Market jumping at Chinese shadows

Sometimes one wonders if the financial markets are mature enough to be allowed out without parental supervision. The equity and forex markets’ reaction to a BHP executive stating the obvious about Chinese growth rates is such a time.

What needs underlining is that BHP Iron Ore president Ian Ashby was talking about a “flattening” in the growth rate of Chinese demand for iron ore. That is more than a little different than suggesting Chinese demand for iron ore is flattening, but that’s the way some traders seem to have taken it and that became an excuse for selling off the Australian dollar and mining stocks.

Having spent a quarter century or so having to find daily excuses for market gyrations, I’m a little wary of taking such reasons too seriously, but this one certainly grew legs and ran.

There is absolutely nothing new in the idea that Chinese growth rates are cooling, but Chinese growth is not. What’s more, it is a healthy and welcome thing that those growth rates cool – they must as the world’s second-biggest economy matures and moves towards greater emphasis on consumer spending and (relatively) less on infrastructure. But, once more for the dummies who simply refuse to get it, a simplistic example: 7 per cent of 200 is bigger than 10 per cent of 100.

BHP and Ashby have been quick to try to put that “flattening” word in context. The Chinese pie is big and it’s still growing – or perhaps that should be the Chinese hotpot. Ashby’s comment came at a Perth conference before delivering a speech which itself left no doubt about that China’s growth rate remained healthily positive.

But if the market enjoys the adrenalin rush of a scare from time to time, here’s another one: While Beijing’s announced immediate growth “forecast” of 7.5 per cent is more of a base figure than a prediction with actual growth likely to be 8 per cent or a little more, according to the World Bank and a Chinese government think tank, China’s growth rate really is likely to slow to 7 per cent in the second half of this decade and start with a 5 in the second half of the 2020s. And that is utterly wonderful news.

It’s also good news that Beijing isn’t shying away from that World Bank report’s recommendations that major reforms are required to sustain those growth rates.

Within that projection, the Chinese economy will overtake the entire euro zone this decade and the United States not too long thereafter.  And as China matures, its steel intensity (the amount of steel it consumes per point of GDP growth) declines – but it still consumes plenty of steel.

The balance between supply and demand for iron ore swings around as it does for all markets. The bubble period of spiking demand hopefully has passed as more supply comes on stream and the price settles at a more sustainable level – the present $US140 a tonne or so would be a very nice number indeed to maintain.

There’s actually been more good news than bad come out of China this week. Car sales missing targets is small beer compared with Vice Premier Li Keqiang strongly endorsing financial and economic reform. Li is the bloke taking over from Wen Jiabao as Premier later this year.

Words are one thing and actions another in the byzantine world of Chinese politics, but coming hot on the heels of red ragger Bo Xilai being dumped and when the Bank of China is fighting the good fight for greater liberalisation, such strong endorsement from the new guard is most encouraging.

That’s the main game – building a strong, stable and steadily liberalising China, not the noise of temporary share price fluctuations.

Earlier this month I was refereeing a Fidelity road show that featured a London-based global funds manager, Amit Lodha. At one stage discussion turned to questions of sovereign risk and such and Lodha said what he looked for in governments was a sense of planning and commitment to future growth.

As an example, he said that when he visits Beijing, officials can show him the plans they have for that city’s subway in 2050. Lodha said he doesn’t have that sort of experience anywhere else.

A cynical soul might well suggest Lodha is wrong: we could show him the plans for Sydney’s 2050 subway and Australia’s 2050 fast train network – they are what we have now.