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China's slowing down

Good morning! There was an uncomfortable milestone reached for many Australians yesterday, as Melbourne brought up its 200th day in lockdown – the fourth most in the world. There's seemingly no end in sight either with another 57 new cases yesterday, although at least 44 were already in isolation.

Moving north, there's not much we can say about NSW at this stage. There were 681 new cases reported yesterday, 59 of which were infectious in the community and another 459 still "under investigation". It's difficult to contact trace at these case levels, even for the diamond standard... don't expect an end to lockdown anytime soon.

There was actually some good pandemic news yesterday, as Darwin's lockdown ended but Katherine – 300km to the south – will remain in lockdown for the rest of today on "the recommendation of our health experts".

Finally, across the ditch the Kiwi cluster grew to 22 community cases. Authorities believe they found the missing link, a New Zealander who returned from NSW on a red-zone (supposedly "managed") flight and was moved to hotel quarantine on 8 August. So it's a quarantine failure, they're just not sure how it failed but they're getting close – according to Prime Minister Ardern, there are now "possibly only one, or maybe two, missing links between this returnee and cases in our current outbreak".

Markets

Daily % change

 

AUD/USD

71.5

-1.2%

 

 

10Y Bond

1.08

-5.3%

 

 

ASX200

7,465

-0.5%

 

 

Brent (bbl)

66.6

-1.2%

 

 

Gold (oz)

1,782

-0.4%

 

 

Iron ore (t)

130.5

-11.7%

 

 

Bitcoin

46,499

+4.2%

 

Note: Brent oil, gold bullion and iron ore prices are the second futures contract.

Overnight the US S&P500 inched up 0.13% after weekly jobless claims came in at a better than expected 348,000 last week, a new pandemic-era low. Locally, the ASX200 (-0.50%) fell for the fourth straight day as the big mining companies such as BHP (-6.09%), Rio (-5.73%) and FMG (-6.08%) all tanked with the iron ore price (see the Feature below).

Deceptively strong: Australia's unemployment rate fell to 4.6% in July (from 4.9% in June), the lowest since December 2008. The problem is, most of the decline came because the number of people actually looking for work dropped by 0.2 percentage points. Worse, total hours worked fell by 0.2% with a massive 7.0% fall in NSW. Having a job isn't much good when you're not allowed to do it!


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Feature

China's slowing down

In July, China reported slowdowns in industrial output, retail sales and fixed asset investment growth. While regional flooding and the ongoing Delta coronavirus outbreaks around the country no doubt took a toll, a more important factor might be its fading credit impulse.

The flow of total social financing – essentially the amount of credit going to the Chinese economy – has been contractionary since March this year. There's a several month lag between when the credit is issued and its effect on activity, so China will only recently have started to feel the burn, so to speak.

Chart showing China's reversing credit growth.
China's government is trying to rein in debt but the side-effects can be painful. Trading Economics

Painful side-effects: The price of a tonne of iron ore has fallen over 40% in the past month and trouble has been brewing in China's once-hot real estate sector, centred around its heavily-indebted and second largest property developer Evergrande, the country's #1 junk-bond issuer.

While some of the pain has been self-inflicted, such as the government's curbs on steel production ahead of the Beijing Winter Olympics in February – another APEC blue event – a significant amount is also likely due to the reversing credit impulse.

Chart showing the iron ore price from March to August.
The iron ore price has plummeted over the past month but is still ~$50 above pre-pandemic levels. LGMI

Why this matters: Unless China redoubles its stimulus efforts (very possible!), it's hard to see economic growth or steel demand getting anywhere near the lofty heights that were maintained for much of 2020-21. China is Australia's largest trading partner, so a slowdown there – particularly in its steel-intensive sectors – could cause a few problems for the ASX200, the Aussie dollar and state and federal government finances.

In a worst case scenario, financial contagion out of China could even be the pin that pops the global recovery. Remember that China's stimulus started months before the rest of the world's, so its hangover should hit first too.


The Wrap Up

  • 🥝 New Zealand made children aged 12-15 eligible for a Pfizer vaccine from 1 September. Meanwhile, Australia's health "experts" twiddle their thumbs...
  • 💉 Pfizer vaccine appointments will be open to every Australian aged over 16 from 30 August.
  • 🆓 Singapore is reopening, lifting quarantine requirements for fully vaccinated travellers from Hong Kong, Macao, Germany and Brunei.
  • 🏎️ Japan cancelled its F1 Grand Prix, scheduled for 10 October, "due to ongoing complexities of the pandemic in the country".
  • 🐱‍💻 US trading app Robinhood reported that cryptocurrencies made up over 50% of its transaction-based revenue in the June quarter, up from 17% in the March quarter.
  • 🚗 Victoria will open three new drive-through vaccination sites within a week.
  • 😲 The first 26km of a new underground rail loop in Melbourne will cost taxpayers up to $A35 billion – or nearly 2x the state's annual revenue.
  • 🦗 Australia named its T20 World Cup squad, with uncapped West Aussie wicketkeeper Josh Inglis selected as the reserve gloveman ahead of Philippe and Carey.
  • 🔨 The US Federal Trade Commission submitted an amended complaint in federal court in an attempt to break up Facebook. A judge threw the previous complaint out for lacking any evidence of monopoly.

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