Understanding the Chinese black box economy is by nature complex owing to the relative opacity of the way metrics are tabulated and released. Grasping the full extent of the most recent slowdown in trade is made easier by looking at more nontraditional measures of economic health in the world’s second largest economy such as rail traffic and electricity consumption. Proxy economies such as Brazil and Australia similarly give a multitude of hints on the state of the industrial juggernaut as trade data is harder to massage from both sides. The big takeaway is that the Chinese economy continues to see the pace of expansion wane as worries grow that the pervasive weakness in global trade is set to persist for the near future. Economies like Australia are most likely to feel the pain of this process given the strategic relationship with China and the slumping commodity trade. Based on the developments, Australian stocks are likely to see risks mainly to the downside as the situation unfolds.
The Fundamental Picture
Since the weekly reopening, the benchmark S&P ASX 200 Index has been in freefall amid the latest trade balance released by China on Sunday. According to the figures, the export economy continues to shrink as evidenced by the -6.90% dip in exports on expectations of a -3.00% contraction which would have been a marked improvement over the -3.70% recorded in the prior period. Imports also shrunk more than expected, with the annualized figure falling by -18.80%. Although the number represents a more positive disposition that the previous -20.40% dip, it still reflects the challenges facing policymakers in China as they seek to steer the economy away from the one of the worst crises since the Asian Financial Crisis in the 1990s. However, as developments in the economy show, the combination of slashing interest rates, reducing bank reserve ratio requirements, and flooding the market with liquidity have had little impact on restoring blockbuster growth.
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