it out of its torpor.