Markets: Feeling the Xi pinch

Spare a thought for the Chinese officialdom this morning.

China’s government has banned its own party and government agencies from constructing new building for five years and ordered new projects be suspended. This is all in the name of cutting wasteful spending.

It has not been an easy year for Chinese Communist Party cadres, their families, developer mates and local government officials. If they have engaged in questionable activities President Xi Jinping has promised to expose and prosecute them, and business deals are under strain because of such scrutiny. Recent efforts by China's central bank to limit speculative lending resulted in the country’s interbank rate rising to a record high last month.

All this could drive one to drink. But even that is being cracked down on by President Xi’s orders. The price of the clear, fiery alcohol Moutai, used in Chinese banquets, quadrupled in price between April 2007 and January 2012, according to Platinum Asset Management. The price of Moutai has since been treading water which, apart from tea, may be the only officially approved liquid consumed at gatherings that involve Chinese officials.

Meanwhile, all is not good news for Australian miners. Less speculative lending in China's property market means less building and demand for steel. A drop in steel demand will result in less demand for Australian iron ore.

China’s economy grew at 7.5 per cent in the second quarter. Ridding the economy of extravagance and corruption may mean President Xi will have to accept growth that is lower than his stated goal of 7.5 per cent this year. If the president and his new leadership team accept this then Australia’s economy and the earnings of its resource stocks will receive more than a knock.