Lockstep Investing's  Instablog

Is Australia about to take shot on the chin? Currently the country is navigating the global downturn with exports of raw commodities to China. Is that about to turn?

Australia, which has benefited greatly from China's increased manufacturing consumption of iron ore. China has gone from consuming less than 20% of Australia's iron ore in 2000 to over 80% in 2008. (1) China has even continued to increase their copper imports during the downturn leading to a scenario where their economy exports less but still increases consumption. For Australia, this situations encourages projections based on artificial demand. For China, this indicates uncorrected inefficiencies in their domestic economies that have been papered over by stimulus plan.

There is evidence that the Chinese binge buying has abated...

"In recent months Chinese demand for iron ore -- the primary material in the manufacture of steel -- has dominated freight market activity while also adding to swings on the main index.Port congestion in China as well as off Australia's coast had previously tied up a large number of Capesize vessels, typically hauling 150,000 tonne cargoes such as iron ore and coal. But queues off China have eased.Brokers said reduced iron ore import activity in China in recent weeks was taking its toll." (2)

Considering the torrid pace of the last six months, this could be a breather or utter exhaustion. We will have to wait and look for more evidence before determining how to address the situation.

(1) "Australia finds fortunes ever more tied to China" Reuters, Aug 19, 2009, by Wayne Cole

(2) "Baltic index drifts lower, cargo enquiry light" Reuters, Sept 16, 2009

Now that the world economic situation has turned up many are looking for a sustainable environment to allocate investment. Yet is it really a meaningful recovery or just a meaningful temporary stimulus?


The total GDP of China $4.3T USD and the amount dispersed through loose credit policies through the first seven months of this year amounted to over $1T USD. This is equivalent to 25% of GDP lent to domestically to increase consumption.


In comparison the US GDP is close to $14T USD and the stimulus program directly related to the federal budget amounted to $1T USD (Stimulus package + Cars for Clunkers + Chrysler Bailout + GM Bailout + TARP + AIG Bailout). This is a total of only 8% of GDP.

IMHO it is obvious that China has been too loose with credit in fear of collapse. There are already signs of liquidity causing bubbles in commodities and property values.  Considering the size of the error, it will only be a matter of time before this causes problems in their financial system.

The author is not yet shorting China, but defintely not long.

Recently China has been viewed as a stand out in a horrible global economic situation. It has been peculiar that the world's biggest exporter has been able 7% rate of growth while other major exporting economies, Taiwan, Japan, Hong Kong, and South Korea, all suffered negative growth rates and negative annual growth targets. In response to this environment, Chinese government has mandated lending in the face of a massive drop in exports revenue.

Unfortunately, in traditional heavy handed approach by the Chinese governmenet, the lending has been indiscrimminately applied. Initial observations suggest that manufacturers have used the additional capital to build up raw material inventories without actual demand to produce for. "The international media has been following reports of record commodity imports by China. The surge is being portrayed as reflecting China's recovering economy. Indeed, the international financial market is portraying China's perceived recovery as a harbinger for global recovery. It is a major factor pushing up stock prices around the world.

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