By Ron Bewley, Switzer Super Report
For the first time in well over a year, we are not anxiously awaiting news each morning from the US and Europe on the state of the economy and bailouts. While the US economy is sluggish and Europe is worse, all the cards seem to be on the table. Stimulus packages are in place and there are no major meetings scheduled for the coming months. But, just as the western world seemed to be restoring order, markets now have the jitters about China.
A new story?
It doesn't seem reasonable to manage an Australian equity portfolio without having a well-defined opinion on China. On the face of it, it seems ridiculous that earlier this year most people here and in China were talking in terms of a boom in China lasting a decade or more ? and now it's all is over for many of the same people! Did they wake up one morning and look out the window to see a stockpile of steel and totally reverse their opinions? What is more likely, in my opinion, is that the story of an end to the boom in China has arisen to replace the US and Europe stories now that those issues have largely been resolved.
The fear about China got going mid-year when a Purchasing Managers Index (PMI) came in at 48.1 (The HSBC 'flash' index) and a reading below 50 signifies the economy is doing worse than normal.
Many misread this statistic as implying a contraction or a recession in China. As the journalist Michael Pascoe wrote, and citing Reserve Bank Governor Glenn Stevens for support, 48.1 just means industrial production running at a bit less than the 14.8% average of recent years. The official PMI is now up to 49.8 ? about as close as you can get to the 50-mark that separates better than normal to worse than normal. The Secretary to the Treasury came out last week saying the boom was not over. So how did the story get going?
In the news
A Deloitte Access Economics report came out and said the China boom would be over in 2014. Again it was Michael Pascoe who point out last year they were predicting it would end in 2013 so this was in fact an extension of the boom! It turns out Access seemingly has always had a relatively negative view on China. But the price of iron ore did fall rather dramatically.
After hovering around $130 to $140 per tonne for a year or more, prices fell sharply to below $90. However, as many markets often do, there was a bounce back to just under $110. Seemingly any company associated with iron ore or its exploration got hit hard, but many of those companies' share prices bounced back by 25% and more since the first panic.
The real story
There is no doubt China's economy is in transition from a government-led infrastructure economy to a consumer-driven economy. This has been a stated aim for some time and, after all, the western world economies are consumer driven. The PMI data for China services support the success of this transition.
In hindsight, there was a bit of over exuberance in following resource stocks, but I believe this bump in the trend will vanish as phases two and three of the boom take over.
Markets rarely travel in straight lines for long. When trends seem to end, as the China story did in 2008 and 2012, the dip can be savage, but a bounce back and renewed growth can emerge.
China did report big new infrastructure programmes over the last one or two months and it pumped over US$50 billion into the finance sector to aid liquidity. But the once-a-decade handover of government leadership in China starts in a few weeks. Wouldn't it look good for the new team if it rescued the economy and reinstated the growth we had all been expecting in recent times?
I think during 2013, this glum view of China will drift away and the new leadership team will look in control. I am holding on to my resource stocks.
Ron Bewley is the Executive Director of