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The Christmas rally arrived late this year, in keeping with the Australian summer. After an ecstatic start to 2012, the markets ground to a halt this week and I covered this sharp reversal in a Trading Tutors blog on Monday. Our predictions in that update rang true and since then the ASX 200 has fallen a further 2%. This time it wasn’t worries of Greek contagion or spiralling U.S. debt levels that gripped global markets. It was an issue much closer to home: China’s revised growth forecast.
The world’s second-largest economy downgraded its growth forecast by 0.5% to a still astounding 7.5%. Doesn’t seem like much? Well, in $$ terms, this is more than the total GDP of many medium-sized countries.
What many are failing to acknowledge is that this revision has had the precise effect China has been trying to achieve for some time. Double-digit growth levels are unsustainable in the long-term and there has been little mention – or understanding - that this fiscal tightening is actually having the desired effect. The People’s Bank of China has been consistently raising rates as the soon-to-be largest economy in the world moves from an industrialising nation to one that feeds growth domestically, rather than internationally. To do this they need to move away from the traditional booming growth in production to a more sustainable, consumer-based economy.
The biggest losers in China’s revision of economic growth are those leveraged to China’s rise. Australia’s resource-based economy, for one, is certain to feel the impact. This comes as no surprise to the world’s institutional and sophisticated investors. Indeed, this could go a long way to explaining the underperformance of the ASX 200 against the Dow Jones Industrial Average:
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click to enlarge
But investors need not worry - the world is far from ending and neither is China. Consistent growth is good, bubbles are bad. The measures that China is taking to cool the growth of its economy may be just what is required. The ideal situation for Australia is a continued demand for resources from a country in control of its economy and its future.
The world moves on. One percentage point at a time…
Stay Ahead of The Game,
Lachlan McPherson
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