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My Take on the China Growth Story

Ashish Advani (July 10, 2009)

Friday, July 10, 2009

One of my subscribers posed the following question to me:

“I’ve read analysis on the outlook on the AUD gaining strength as China grows. Australia supplies a lot of the commodities that China consumes. So it is logical the Australian Economy will grow and the AUD will strengthen. On a fundamental basis, I agree with the analysis.

“However, on a Chinese cultural basis, the assessment may be off somewhat. It is my understanding that the average Chinese person saves a considerable amount of their income. This would impede an economic recovery led by an internal stimulus. The Chinese economy is export driven, and not domestically driven.

“Therefore, I believe that the Chinese “recovery” will take longer than anticipated, thus driving the AUD lower. I could be wrong about the Chinese exports recovering, if the consumer demand in Brazil and South America pick up…a lot! I don’t see that happening on the scale that the US imported from China, however.

So how do you bridge the gap between a potential AUD rise and the slow recovery that is expected?”

How Will the China Story Affect the Aussie Dollar?

I thought this was a great question to share my answer with you dear readers. Here’s my response…

Dear Joe,

I see the reconciliation of the diverging views on the Aussie dollar as one of timing here. I have had several spirited discussions on this very issue.
Here are my thoughts on that very issue…based on my several visits to China. And these visits were deep into the heartland rather than staying in 5-star hotels in Shanghai /Beijing and back…

China is undergoing a sea change in its growth story. While exports are still going to remain a bulk of their growth story for now, the trend is weakening. Internal consumption has been on the rise. Savings has been the norm for a few generations but this is gradually shifting. I strongly believe that China will lead the world out of this recession (and George Soros on NPR said very much the same this week).

The Chinese growth story is much smaller than the U.S. Consumer (about 1/3rd in size) but it is growing. So the recovery will be slow as a smaller engine is pulling the global economy out of the rut. But when you add India – you have another small engine pulling along, and suddenly the small China engine has a companion. I believe this combined engine will lead the world out of its current recession.

Albeit, it will be slow and gradual and not a “V” shaped recovery as the stock jockeys would like to project.

Now as far as direction of Aussie dollar is concerned, it may gyrate in the near-term but in the longer term, if you can believe the China/India growth story, then we are going to see strong growth in Australia and the Aussie dollar. All this is over and above what the U.S. Government and Treasury policies are doing to debase the US Dollar which would increase the values of all other currencies by default.

Hope that clarifies the question!

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