China´s nominal
GDP growth has declined from a post-crisis (2009) level of close to 20% yoy to the
recent low of 5.8% yoy in early 2015, according to the last CICC Macro Thematic
Report. The government targets almost 10% nominal GDP growth, with 7% real
annual growth. By contrast, a soft purchasing manager index (PMI) and another
equity sell-off have reinforced fears of Chinese growth slowing down. The flash
Caixin/Markit PMI released last week showed China's factory activity contracted
by the most in 15 months in July; however, the official PMI stood at 50.2 in
July, on par with the previous month's reading, according to the median
forecast of 20 economists in Reuters poll.
Figure 1: China Growth,
yoy, 2006-2015
What have
the Australian dollar, copper futures and Volkswagen share prices in common?
China. China´s linkage with the world economy is most directly read via
demand-driven industrial commodities (copper, iron ore), market-determined China
dependent currencies (such as the Australian dollar) and industrial goods that
the Chinese like to and can increasingly afford (such as VW´s Audi cars). These
asset prices can be taken as proxies for China´s growth.
China these
days demands more industrial metals
than the rest of the world combined. China´s industrialization and urbanization
had created a super cycle in metal prices; with the new emphasis on consumption
and services, this super cycle has probably ended. Still, short-term assessments
about China´s growth prospects move copper futures and options contracts.
The Australian dollar (like the New Zealand
dollar) is a flexible market determined currency, which has a high (ca 50%)
beta to the renminbi (RMB). Several emerging-country currencies (which as a
group had a 15-year low this week) will have even higher RMB betas; but their central
banks intervene quite heavily on the FX markets.
Figure 2:
Austral-Asian RMB Betas
Volkswagen depends on China for more than half its net
profit and 71 percent of its free cash flow including income from joint
ventures and royalties, according to auto industry analysts. Growing
uncertainty over China has finally been weighing on Volkswagen shares.
Half-year results show that weaker demand in the world’s biggest car market is
already slowing the 89 bln euro giant.
If you
believe (and many economists still do) that asset prices are leading
indicators, a select narrow group of assets would provide information on
China´s immediate growth prospects – the Australian dollar, copper futures,
and, e.g., the VW share prices. If you think, instead, that China will defend
its 7% growth target and soon start an upswing, you can consider the three
assets as a great buying opportunity (and their prices as lagging indicators). Aussie,
copper prices and VW shares are now caught in a nice solid downward channel.
Figure 3: Dr. Copper,
2011-2015
Figure 4:
Australian/US Dollar, 2011-2015
Figure 5: Volkswagen
Vz, 2015
Official
Chinese macro data are routinely met with suspicion, especially by those
foreign observers who think that government legitimacy is only supported by
high growth and rising consumer wealth. Actually, sentiment about domestic
economic conditions is nowhere in the world better than in China where 90% of
the population consider the current economic condition as good, according to
the Spring 2015 Global Attitudes survey
released by the Pew Research Center. Although Pew Reseach doesn´t ask the Chinese
about political (dis)satisfaction, the correlation between economic and
political satisfaction is high; and political satisfaction nowhere higher than
in Asia[1].
It would
seem then that domestic assessments of China´s growth prospects are more upbeat
than foreign (media, investors). To be sure, the foreign impact of China will
morph as the People Bank of China is envisaging a wider trading band for the
RMB, likely anticipating competitive depreciation as early as August.
Historically, China has been very efficient to translate RMB depreciation into
higher growth[2].
Time to go long Aussie, copper and VW?
Time to go long Aussie, copper and VW?