China on course for slowest growth since 1990

Asia is about to see the ‘new normal’ from the region’s superpower over the coming years as Chinese President Xi Jinping publicly stated the nation will have to adapt to the slower pace of growth on the weekend.

China is currently on course for its slowest growth period since 1990. Since the change of leaders at the once-in-a-decade closed doors People’s Congress Assembly, the new central government has made a concerted and deliberate effort to take the heat out of public debt levels, which in turn has led to the slowing the economy.

The central government’s policy change has also exposed the lengths to which local government and private enterprise debt has expanded to create high level defaults risk. With collateral funding being margin called, and the PBoC looking to wind up issues around shadow banks the defaults of private enterprise and trusts over the previous months is only going to accelerate. But what is more interesting about the ‘new normal’ is this line on forward guidance: ‘the government must prevent risks and take timely countermeasures to reduce potential negative effects (on the economy).’ This is the clearest sign I have seen that a board-base monetary stimulus to elevate that current slowdown will not eventuate.

The evidence has been there over the past three months; industrial production has slipped to a ten-year low, GDP is ticking toward 7.0% - well away from the central government’s forecast of 7.5%, yet the recovery in the US and Europe - the two largest consumers of Chinese goods - has seen trade balance figures (particularly exports) holding firm. This provides further reasoning that despite the current fluctuations in key parts of the Chinese economy and the possible short-term issues, policy is holding firm.

From and Australian-centric point of view the further strengthening of language around no stimulus is coming to an interesting political point with the budget due tomorrow. The fact iron that ore has slipped further over the weekend, with almost one third of stock piles at Chinese ports under finance, plus with Chinese infrastructure projects still months to years off, there is every chance we could see iron ore under the US$100 a tonne mark for the first time since September 13 2012 when the price fell to $US96.10 a tonne.

The effect on the budget of a falling iron ore price is hugely detrimental and the effect on balance of trade and by extension tax receipts is going to create a public purse breakdown. The budget itself will be an interesting pull on the accommodation hand brake as well. UBS estimates fiscal policy will be tightened by a little more than 0.25%of GDP, coupled with other discretionary measures the fiscal drag is expected to be 0.5% from July 1. The likely outcome of this fiscal measure is a sustained period of interest rates on the monetary policy side.

The other likely outcome of tomorrow night’s budget is the politics of frontloading, ahead of the next federal election. Hard cuts now that should see public revenue increase over the next two years could be returned in the form of tax cuts in 2016 – right before the election. The forecasted drag therefore could be harder than UBS has forecasted and may see growth lower still.

Ahead of the Australian Open

We are currently calling the Aussie market up four points to 5465 on the 10:00am bell (AEST) based on the futures read from Saturday night’s close. However the comments by Xi Jinping, the iron ore price and the looming Federal budget is likely to see a fairly modest print in either direction as a holding pattern emerges ahead of data and political clarity tomorrow.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.