The Chinese hurdle

The first hurdle (FOMC meeting) has now been cleared, even if the markets did catch their toes on the top of the bar and tumbled to the ground.

The second hurdle is more specific to the Asian region; it comes in the form of China’s cash squeeze. 

This issue has been completely overlooked over the last few weeks as the build-up to Ben Bernanke’s speech reached fever-pitch and drowned everything else out.

It started to hit analysts’ radars when the shibor rate (China’s libor rate) spiked through the roof, hitting the highest levels since 2003.

Lending between Chinese banks has been heating up for months as the central government cracks down on ‘shadow banking’ and clamps down on the huge amount of illegal capital inflows that have made credit in China easy.

The slowing in growth for the world’s second largest economy is becoming visible. The HSBC flash PMI data from last Thursday showed China’s small to medium manufacturing enterprises are contracting faster than estimated as they struggle for liquidity due to the current policy stance.

Some are suggesting that the current state of affairs in China is very similar to that seen in the US pre-GFC. Leverage was cheap and easy, investors and business leaders alike snapped up credit with glee and high leverage levels were king – then it collapsed. Is China in a similar state of affairs?

Possibly - the Chinese central bank is starting change its hawkish stance for the first time since September last year, the phrase ‘fine-tune’ monetary policy statement has been added.

It is the silver lining that we have been looking for. The slowing in the Chinese economy has been well and truly ahead of the official rates, with CPI at 2.1% versus official expectations of 3.5%, and GDP estimates are now 7% for year-end versus official estimates of 7.5% slowing is ahead of expectations.

A loosening in the credit market should help bring manufacturing, and therefore growth, back towards official targets. If the ASX is going to find its feet again this year, cyclical stocks will need positive leads coming out of China. Currently this is not happening and the second hurdle is getting higher and higher by the day.

Getting stock specific, the casino wars is getting quite testy. Over the weekend, Echo announced a $1.1 billion upgrade to Star casino. This is to counter the James Packer lead bid for Barangaroo development site. Echo expects the upgrade will see an additional 330,000 international and interstate visitors a year plus an additional $1billion in state tax revenue putting the O’Farrell government in a wedge to support the new update over the Crown proposal.

The redevelopment will see two new hotels and an estimated 50 new bars and restaurants and will also see a major upgrade to public transport in Darling Harbour with Echo adding $130 million to a ‘City Link’ for a walkover for pedestrians and cyclists as well as an upgrade to light rail. We await the counter from Crown.

Ahead of the open today, we are calling the ASX 200 down 51 points to 4688 (-1.07%). It may not fall this far as the Nikkei is matching up solidly and may tempt Japanese investors out. However it is the last week of the financial year and the closing out of loss-making positions is likely for tax purposes.

BHP's ADR is suggesting the security will lose 50 cents (-1.52%) down to $31.95 as iron ore prices eased over the weekend on the China cash squeeze to US$118 a tonne and could lead the sector lower.

It is a very light week on the macro fronts which should give bottom-up views a chance for clear air. However, considering the downgrade seen over the last month, the bottom-up views could see more negative news than positive.

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