THE DISTILLERY: China decipher

Jotters try to get a handle on just how severe China's slowdown is, while one spots battlelines between the ACCC and supermarkets on the issue of pubs.

China’s economy is slowing down, that much is agreed upon. But Australia’s business commentators are split on how to interpret the latest quarterly GDP numbers. Are they the latest step towards a hard landing, or the last chapter of Beijing’s moves to keep inflation under control?

The Australian Financial Review’s Chanticleer columnist Tony Boyd writes that investors should at least consider the potential of a hard landing in China.

"Questions that investors ought to be asking themselves include the following: Should I continue to have a market weighting to resources stocks? Should I reduce my exposure to small- to mid-cap resources companies that will struggle to raise capital if the China slowdown accelerates? Are the risks I am taking in relation to China-related stocks commensurate with the likely returns? The majority of Australians in default superannuation funds will have a high exposure to resources and will be vulnerable to a China slowdown. In fact, those with the typical default fund should brace themselves for negative super returns for the year to June 2012 of between 5 and 7 per cent simply because of their exposure to companies such as BHP Billiton and Rio Tinto. While it is silly to panic, it is worth remembering that when the global financial crisis hit in 2008-09 the Hong Kong Stock Exchange fell by 76 per cent from peak to trough. The Hong Kong market is down about 40 per cent from its recent peak so investors have already factored in much of the potential impact on earnings from a slowdown.”

The Australian’s David Uren says Beijing’s objective to rekindle growth has been clear, but it will take some time before it can achieve this goal.

"The latest cut in China's benchmark interest rate, the second such move in a month, showed the authorities' determination to halt the downward drift in the growth. But the broader story of softer growth in the emerging world is likely to keep troubling financial markets, with authorities in many parts of the emerging world battling softer global trade and domestic imbalances. This is likely to keep downward pressure on our commodity exports and make it harder for Australia to buck the global slowdown. The slower growth in China is partly the hangover left after the massive stimulus spending of 2008-09 has run its course. The completion of infrastructure projects and a halt to the construction of very fast train projects following an accident last year meant government spending slowed sharply. The easing of monetary policy that accompanied the stimulus led to a surge in speculative property development. Efforts by the government to contain this, both through higher interest rates and regulatory restrictions on property investment, were successful, but the legacy is large unsold stocks of apartments with falling prices in many of the major cities.”

After speaking with ANZ chief Greater China economist Liu Li-Gang, Business Spectator’s Stephen Bartholomeusz says China could be on the brink of a positive turning point, while acknowledging the problems in China’s two main export markets, Europe and the US, offer obvious reasons for the slowdown.

"More significant, however, was the authorities’ assault on the property bubble that developed last year amid their fears that inflation would get out of control. That crackdown has been very effective, with the most recent inflation numbers showing inflation at a two-year low. Perhaps they overdid things. Liu effectively argues that the authorities have been too cautious in responding to the slowdown because of the inflationary fears and that, because it does take time to have an effect, the impact of the easing of monetary policy has yet to show up – although this week’s data on new bank lending suggests the easing of reserve requirements, the reduction in rates and the encouragement to banks to lend is starting to work. He also points to some execution issues, highlighting the central government’s massive public housing program. It budgeted to build seven million housing units this year but has distributed only 17 per cent of the funds it allocated to the program. That tardiness compounds because local authorities then don’t spend their matching allocations. Again, that means delayed effects rather than an absence of effects.”

Fairfax’s Malcolm Maiden argues quite clearly that Friday’s 7.6 per cent annualised economic growth figure will be the bottom of China’s growth slump.

"Growth will stabilise and then accelerate towards 9 per cent from here, pulling Australia and the Western world along with it. The 7.6 per cent growth number was down from 8.1 per cent in the first quarter and just below the market's forecast of 7.7 per cent, but it was above Beijing's target of 7.5 per cent growth this year, and the short-term key is that a new round of stimulus is already under way. China's $US586 billion 'Great Stimulus' package in 2008-2009 included both direct investment in infrastructure by Beijing and indirect stimulus that was passed through banks and shadow, or private, banks. It worked, but the indirect stimulus flowed too heavily into an already overheated property sector, forcing a clampdown that includes restrictions on home purchases and a boost in property taxes. The new package will wind up being about 25 per cent as large as the Great Stimulus, and it is being delivered more directly, and with less fanfare. Chinese Premier Wen Jiabao said in mid-May that Beijing was ''giving more priority to maintaining growth'', and China's economic planning agency, the National Development and Reform Commission, approved 868 investment projects in the first four months of the year compared with 363 projects in the first four months of 2011. On the day that Wen spoke, it approved 100.”

One point that almost all the above commentators concede in their analysis is that China's economic figures have to be taken with a grain of salt. The Australian Bureau of Statistics takes about two months to release quarterly GDP data, hence commentators routinely cast them as a picture of the past, not the present or future. China, on the other hand, releases its initial figures within two weeks, so there's a good chance that they reflect something a little closer to what Beijing would want them to.

While we’re on China, The Australian’s Robin Bromby comes up with an interesting angle for those considering the gold price – China might have more of the stuff that it officially says. Meanwhile, Fairfax’s Ian Verrender says the fear that China is trying to buy up the farm in Australia simply isn’t supported by foreign investment data.

On economic matters closer to home, The Australian’s Paul Garvey tries to get the skinny on a closed-session briefing that Treasurer Wayne Swan gave to investors in Hong Kong, which was organised by Goldman Sachs. While the treasurer appears to have put in an impressive performance, there’s one concern about the Australian economy that he couldn’t ease – the dollar.

Fairfax’s Ross Gittins makes the case that Australians will not become more confident in the economy until Labor is removed from office. Far from arguing that Julia Gillard’s policies are bad, or that Tony Abbott’s policies will be good – it’s all a matter of perception.

In a separate piece, Gittins welcomes what should be an uncontroversial point from Dr David Gruen of Treasury, that productivity growth is firstly the responsibility of business and secondly the responsibility of government. However, The Australian’s economics correspondent Adam Creighton pleads on bended knee for tax reform as a means of improving productivity.

In company news, The Australian’s Sarah-Jane Tasker says coal tycoon Nathan Tinkler might be hard to read, but those close to him believe that he would have been looking at eventually taking Whitehaven Coal private before rolling Aston Resources into it. Tasker’s colleague John Durie foreshadows a potential legal showdown between Woolworths and the Australian Competition and Consumer Commission in regards to pub ownership.

The Australian’s media writer Mark Day says there’s little to back up the persistent rumours that Fairfax Media is still trying to sell its radio assets. But, equally, there’s very little to suggest that Fairfax’s declared intention to develop a "new strategic plan” is any closer to being realised.

Speaking of media, The Australian’s Errol Simpler welcomes more reports that rural media organisations are doing well, which contrasts markedly with their metro cousins.

Meanwhile, Fairfax’s Adele Ferguson looks beyond the dour state of the equities market and finds a truly harrowing scene in the offices of the nation’s stockbrokers.

And finally, Fairfax’s Elizabeth Sexton makes the compelling argument that companies mining data raises serious ethical questions about the monitoring of our consumer behaviour.

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