China's slowdown and impact on Australia

We started this week with my regular monthly catch up with Malaysian Business channel BFM. I was asked about China and the flow on effects here in Australia. As we come to the end of the week, many of the themes discussed in the interview (attached) are starting to play out.

The Aussie dollar has continued to slump, not just because of weaker than expected jobs, but mainly because of the slowdown in China. I believe the Aussie will now trade within the US$0.60-0.65 range for the next few weeks before finding a bottom.

We’ve been here before.

One of the biggest traps we fall into is viewing China through a western prism. China’s economic transformation is very different to that of other G20 nations. It’s a long term, economic, social and political transformation that has its ups and downs.

Any short term Chinese economic problems are just that, short term. I don’t buy into the view that the Chinese economy will fall apart. I also think there is a big difference this time because China’s policymakers are trying to address many structural issues as part of their long term planning process.

If they need to step in, they will. But they also need to let the economy take the necessary pain and deal with its debt issues. In contrast, the US has its own issues, with spiralling debt and a fiscal position which is approaching laughable. The markets tend to agree, which is why I think US long term interest rates are rising.

More US debt means more US treasury supply, pushing up yields.

I’m a big believer in China and India, obviously with bias because of my vantage point here in Australia, but not without substance. I think Australia is very well-placed to benefit and the Aussie dollar, along with mining stocks, will bounce once the China issues are worked through.

I’ve seen these Chinese concerns many times in the past, particularly the 2015-16 Chinese stock market experience which ended up being a storm in a tea cup. Fortune favours the brave. Go Australia 🇦🇺

Peter Esho is an economist and Founder of Esho Group. He has 20 years of experience in investments and markets.