29 Jul 2013
China debt crackdown: when it rains, it pours...
FXstreet.com (Barcelona) - Earlier today, it was reported the 'urgent' calls by top Chinese officials to carry out a nationwide debt audit, which is yet another clear evidence the country is committed to carry on sweeping reforms for fiscal adjustments.
After the news broke out on Friday, no much coverage over the possible implications were reported. However, and while still premature, the initial take-away is that China may be willing to accept weaker growth in exchange of a debt crack down. China may find itself with no option but to tolerate softer economic progress in an attempt to put its house in order, especially if the latest indications of a 45% debt to GDP ratio published by the IMF happens to be accurate.
Growth coming down to 7% minimum done deal?
Conflicting reports by Chinese local media emerged last week about Chinese Premier Li Keqiang allegedly underlying 7% as the "growth floor". Today, Shirley Yam, Editor at South China Morning Post, clears things up by noting that "several major securities houses did something extraordinary last week by publishing a report based on an 'unofficial' 7,500-word transcript of a speech by Li at a meeting with corporate heads and academics in Beijing on July 16."
Yam adds: "According to the transcript, Li said he was committed to delivering the 7.5 per cent growth target this year while keeping inflation below 3.5 per cent. He said growth was trending down but had yet to reach the 7 per cent bottom line and therefore his focus would remain long-term, structural reform." In view of Yan, it seems clear that if growth heads too close to 7%, he will resort to short-term stimulus despite concern about the long-term damage."
So on one hand, Chinese Premier has set 7% as bottom line before further stimulus in the economy may be injected, while on the other hand, China has hardened its tone towards to crack down on overly large liabilities, usually a recipe that guarantees a temporary cap on growth to instead focus on structural reforms for a more locally dependable and consumption-driven new economy. If we throw into the mix the deteriorating HSBC PMI published last week, chances are that a slide from the last 7.5% GDP in Q2 to 7% bottom growth has greater odds from happening than an immediate pick up in growth.
Further supporting the case for a slowdown resumption in China, a recent article published at FXstreet.com via Hua Changchun, Economist at Nomura Securities, warns that China's economic slowdown and domestic demand are only expected to regain momentum in H2 2014.
What are the implications for the Australian Dollar?
Since the performance by the Australian Dollar has grown much closer ties with the economic situation in China, and bearing in mind China is still in the midst of an unprecedented transition which allows growth to fall further, there is still plenty of room for pricing a lower GDP from current levels, and subsequently see the Australian Dollar struggling.
While the question lying now is whether or not a 7% breach in Chinese growth may trigger stimulus in the economy - 7% growth bottom' suggests so, yet latest debt crackdown may contradict such approach -, which is seen as short term 'Aussie positive', the underlying unsupportive scenario China offers to the Aussie, makes any broad-based rally by the Oceanic currency, barring any surprise by the RBA ending its easing campaign or the Fed taper being put on hold, quite illusive at best, and heavily dependable on technical-induced moves to recover, temporarily, its lost allure.
After the news broke out on Friday, no much coverage over the possible implications were reported. However, and while still premature, the initial take-away is that China may be willing to accept weaker growth in exchange of a debt crack down. China may find itself with no option but to tolerate softer economic progress in an attempt to put its house in order, especially if the latest indications of a 45% debt to GDP ratio published by the IMF happens to be accurate.
Growth coming down to 7% minimum done deal?
Conflicting reports by Chinese local media emerged last week about Chinese Premier Li Keqiang allegedly underlying 7% as the "growth floor". Today, Shirley Yam, Editor at South China Morning Post, clears things up by noting that "several major securities houses did something extraordinary last week by publishing a report based on an 'unofficial' 7,500-word transcript of a speech by Li at a meeting with corporate heads and academics in Beijing on July 16."
Yam adds: "According to the transcript, Li said he was committed to delivering the 7.5 per cent growth target this year while keeping inflation below 3.5 per cent. He said growth was trending down but had yet to reach the 7 per cent bottom line and therefore his focus would remain long-term, structural reform." In view of Yan, it seems clear that if growth heads too close to 7%, he will resort to short-term stimulus despite concern about the long-term damage."
So on one hand, Chinese Premier has set 7% as bottom line before further stimulus in the economy may be injected, while on the other hand, China has hardened its tone towards to crack down on overly large liabilities, usually a recipe that guarantees a temporary cap on growth to instead focus on structural reforms for a more locally dependable and consumption-driven new economy. If we throw into the mix the deteriorating HSBC PMI published last week, chances are that a slide from the last 7.5% GDP in Q2 to 7% bottom growth has greater odds from happening than an immediate pick up in growth.
Further supporting the case for a slowdown resumption in China, a recent article published at FXstreet.com via Hua Changchun, Economist at Nomura Securities, warns that China's economic slowdown and domestic demand are only expected to regain momentum in H2 2014.
What are the implications for the Australian Dollar?
Since the performance by the Australian Dollar has grown much closer ties with the economic situation in China, and bearing in mind China is still in the midst of an unprecedented transition which allows growth to fall further, there is still plenty of room for pricing a lower GDP from current levels, and subsequently see the Australian Dollar struggling.
While the question lying now is whether or not a 7% breach in Chinese growth may trigger stimulus in the economy - 7% growth bottom' suggests so, yet latest debt crackdown may contradict such approach -, which is seen as short term 'Aussie positive', the underlying unsupportive scenario China offers to the Aussie, makes any broad-based rally by the Oceanic currency, barring any surprise by the RBA ending its easing campaign or the Fed taper being put on hold, quite illusive at best, and heavily dependable on technical-induced moves to recover, temporarily, its lost allure.