China – When Stimulus is Turned Off…

It could be a rough day on the Aussie share market today.  Like it or not, but we catch the cold when the Chinese market sneezes.  April data released over the weekend showed a slowdown in industrial production, property investment, and retail sales.  That (for listeners of our weekly podcast) is nothing new but it was just after an incredible $1 trillion injection from the Chinese Government in the first quarter after their assertion they will maintain strong growth even if that meant more stimulus.  And stimulate they did, with annual credit growth hitting 15% in the first quarter.

The front page of today’s AFR includes a headline story on reports that the Chinese President, Xi Jinping, is not in favour of more stimulus, and hence in direct contradiction to Premier Li Keqiang’s policy.  He reiterated the need for a consumption based, not investment based, economy – something that hasn’t worked to date, and certainly not good for Australian miners.  This was reflected in a more than halving of new loans in April and possibly already those aforementioned poor figures from the weekend.

Of course iron ore has fallen sharply in the last week and that is not good news for an Aussie government basing budget forecasts on $55 ore.  But more broadly it could see an end to the commodities bounce in general.  The much bigger elephant in the room is the question of how the world’s second biggest economy fares without all that stimulus.

For gold and silver there are a number of implications.  If the Chinese turn to more risk-off investments we may see a rebound in gold consumption after demand this year has slipped back to 2013/14 levels off the record highs last year.  Should their market crash in response, the worldwide contagion, especially if accompanied by a big Yuan devaluation, would of course see a flight to gold and silver.  History would suggest they would intervene regardless of this ‘stance’ but that would just add more debt to the already 300% of GDP burden they are trying to get down.  That just makes the inevitable crash all the bigger.  In the short term, if commodities all come off, we may even see a decline in the silver price, presenting more of this wonderful buying opportunity before its ‘monetary’ use outweighs its industrial use.  It’s the beauty of silver…. It wears two hats.  However keep in mind Aussies have another dual dynamic and that is our Aussie dollar.  A decline in commodities would see a decline in the AUD and hence a lift in your metals price.