China delivering on stimulus plan

The Australian and global economies got some good news over the weekend with Chinese trade data revealing a rebound in trade volumes. At the same time, officials at the People's Bank of China said that China had a further fiscal stimulus plan ready to implement which should ensure economic growth picks up in 2013. The PBoC did, however, also suggest that the current level of the yuan, the Chinese currency, is about right, which means that any further appreciation in the yuan is unlikely in the near term.

In terms of the trade data, Chinese exports jumped 9.9 per cent while imports rose 2.4 per cent in September. This saw the monthly international trade surplus rise to $US27.7 billion. The solid rise in exports suggests that global demand may be holding up a little better than feared. The rise in imports suggests stable, albeit moderate, demand growth from China for the raw materials that go into the production chain which is where the good news for Australia comes in. Both sides of the trade data are positive.

One notable aspect of the data was the 4.1 per cent rise in iron ore imports which, according to Bloomberg data, were 65.01 million tons in September. This rebound in import volumes for iron ore fits with the recent news of sharply stronger iron ore prices which have rebounded around 30 per cent since falling to a three-year low of $US86.70 a tonne in early September. With iron ore prices holding recent gains in the first half of October at over US$110 a tonne, it is likely that Chinese import volumes have continued to rise.

It is a simple fact when analysing global economic conditions that higher trade volumes are associated with strong global economic growth and vice versa. This was seen recently during the global economic and financial crisis, which saw trade volumes fall precipitously as the global economy shrunk.

The better Chinese trade data come at the same time the Deputy Governor of the People's Bank of China, Zhou Xiaochuan, confirmed that the Chinese currency had "reached its equilibrium rate” and that its value was now largely determined by the market. Speaking at the IMF annual meeting in Tokyo over the weekend, Mr Zhou said that China has made considerable progress in reforming its financial sector and setting up foreign exchange markets.

The Chinese yuan has recently hit its highest level in around two decades at 6.28 to the US dollar. This is around 10 per cent stronger than the level prevailing at the beginning of 2010 and it has risen by around 30 per cent since 2005. The PBoC had been allowing the yuan to appreciate to help contain domestic inflation pressures.

With the economy slowing and at risk of GDP decelerating too far, Chinese policy makers have been easing policy but not aggressively so. There has been only a moderate relaxation in monetary policy because the People's Bank of China remains concerned about simmering inflation risks and concerns about refuelling the still overheated property market. Domestic inflation risks were also being threatened by a global liquidity glut, according to Zhou.

To address the economic slowdown in China, there have been a range of fiscal measures, including a huge infrastructure program that is designed to support the economy through construction of railways, roads and ports. This sort of stimulus is seen as having a much more limited impact on inflation and the projects are usually long run in nature which means the benefits to the economy are spread over many years.

Also speaking at the IMF meeting, the People's Bank of China's Yi Gang said China plans an appropriately sized stimulus package to counter its economic slowdown. It will be "large enough to stabilise growth but not too large to cause negative impact or problems in the future," Yi said.

While there is nothing particularly new in Yi's comments, they are likely to be positive for global markets. They reinforce the pro-growth objective of the Chinese authorities.

There is still considerable uncertainty about whether the Chinese economy is at a turning point, with GDP growth bottoming out around 7.5 per cent, or whether there is a further cooling unfolding before the pick up arrives in 2013.

The Chinese authorities and the data are suggesting an optimistic tone, with the turning point very near. This point is reinforced by the recent uptick in some commodity prices, including for iron ore.