China is Australia’s biggest destination for exports, the biggest iron ore customer and is key to the outlook for the Australian GDP growth.
So a note from Morgan Stanley overnight looking at Asian growth in general and China in particular won’t make good reading for Australian exporters.
The Morgan Stanley analysts highlight that while rates were eased by the PBOC in response to slowing growth in November, rates are still too high and the economy is deteriorating. They also highlighted that China’s economic transition has stalled with household income growth stalling.
The deteriorating economy is also feeding back into less steel demand and falling iron ore prices.
It sounds like China is turning Japanese like the rest of the planet except the US at the moment with falling prices, weak consumer demand and a real chance of a negative feedback loop.
The PBoC will have to cut rates again.
Here is Morgan Stanley’s summary:
China – Weaker growth momentum contributing to further buildup of disinflation pressures and elevated real rates:
Growth momentum weakened further in November across most sectors, as reflected by slower growth in industrial and electricity production, property market activities, and non-processing goods imports. Amid a backdrop of weak domestic demand, exports growth, which had been strong until recently, also weakened for the 2nd consecutive month.
The weakening aggregate demand has led to a continued buildup of disinflationary pressures, which, in our view, will weigh on nominal GDP growth and push up real interest rates, further complicating the debt management dynamics. In light of this risk, PBoC has cut 1Y benchmark rate by 40bps on November 21.
However, real rates have remained elevated, as the magnitude of rate cuts has lagged the pace of the disinflation trend. Moreover, market oriented interest rates are facing upward pressures due to tight liquidity conditions and also a tightening of regulations related to repo transactions (highrisk enterprise bonds may no longer be used as collateral in short-term loans).
In the context of deleveraging process, the growth outlook will be hinged on (a) the pace of NPL provision and clean-up of banks’ balance sheets, (b) whether real borrowing costs are brought down meaningfully below real GDP growth, and (c) the pace of structural reforms, which ensures improvement in capital allocation