Australian share investors are receiving a much-needed Christmas present because encouraging news is seeping out of China – the great Australian beneficiary is starting to stir.
And as a result money is flowing into our stock markets. As I described yesterday Australia has dug a deep hole for itself but a China revival will certainly help (Fortune won't cut it for the lucky country, December 11).
The median forecast among 12 economists polled by The Wall Street Journal is for 8 per cent China growth in 2013, an improvement on 7.7 per cent in the first three quarters of 2012.
Until now the growth projections have not been matched by China’s power generation and consumption, which has remained depressed. You can’t stockpile power so power generation and consumption are a clear indicator of what is really happening.
Across my desk this morning came statistics and a graph from Macquarie, which shows that the growth rate in China’s power output accelerated in November.
By November 28, power production in the month had increased by 7.41 per cent year on year, compared with 6.4 per cent for October.
The November electricity production growth rate was the highest so far this year. China’s Electricity Regulatory Commission attributes this to the massive infrastructure program announced earlier this year.
Better still, the SERC forecasts the recovery will continue, which will put the full year’s power generation up 6 per cent year-on-year.
Once power generation starts to rise, suddenly other growth shoots make more sense. For example both industrial output and retail sales rose in November at their fastest annual pace in eight months.
The HSBC China PMI in November, rose from October’s 49.5 to 50.5 – the first move to expansion in 13 months. The Chinese domestic hard coking coal price has risen by almost $US20 per tonne since the start of November, to $180 per tonne, and that should flow to the international spot price. That will underpin iron ore, especially as the Brazilian giant Vale is forecasting lower output. In copper, people are worried about the high bonded stocks in China but the Chinese use copper as a security for property and other development.
On the other hand China's export growth slowed sharply, reflecting tough conditions in Europe and the US.
Europe will struggle for an extended period and the US has to get through its fiscal cliff. Alan Kohler wrote from the US that this is likely (The fiscal cliff conspiracy of fear, December 7).
But post the fiscal cliff I believe the US is headed for a major investment-led rally based in its shale gas.
Let’s be clear: no one is predicting a return to the boom but low interest rates mean that when traders see an uptick, the money flows rapidly and that is pushing up the Australian stock market.
China’s model of once again using infrastructure investment to boost growth will struggle longer term. The Chinese need to boost their consumption. But right now infrastructure spending is clearly working, at least for the moment.