Here we go again. Market robots (dressed in expensive suits as well as their quant computer rivals) moving the Australian dollar and share markets up and down with each sliver of slightly rubbishy data that comes out of China.
Just 11 days ago it was all doom and gloom when the PMI – the purchasing managers index – which is a very rough measure of Chinese factory activity slid. Down went the AUD and Australian share markets.
Now, apparently, less that two weeks later markets are cheered by Chinese trade data. Better than expected, the Chinese economy is OK.
Even more exciting was the news that iron ore shipments to China hit new records. Well, with the economy still growing at a headline 7.7 per cent last year it would be a very serious worry if the records weren’t broken pretty much each month. Stockpiles of iron ore at Chinese ports are building higher and higher too, and the country’s steel industry now has over capacity of 30 percent. China is littered with steelyards of rusting metal and steel prices continue to head south. But yesterday none of that mattered. Everything in market mu-mu land was right with the world.
The Chinese economy is quantum almost 8 per cent larger than it was last year. But were iron ore exports up 8 per cent year on year? That would really be the question that the markets should be asking, factoring in of course the different times for Chinese New Year. Too hard maybe?
Now Little Red Blog is not suggesting that the Chinese economy is about to collapse but it is certainly slowing down NOT speeding up. Quick. Sell those Aussie dollars before the next piece of data emerges. Or not.
The other question that the markets should be asking but don’t seem to be, at least not in its initial flushes was just how real is China’s export growth. It’s now the worst kept secret in the world that Chinese business folk use trading invoices to move currency in and out of a country which has stringent currency controls. In fact, this all happened about the same time last year. Déjà vu anyone?
This is what Dow Jones newswire had to say to its readers.
China reported a January trade surplus of $US31.86 billion versus $US27.1 billion expected by economists. The trade data poured cold water on recent fear of a hard landing in Australia’s biggest trading partner. Of particular significance to Australia, China’s iron-ore imports hit a record high.
And here is what the economists at ANZ , who have a pretty good track record of understanding China from their Chinese-speaking base in Hong Kong, had to say.
China’s January export growth surprised the market on the upside, gaining 10.6% y/y in January despite of a high base last year. While this could reflect an improving external demand, we suspect that export over-invoicing activities have re-emerged. It is important to note that China’s regional trading partners such as Taiwan and South Korea registered very weak January exports.
We also found that the round-tripping trade between Hong Kong and China have picked up again since Q4 2013, reflecting the incentives to take advantage of the onshore high interest rates and RMB appreciation opportunities.
And on iron ore:
Consistent with previous seasonal patterns, the iron ore inventories in Chinese ports picked up strongly in the past few weeks. On one hand, the iron ore imports rose 33% y/y to the record high of 86.8m tons. On the other hand, the weakness of economic activity could have played a role as well. It is reported that Chinese steel mills held 36-day supply of imported iron ore stock by the end of last week, compared with an average level of 30-day supply. As a result, the iron ore prices retreated during the same period.
There’s your choice. You decide who’s right. But as long as they are buying and selling, the brokers are making money. The right answer isn’t really relevant.