MARKETS SPECTATOR: Beijing credit cuffs our market

Nomura believes a dire Chinese credit report over weekend confirms the increasingly bearish view forming on the Australian market.

A weekend report on Chinese credit was a real “eye opener” for a bearish view of markets, says Nomura analyst Tim Rocks.

Total social financing, China's widest measure of credit, fell by about one-third in May from April, the second month of substantial decline, according to the People's Bank of China.

“That’s a game changer,” says Rocks, speaking of Australia’s biggest trading partner.

“If credit slows down in China the risks to the economy are high”.

Rocks is not a bull at present.

China’s economy may be tottering, investors are re-thinking the effectiveness of quantitative easing by the US Federal Reserve and the gloom has not lifted on people’s perspective about the local economy, says the Nomura strategist.

This means Australian stocks are likely to be subject to more selling pressure. At 1125 AEST the S&P/ASX200 Index was down 35.06, or 0.7 per cent, to 4722, 9.6 per cent lower than its high this year on May 14 of 5220.987.

“It’s no surprise people are gun shy about putting money to work,” says Rocks.

China is the biggest buyer of iron ore and coal, primarily used in steel making and power generation.

If Chinese steel companies are having difficulty getting paid, says Rocks, then they are likely to “liquidate inventory” to try and get cash, depressing the price of steel and ultimately the demand for the raw materials that go into it such as iron ore.

The spot price for iron ore imported through the Chinese port city of Tianjin has declined 30 per cent since its high this year of $US158.90 a tonne on February 20.  Yesterday the Tianjin iron ore spot price was at $US110.90 a tonne, unchanged from Monday.  

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