WARNING THE FOLLOWING MAY CONTAIN INFORMATION AND OPINION THAT SOME MAY FIND DISTURBING:
So much for our robust economy, but what about a speedy recovery? The bursting of the commodities bubble and a softening Asian economy on top of a sea of personal debt doesn’t make for a robust economy. But that’s not the really bad news.
First, some really bad news about our export market:
DOZENS of freighters carrying Australian iron ore are stalled outside Chinese ports amid a collapse in demand for steel, dashing hopes that Chinese industrial demand will protect Australia from the worst of the global recession.
Tumbling Chinese exports and renewed stock market lethargy indicate that efforts by Chinese leaders to defy the global economic crisis are struggling.
Instead of being used in new office buildings, factories and bridges, steel is being stockpiled, driving an 8.6 per cent fall in Chinese steel prices in the past fortnight.
The situation bodes ill for pivotal annual iron ore contract negotiations between Australia’s big iron ore miners and China’s steel mills.
The emerging weakness in China will weigh on the Reserve Bank board, which is meeting in Sydney tomorrow to consider a recommendation from the RBA management to halt its run of interest rate cuts.
Although Chinese authorities hope they can hold the decline in the country’s growth rate to 8 per cent, the IMF is forecasting 6.5 per cent and private analysts are suggesting it could be considerably lower.
In January I posted this prediction Societe Generale strategist Albert Edwards, which pointed to major problems with the Chinese economy and the implications globally, especially for the US:
“In 2009 it is not the mounting risk of depression in developed economies that will come as a major surprise,” Mr Edwards wrote in a note to clients, “it is economic implosion in China and the global and geopolitical risk thereof.”
In forecasting a depression in the US, Mr Edwards means that he believes the US will see a peak-to-trough decline in its gross domestic product of more than 10 per cent.
In China, Mr Edwards expects the worst domestic upheaval since the Tiananmen Square protests in 1989 may cause the Chinese authorities to undertake a “mega-devaluation” of the Chinese currency, the yuan, in an effort to stay in power, as “the very survival of the regime depends on growth”.
A devaluation of the yuan would cause the rest of the world’s economies to competitively devalue their own currencies in response, Mr Edwards said, sparking a “1930’s-style trade war” that “could see a rerun of the Great Depression”.
Only last week I indicated the importance of US and China relations and the important role China plays in supporting US efforts to stabilise their economy:
Posted on February 24, 2009
Secretary of State, Hillary Clinton’s recent visit to China is a significant event in U.S – Chinese relations and the implications are sure to effect the future direction of the global economy and world markets.
Global markets have every reason to be jittery. In the last few years, Japan and China have bought into US treasury bonds and hold large significant US currency reserves. Why? To keep the value of the dollar high so the US can continue buying lots of their exports. What would the dollar be worth if they were not propping it up? What will it be worth when they can buy no more?
This seems to be the question being asked by investors on Wall Street
What does this all mean? If the Chinese economy implodes the consequences will have far reaching effects on the global economy and financial markets, not to mention the potential political upheaval it will cause.
We’ve seen our largest trading partner, Japan’s economy tank and now if our resource exports to China should fail badly, there’s little room for our government to successfully guide us into calmer waters.
I sincerely wish I were seeing it in a more optimistic light but it’s simply not the case at the moment. All we can do now is cross our fingers and hope China’s fortunes turn.
Over to you
UPDATE: ASX HITS 5 YEAR LOW
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