A China watcher with plenty of skin in the Beijing game put it thus: ?Q3 GDP could be the most hotly awaited number in the history of the universe, or at least since the range of the Death Star's Planet Destroyer was calculated.?
It could fill an idle quarter hour applying Star Wars identities to various players in our present markets, but while that statistic will loom ominously large over our world the closer we get to it, I can't quite see it as a death ray when we've already priced in disappointment. (With her hair in ear muff buns, Gina Rinehart as Princess Leia? Let's not go there.)
In the market's usual effort to predict the future, the forces of gloom are dominating with their scenario of a disastrous China slowdown coming on top of Europe's decay and whatever is happening in the US. However, the popularity of forecasts doesn't necessarily correlate with their probability of being right, or even how well the forecast fits all the available facts.
China is not growing as quickly as it used to, and growth slipped a little further in the June quarter than Beijing would have liked it to. The first hurdle to get over with the China bears is that it is an entirely desirable thing that China no longer aspires to double-digit growth, that as the world's second biggest economy becomes the world's biggest economy in a few years, its growth rate must slow further. A rate of 7 per cent as this decade matures would be a wonderful and quite astounding thing.
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Regarding the second hurdle, the June quarter figure, the cadres are working on it. There's something of a promise that June will be the bottom on China's soft landing with stimulus ranging from lower interest rates to increased railway spending expected to gently raise annual growth closer to 8 per cent from the latest 7.6 reading.
That promise will build anxious anticipation about the September quarter GDP, the importance magnified by the realisation that China is carrying our world's growth hopes. The share prices of Australian iron ore miners yesterday indicated there's already plenty of doubt, but the reaction to a lack of improvement in three months' time would be worse.
So between now and then, all manner of indicators will be subjected to magnifying glasses and plenty of old adages about the Chinese economy will be trotted out.
On that first point, a submission by Barclays analyst Kieran Davies therefore makes interesting reading in light of this week's strong iron ore production numbers.
That record amounts were successfully dug up, sold and shipped should question the credibility of some of the more pessimistic opinions that have been promoted this year. Yes, prices have come off a bit, but only to what they were a few months ago and they are still high on any historical basis once the peak of the pre-GFC bubble is discounted. The neat thing for Australia is that as the cause-and-effect of increased production and reduced prices plays out, we still end up receiving a couple of hundred billion dollars for the stuff.
Davies' latest research suggests it is the Australian export performance, rather than Chinese trade figures, that tells the more reliable story about what has been happening:
The market is paying more attention to Chinese trade data to gain insight into the demand for Australian commodities. While the Chinese data are timely, we find that Chinese imports from Australia do not line up with Australian exports to China, either in level terms or growth rates. We believe this means the strength in Australian exports is likely giving a more reliable signal than the slowdown in Chinese imports.
For iron ore volumes, however, Australian exports lead Chinese imports by about a month (Australia is the world's largest exporter of iron ore and China is Australia's biggest customer). Volumes remain strong, unlike 2008-09, when they briefly halved. Export prices have adjusted, though, down about 20 per cent versus a roughly 50 per cent drop in 2008-09, with spot prices falling recently.
This suggests that Chinese demand for Australian commodities is holding up, but has slowed compared with last year. It also cautions against relying on Chinese trade data as a quick update on commodity demand. In our view, it is better to look at the more detailed volume data from the Australian side.
And that more detailed volume data is holding up.
On the latter matter of out-dated adages, the impact of Europe's recession on China continues to be exaggerated by a mindset that still thinks the Chinese economy is primarily export driven (it's not and hasn't been for several years) and that Europe is China's biggest and most crucial market. China has been intentionally diversifying its markets for more than a decade and, as previously noted, the emerging world buys more than twice as much Chinese stuff as Europe does.
There's still an impact, of course. The weakness in the North Atlantic does hurt the growth of Chinese exporters, but that is in the context of a Chinese economy that is attempting to flick the switch towards more consumption, with the similar mixture of job losses in some sectors and job creation in others that we are experiencing.
Comrade Luke is out there, aiming to drop one down the Death Star's exhaust pipe. It will indeed make for gripping viewing over the next three months. Just remember that there is a 1.3 billion-strong force with him.
Michael Pascoe is a BusinessDay contributing editor.
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