Of course China will be the very large gorilla in the room for tomorrow’s 2008-09 Federal Budget.
Its strong demand for our resources is powering the export side of our economy, especially the likes of iron ore and coal and oil, and it's also been a major source of downward pressure on import prices for us.
The latter is easing, the former is still happening, although there have been hiccups on new 2008-09 contracts for iron ore and coal, and for a number of corporate deals, starting with the BHP Billiton bid for Rio Tinto.
China and the surging in commodity returns and our terms of trade, is what could power the Australian dollar close to the almost mythical parity level with the US dollar over the next few months.
A forecast on the value of the Aussie dollar over the next year will be another point to watch for in the budget.
So the major factor on the budget will be China: and what the Federal Government says about China's prospects in the coming year.
It is the major influence on our economy, has been for three years and will be for years to come. (See below for the upbeat outlook from the Reserve Bank about China, the rest of East Asia and commodity exports in the coming year in its second Monetary Policy Statement on Friday.)
The RBA is slowing the domestic economy to accommodate many of the pressures caused by booming exports and that will be the key for the year ahead in the budget, and for the stockmarket.
But China isn't without perils of its own: high inflation, some social unrest resulting from that and coping with a slowing in exports, will be the key as China tries to push some exports into the domestic markets.
The country's government is stepping up a campaign for Chinese consumers to save less and spend more to accommodate greater domestic demand. That will benefit exporters like Australia.
Figures started flowing Friday from China for its economic performance last month. This week, possibly today, we will see figures on inflation and trade. Friday we got the latest export numbers.
They showed that China's recent strong export performance continued at high levels, but also again showed signs of slowing growth.
Overseas sales rose about 21.8% in April, compared to a year earlier, and down from the 30.6% annual rate in March.
The April rise compares to the 21.4% annual rate in the March quarter and the 26% rise in 2007.
The Ministry's figures show that imports increased by around 26% in April, compared to the same month of last year and March's 24.6% annual rate.
Inflation figures for April are due for release later today. They are expected to show another big rise, given the upward pressures from food and energy costs (and despite government controls).
Inflation has been running at more than 8% so far this year.
Official figures on Friday suggested that producer prices rose 8.1% last month, the fastest annual rate for three years and a sign that Chinese export prices will be pushed up.
The Yuan has been allowed 18% against the US dollar since being allowed a limited float nearly three years ago. That is driving up import volumes and lowering export values, but it should also be mitigating some of the higher cost of imports like coal and iron ore from Australia.
China's stockmarkets had the first loss in three weeks last week.
The CSI 300, which tracks stocks traded on the Shanghai and Shenzhen exchanges, fell 1.2% on Friday to be down 2% over the week, ending a two week rally sparked by moves by the central government to arrest the 50% fall in the market over the past seven to eight months.
Here's what the RBA said on Friday about the prospects for Asia and for commodity exports, in particular resources.
Growth in China’s GDP was estimated to be 10.5% the year to the March quarter, down somewhat from the exceptionally rapid pace recorded in the past two years.
The slowing appears to be concentrated in the external sector, with growth in exports moderating and imports growth picking up.
The available indicators suggest that domestic demand growth remains strong; nominal spending on fixed-asset investment increased by 27% over the year to March and retail sales volumes are estimated to have grown by around 14% over the same period.
Growth in industrial production has recently been volatile due to severe weather that disrupted activity early this year, but appears to remain firm.
Growth remains solid elsewhere in the Asian region; preliminary estimates of GDP growth in the March quarter suggested a strong outcome for Singapore but a more moderate one for Korea.
Growth in industrial production and exports has picked up since the start of the year and has been broad-based across the region; industrial production in east Asia (excluding China) increased by 11% over the year to February and the value of exports grew by 19% over the same period.
While growth in exports to the United States and the other major developed economies has slowed, this has been more than offset by a pick-up in exports to other emerging economies, including China, Russia and the Middle East.
In India, GDP growth was 8.5% over the year to the December quarter, with little evidence of any emerging weakness in the available data for 2008.
(Of all our major trading partners in Asia, Japan is the worst performer with inflation rising, industrial production easing and exports slowing, especially to the US and to elsewhere in Asia.)
Overall commodity prices have strengthened in recent months, as higher prices for coal and base metals have more than offset declines in wool and wheat prices.
The RBA’s index of commodity prices has risen by 17% (in SDR terms) since January, and has doubled over the past four years.
Further gains in the index are expected over coming months, due to substantial increases in coal and iron ore contract prices for 2008/09.
Coal contract prices have been settled by a number of Australian companies at significant premiums over 2007/08 prices, the result of tight supply and continuing strong demand from developing Asia.
Contract prices for coking coal – for which Australia accounts for almost 60% of world exports – will increase by more than 200%, well above market analysts’ expectations from a few months ago.
Thermal coal contract prices are set to rise by around 125%, with power shortages in South Africa and temporary restrictions on coal exports from China accentuating existing supply concerns.
Iron ore contract price increases of at least 65% appear likely based on various agreements to date, although negotiations between Australian exporters and foreign steel producers have not been concluded.
These developments by themselves imply an increase of around 20% in the level of the terms of trade over 2008.
The RBA index of base metals prices has risen by 10% over the past three months, pushed up by strong gains in copper and aluminium prices. Copper prices have increased by 19% since January, partly reflecting falling inventories, which are around historically low levels. (Though copper prices have eased in the past week.)
Aluminium prices have risen in response to disruptions to production in South Africa and China as well as rising energy costs (aluminium production is highly energy intensive). Gold prices have been volatile, reflecting the turbulence in financial markets; prices reached a (nominal) record of just over US$1,000 per ounce in early March, before falling back to a level similar to that at the time of the February Statement.
Copyright Australasian Investment Review.
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