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should not come as a complete surprise given the
attempts by the authorities to remove some of the tax
incentives put in place for steel exporters since June
of last year.
…as administrative measures cool overheating…
Effective from 15 July, the Chinese Ministry of
Finance will abolish a 9% tax rebate on exports, such
as hot and cold rolled coils, and long steel, which are
primarily used in the construction sector. This could
discourage Chinese makers from aggressively
expanding steel production, which in turn would not
bode well for Australia’s iron ore exports. If these
developments start to be reflected in a slowdown of
Australian exports, the AUD would become
vulnerable to at least a corrective setback of recent
gains.
Our Asian economics team have lowered their
Chinese growth forecast for 2010 to 9.8% from
10.50% previously, and forecast a further growth
slowdown in 2011 to 8.4%, anticipating further policy
tightening via a mixture of quantitative credit controls
and regulation of local government investment.
Indeed, the authorities appear to be steadfast in their
policies to tame speculative investments via curbs on
loans to multi-home buyers in the property market,
an area which has been a source of concern for
some time.
…but global policy will remain supportive
Although the risk of a slowdown in China and the US
has been clearly identified, it is encouraging that
monetary authorities have responded. The latest
FOMC minutes show a significant shift in tone, taking
on a more dovish stance, suggesting that liquidity will
be left in the system for longer than the market was
initially anticipating. Some members of the FOMC
have also put the case for further measures to be
taken if the outlook deteriorates further. Furthermore,
the Chinese authorities have reaffirmed their
commitment to using an active fiscal policy together
with a moderately accommodative monetary policy to
maintain sustained growth. In an environment of
continued ample global liquidity, we would expect
asset markets to remain supported and investor
confidence to be maintained, which will provide a
favourable backdrop for the commodity and procyclical
currencies.
The risk of a sharper slowdown in Europe
Along with many other central banks, Chinese
officials have recently expressed concern over the
external demand picture (namely Europe). As a
producer of intermediate goods which are then
finished and exported to the rest of the world, the
largest destination being Europe, these concerns are
not surprising. Chart 3 suggests that, in nominal
60
50
40
30
20
10
0
-10
-20
-30
Chart 3: Chinese Exports (% y/y)
00 01 02 03 04 05 06 07 08 09
Source: Reuters EcoWin Pro
1.4
1.5
1.6
1.7
1.8
1.9
2.0
EU
annual terms, the growth of Chinese exports to
Europe is peaking. So far, relative strength in core-
European countries has, to some extent, provided a
cushion to a significantly weaker growth profile in the
peripheral eurozone countries. But that might be
about to change.
Both the survey and ‘hard’ activity data in Germany
point to a noticeable acceleration in GDP growth over
the second quarter, driven to a large extent by the
export-sensitive manufacturing sector. But, looking
forward, we anticipate that growth will slow in the
second half of the year as tighter fiscal policy makes
its presence felt. Indeed, leading growth indicators on
the German front are already flagging such an
outcome with the likes of the new-orders-to-inventory
ratio in the manufacturing PMI survey turning sharply
lower. We favour short EURAUD positions
US
Chart 4: EURAUD versus German Ifo
Expectations. (Inversely) Hand in Hand?
2.1
94 96 98 00 02 04 06 08 10
Source: Reuters EcoWin Pro
EURAUD (Inverted)
German IFO Index
115
110
105
100
95
90
85
80
Ian Stannard 16 July 2010
Market Mover, Non-Objective Research Section
51
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