The risk-on trade sends emerging markets currencies to new lows

Today's China-induced "risk-off" trade sent emerging markets currencies into a sharp decline. As discussed before Turkey and South Africa have been hit the hardest recently and today touched fresh all-time lows.

ZAR = South African rand, TRY = Turkish lira
(chart shows dollar appreciating against these currencies; source: Investing.com) 

But even some of the larger emerging markets nations saw their currencies decline to multi-year lows. Brazil and Russia in particular experienced a significant selloff.

BRL = Brazilian real, RUB = Russia ruble
(chart shows dollar appreciating against these currencies; source: Investing.com) 

The "risk-on" currency correction was not limited to emerging markets, as the Australian dollar touched levels not seen since 2009 (at some point hitting US$ 0.874 - vs. 1.05 last spring). It seems that some of the volatility seen in global markets during the Eurozone crisis has returned.

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Currencies of natural resource exporters under pressure

Some of the largest natural resource exporters with floating exchange rates have seen their currencies come under significant pressure over the past year.

And it wasn't just the US dollar strength that was responsible for commodity producers' currency adjustments - the dollar (DXY index) is up only about 2% over the same period. Some of these countries clearly have other issues that prompted the currency selloff, but as a whole, it is the decline in demand for natural resources (the end of the "commodities super cycle") that precipitated this weakness. Of course much of this adjustment in demand is driven by slower economic expansion in China.

Bloomberg: - China’s factory output and investment growth probably weakened in December, adding to signs the world’s second-largest economy is losing momentum as analysts forecast 2014 expansion at the lowest in 24 years.

Industrial-production gains slowed to a five-month low of 9.8 percent and gross domestic product grew 7.6 percent from a year earlier in the October-December period, based on the median estimates of analysts before data due Jan. 20. Expansion will moderate to 7.4 percent this year as investment slows and overcapacity is squeezed, according to a survey last month.

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Evidence mounts that China had escaped the worst of emerging markets rout

The latest data seem to suggest that China has so far been able to elude the severe economic headwinds faced by other emerging economies. Signs of stability have been around for a few weeks, but the first set of direct evidence came from Markit/HSBC PMI, showing China's manufacturing contraction easing (see Twitter post). The official PMI number (to the extent it can be trusted) confirmed the HSBC's result.

Official China Manufacturing PMI (source: Fung Business Intelligence Centre)

The nation's exports (once again to the extent the official data here can be trusted) unexpectedly picked up last month as well.

Bloomberg: - Overseas shipments rose 7.2 percent from a year earlier, the General Administration of Customs said in Beijing today. That compares with the 5.5 percent median estimate of 46 economists surveyed by Bloomberg News and July’s 5.1 percent gain. Imports rose a less-than-estimated 7 percent from a year earlier, leaving a trade surplus of more than $28 billion.

The Fung Business Intelligence Centre reported improvements in China's logistics index (from 52.4 to 52.9), which tends to be a leading indicator of activity. Here are the details.

Source: Fung Business Intelligence Centre

After a liquidity squeeze forced a sharp selloff in June (see post), the stock market has stabilized for now. The profitability of the banking system has been declining for some time (see Twitter post), but so far we haven't seen any failures as some had predicted. That doesn't mean such an event is off the table - bad assets can be hidden for a long time. But if it were to happen, the government may not let such news see the light of day. Investors seem cautiously optimistic.

Shanghai Stock Exchange Composite Index (source: Bigcharts)

Perhaps the best indicator of China's recent economic stability comes from outside the country. Australian markets are often viewed as a proxy to China, given the two nations' close trade relationship. The Australian dollar, after touching a multi-year low of around 89 US cents a couple of times, is now back around 92. And the Australian stock market has been tremendously resilient lately, outperforming the S&P500 by 6% over the past two months.

blue = S&P/ASX 200, red = S&P500

Putting these facts together paints a picture of the Chinese ecenomy that is not about to "fall out of bed". If this trend can be sustained, it is certainly good news for the global economy. Most importantly this recent stability could provide some cushion to other emerging economies who trade with China - as they grapple with capital outflows driven by the Fed's expected action.

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From our sponsor:

Short Australian dollar is becoming a crowded trade

The Australian dollar remains under pressure, approaching the lows not seen in nearly three years.

AUD/USD (source: Investing.com)

The key fundamental reason of course remains China's ongoing economic slowdown. Other fundamentals include:

1. Recent increases in US interest rates (and the risk of rates going even higher).
2. Weak global commodity prices (see discussion).
3. Weak Brazilian real (see discussion), as Brazil remains one of Australia's key competitors for natural resources exports.
4. Australia's producer prices remain subdued, giving the RBA plenty of room to lower rates to historically low levels (see discussion from October of 2012).

5. As a result, Australia's short-term rates have declined sharply.

Australia's 1-year government bond yield (source: Investing.com)

6. Australian government budget deficit for 2013/14 is now forecast to be AUD 30bn rather than the AUD 18bn predicted earlier.

But fundamentals aside, the short AUD position is becoming a crowded trade, as everyone jumps on the "short Australia as a proxy to China" bandwagon. The Goldman positioning index (based on the CFTC futures data) shows a record buildup in net short speculative positions.

Source: GS

This tells us that this trade, while correct fundamentally, is vulnerable to sharp upside corrections. The unwind of the short AUD positions could get ugly.

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Market not buying RBA's optimism

Australia's central bank left rates on hold yesterday as was generally expected. The RBA continues to be quite hawkish as well as relatively optimistic (perhaps too optimistic) on the nation's economy. Given the "cash rate" is at historical lows at 2.75% (see post from November on the topic), the board wants to leave room for further action should the need arise (there are only so many "bullets" left before you hit zero).

Source: Tradingeconomics

Australia's interbank rates (to the extent any of the quotes are real) seem to be following the RBA rates to new lows as well.

The Guardian: - The Reserve Bank of Australia (RBA) has kept the cash rate unchanged at the record low of 2.75% at its June board meeting, saying that rate cuts in the past 18 months are helping the economy.

The RBA last cut the cash rate by a quarter of a percentage point at its May meeting, after making four cuts in 2012.

In a statement accompanying the decision, RBA governor Glenn Stevens said household spending had been helped by lower interest rates.

"Further effects can be expected over time," Stevens said on Tuesday.

"The pace of borrowing has thus far remained relatively subdued, though recently there have been some signs of increased demand for finance by households.

"The board judged that the easier financial conditions now in place will contribute to a strengthening of growth over time."

That's quite an optimistic view, particularly given some of the headwinds facing Australia's economy after a long period of strong growth.

The Sydney Morning Herald: - Clouds are massing on Australia's economic horizon after new data showed a sharper-than-expected slowdown in GDP growth over the year to March.

The national economy, which is in its 22nd consecutive year of expansion, grew 0.6 per cent in the first quarter of 2013, taking the growth for the year to 2.5 per cent, according to figures from the Australian Bureau of Statistics.

But economists' predictions had forecast gross domestic product (GDP) growth of 0.8 per cent for the March quarter and year-on-year growth of 2.7 per cent.

So far the markets are not buying RBA's optimism. Concerns over the economy combined with a general risk-off sentiment sent the Australian dollar to a multi-year low of 0.95 today.

Source: Investing.com

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From our sponsor:

Australia's turn to enter the currency war?

A major casualty of China's slowdown (discussed here) has been one of its key natural resources supplier, Australia. Many Australians feel misled by all the projections of China's growing demand, believing that China will continue beating its yearly 8% growth projections.

The Australian: - China outperformed for a decade its own government's 8 per cent growth target, which was lowered to 7.5 per cent for last year and this year.

And Australia's budget planners were confident China's economy would keep surpassing the official target.

They forecast that China's economic growth, the core driver for Australian commodity sales and thus of our formerly burgeoning terms of trade, would bottom out at 8.5 per cent last year, rebounding higher this year. The current budget also was based on 2012 growth reaching 6.25 per cent in India and 2.25 per cent in Japan.

But China's growth for last year ended up at 7.8 per cent, India's at 4.5 per cent and Japan's at 2 per cent. The forecasts were thus overestimated by 8.3 per cent, 28.1 per cent and 8.9 per cent respectively.

China is Australia's top export buyer, Japan the second and India the fourth. So these outcomes had a big impact on budgeted receipts.

Last year's budget papers forecast "economic conditions in China to remain solid", and that Australian resource companies, high-end manufacturers, service providers and rural commodity producers would all gain more opportunities "as the Asian Century proceeds", brandishing the government's mantra of the day. They insisted that "China has the capacity to use macro-economic policy to stimulate growth", and that terms of trade would remain "close to their highest sustained levels in 140 years".

Right... So much for the "Asian Century" - at least for now. The deterioration in Australia's fundamentals has been harsh, as exports and new orders plunged in the last few months.

Australian Industry Group: - Reflecting ongoing weakness in the global economy and the high Australian dollar, the manufacturing exports sub-index worsened again in April. The exports sub-index fell 2.9 points to 24.5 (seasonally adjusted) in April, marking the ninth consecutive month of contraction and the lowest reading for the exports sub-index in the history of this series (commencing in 2004) .

Manufacturing PMI Sub-indices (source: Australian Industry Group)

And Australia's overall manufacturing index hit the lowest level since 2009, with the nation's manufacturing sector in full contraction.

Source: DB

The Reserve Bank of Australia has been holding rates steady for much too long, believing in some sort of miracle from China (per government's forecast). What makes their job particularly difficult is the fact that both the US and Japan are conducting unprecedented monetary expansion, thus putting upward pressure on the Australian dollar. And that makes Australian products less competitive in global markets, particularly versus South American competitors (see post).

The Australian: - [Matthew Johnson (UBS)] said any further easing in the US would force the RBA to cut interest rates to stop the [Australian] dollar from being propelled higher. 

Now the RBA has little choice but to ease monetary policy by lowering short term rates. Given the worsening economic fundamentals and most major central banks' highly accommodative policies, the RBA will be forced to abandon its normally hawkish stance. It may be Australia's turn to enter the currency war.

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From our sponsor:

AUD remains vulnerable; 75bp in rate cuts expected next year

There are clearly a number of reasons that "non-commercial" short positions on the Australian dollar have been cut (see discussion) by investors. But the Australian dollar remains vulnerable to the downside - particularly now that the net non-commercial CME position is near record highs. Investment-related portfolios are positioned long.

CME non-commercial net (source: CME)

What many fail to realize is that the Australian government is in a belt-tightening mode as it tries to address its budget shortfall (AUD 2.6bn). The fiscal tightening is expected to be a drag on the economy, pushing the RBA (in spite of its hawkish stance) to cut rates in 2013. Goldman is predicting another 75bp worth of cuts next year, taking the overnight rate to record lows.

GS: - With the fiscal contraction now extending into the FY14 year and coinciding with the ongoing income shock and the transition of the mining investment cycle to being a drag on growth, we believe the rationale for further easing remains in place. We continue to expect 75bp of rate cuts in 2013.

That does not bode well for AUD next year, and investors got a taste of the currency's vulnerability on Friday (in the "risk-off" trade).

Source: Investing.com

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From our sponsor:

What's spooking AUD shorts?

A number of trades who have shorted the Australian dollar due to weakening fundamentals (see post) are capitulating. The net non-commercial positions on the CME reached a new all-time high.

Source: CFTC

And the CFTC data clearly shows that this increase in the net is mostly due to shorts getting out of their positions (rather than from longs adding to positions). What's spooking the shorts? Here are some thoughts:

1. The recent pickup in China's economic activity (see discussion) could cushion weakening Australian economy.

2. Related to that, China's demand for steel has picked up somewhat, as steel and iron ore inventories decline (see discussion). Steel prices in China have firmed up as a result, which in turn lifted iron ore prices. That may provide some support to Australia's mining industry.

Steel Rebar Futures on SHFE

3. The RBA has taken a surprisingly hawkish approach, which reduces the probability of the central bank pushing the overnight rate below 3% (see discussion). In fact the central bank has been critical of its counterparts in the EU, the US, and Japan for excessive monetary expansion (see discussion).

4.  Being short AUD against USD (using an FX forward for example) costs almost 300bp/y of negative carry due to the rate differential between the two currencies. Plus the Fed's actions to dramatically expand the monetary base makes some traders uneasy with being long the USD.

5. Technically AUD is near a resistance level, which if broken, could send AUD higher.

Ironically, this AUD strength is going to keep the Australian economy from significant improvements (and could in fact weaken it further) - at least in the near term. Strong Australian dollar continues to plague Australia's export sector, which competes with nations who have successfully depreciated their currencies on a relative basis (see discussion).

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RBA's remains hawkish after the rate cut (and who renamed the central bank?)

The Reserve Bank of Australia continues to surprise with their hawkish stance. In spite of lowering the benchmark rate to 3%, the RBA made comments suggesting that they are going into a holding pattern for a while. Since the RBA has never gone below 3%, it seems to represent something of a "support level".

Source: Tradingeconomics

The Australian: - "People are speculating we are nearing the end of the easing cycle," said Matthew Johnson, a UBS interest rate strategist.

Australia's economic data stays weak; 75% chance of rate cut

In spite of signs of stabilization in China's output, Australian economy continues to weaken. The Australian Industry Group (AIG) Performance of Manufacturing Index (discussed here) is showing an ongoing contraction.

AIG/PwC: - Manufacturing activity contracted for the ninth consecutive month in November, with the seasonally adjusted Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) recording a level of 43.6 (readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of the decrease). This was a drop of 1.6 points compared to the previous month.

The slump in manufacturing new orders also extended into a ninth month, reflecting weak global demand and a softening Australian economy. The new orders sub-index dropped a further 0.4 points to 43.5 in November.

The only one of the 12 industries showing expansion is Food & Beverages - cheers! The weakest sectors are fabricated metals, chemicals and petroleum, and construction materials.

AIG-PwC Australian Performance of Manufacturing Index

And bad economic news continued to pour in today with the October retail sales - also weaker than expected.

Source: Econoday.com

The Q3 company gross operating profits released today by Australian Bureau of Statistics (ABS) have been in the red for the past 4 quarters.

Company gross operating profits (source: ABS)

As a result, third quarter GDP is expected to be quite soft.

Source: JPMorgan

Ironically Australia's stock market is rallying in response. Why? The expectations are rising that the RBA will now have the ammunition to decrease rates to record lows (see discussion). Another central bank comes to the rescue.

Reuters: - Australian shares gained 0.5 percent on Monday to a five-week high, as investors bet on the Reserve Bank of Australia cutting its policy interest rate this week to boost the economy.

Weaker than expected retail sales data released on Monday supported expectations for a rate cut by the central bank at its policy meeting on Tuesday. Following the data, interbank futures pointed to a 75 percent chance that the bank would ease rates.

A Reuters poll released on Sunday showed 16 of 23 economists expect the RBA to cut ts cash rate by 25 basis points to 3.0 percent, matching record lows seen during the global financial crisis.

A rate cut would help support equities and would fend off economic weakness in the first quarter, CMC Markets chief market strategist Michael McCarthy said.

S&P/ASX 200 (EST, source Bloomberg)

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From our sponsor:

The RBA will lower rates to blunt the impact of slower mining investment

Australian mining investment growth has been tremendous in the past couple of years, with current financial year inflow of some 7% of the GDP. Companies like Fortescue have tapped the hot US junk bond market to pump cash into mining operations. At the same time non-mining investment has been declining, making Australia's economy more vulnerable to a downturn in demand for raw materials.

Source: Merrill Lynch

But the party is about to end. In spite of China's recent mild economic rebound (see discussion), infrastructure spending is not going to generate the demand for iron ore and coal that it used to. Mining firms need to shift their focus. What makes it particularly painful for Australian mines however is their high costs relative to the competition. Mining labor costs have grown at over 4% per year since 2009. And as other nations with large mining sectors have seen their currencies devalued, the Australian dollar has remained relatively strong - making Australian product more expensive.

Source: Merrill Lynch

With investment in Australia's mining sector slowing, the nation will need to transition to other sources of growth. To help with the transition, the RBA is likely to lower rates again in December.

Merrill Lynch (Australia): - ... in our view the case for further easing isn't substantially data dependent. Rather, it is based on the need to nurture alternative sources of economic growth as the mining investment boom approaches its peak, and a recognition that – in the face of the substantial ‘headwinds’ confronting those alternative sources of growth (such as the persistent strength of the A$, depressed business confidence, and ongoing fiscal consolidation) – further support from monetary policy is likely to be needed in order to ensure that this ‘baton change’ in the drivers of growth happens smoothly.

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Australia's fundamentals continue to weaken; AUD should follow

Australian business surveys continue to show deteriorating sentiment across the board. Earlier we saw clear signs of flagging labor demand (see discussion). The recent NAB (National Australia Bank) survey showed that Australian businesses are becoming quite pessimistic.

The Australian: - An index of business conditions published by National Australia Bank fell two points to minus 5 points in October from September, the worst outcome since May 2009 when world financial markets were in crisis. Business confidence fell one point to minus 1 point.
...
A measure of capital spending fell to its lowest level since August 2009, underscoring a slowdown in business investment, especially in the once-booming mining sector, NAB said.

"The Australian economy appears to have stumbled into the fourth quarter," said Alan Oster, chief economist at NAB.

Source: DB

The components of the business conditions trend survey look weak across the board (sales, profitability, employment).

NAB business conditions and components (source: DB)

Another survey from AICD seems to support this trend.

The Sydney Morning Herald: - Australian directors are more pessimistic about business conditions now than they were two years ago, and still believe regulation and personal liability for directors is excessive.

The biggest challenges for businesses are national productivity, a lack of government investment in infrastructure – primarily roads, telecommunications, water supply and ports – and the high Australian dollar.

And the biggest hurdles to fixing these problems are general economic conditions, workplace laws, excessive regulation and skills shortages, according to a survey of 540 directors by the Australian Institute of Company Directors (AICD). Overall, the director sentiment index now sits at just 56.3 points, compared to 93.6 points at the start of 2011. A score of 100 is "neutral", while 200 would be "optimistic".

The directors' outlook for the Australian economy is dire, with 56 expecting growth over the next year to be weak or very weak. They expect the value of the Australian dollar, the official cash rate and wages growth to decline while unemployment rises.

That's why the decision by the RBA (Australia's central bank) to hold the overnight rate steady at their previous meeting seemed strange. Part of that decision was the central banks' surprise reduction in rates in October (the meeting before last), which likely put them into a wait-and-see mode. The combination of the latest rate decision and the Fed's monetary expansion has provided recent strength to the Australian dollar.

Source: Forexpros

The AUD's strength works against Australia's export oriented corporate sector, further weakening sentiment and investment. In the long run, the RBA will have to lower rates further, given the weakening fundamentals, ultimately taking rates to record low levels. And with that we should see a decline in the Australian dollar.

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Some signs of weakness in Australia's labor markets

Today's comments from Westpac, Australia's second largest bank are a good indication that 2013 will be a challenging year for the nation's economy. In spite of strong results, the bank struck a cautious tone.

MarketWatch: - Westpac Banking Corp.'s Chief Executive Gail Kelly Monday warned of "challenging" times ahead for the Australian economy, even as the bank reported an expectation-beating rise in cash profits for fiscal 2012.

To be sure, Australian economic activity remains the envy of most developed nations, as employment (5.4% unemployment rate) and retail sales remain strong. But signs of stress are developing. The economy is heavily dependent on mining (and therefore global macro fundamentals), prompting many analysts to downgrade Australia's corporate earnings growth (see story from BI). And some leading indicators on the labor markets are pointing to potential weakness going forward as well. In particular the number of job ads in the newspapers and online are continuing to decline.

Australia's job ads (source: GS Global ECS Australia Research)

With inflation under control, the RBA is fully expected to cut rates (to be announced shortly), with the short-term rates ultimately moving into record low territory (see discussion).

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Australian overnight rate expected to hit the lowest level in the RBA's history

Australian economy continues to show signs of weakness. To be sure conditions are far better than in most other developed economies, but the nation is not immune from the global manufacturing slowdown - particularly in China.

The latest manufacturing surveys show a marked contraction over the past few months.

Australian Industry Group Australian Performance of Manufacturing Index
(Australian PMI. source: Markit)

A very similar picture is developing in the Australian services sector.

Australian Industry Group/ Commonwealth Bank Australian Performance of Services Index
(Australian PSI, source: Markit)

The RBA (the central bank) has been trying to stay "ahead of the curve" by lowering interest rates. The overnight rates are approaching historical lows of 3% reached in 2009.

RBA overnight rate (Bloomberg)

The market expects Australian short-term rates to continue moving lower. The OIS curve (overnight index swap) which predicts where the overnight rates will be in the future is highly inverted. The curve implies an 87% probability of a 25bp rate cut in November.

Bloomberg/BW: - Interest-rate swaps data compiled by Bloomberg show traders see an 87 percent chance the RBA will lower its overnight cash rate target by 25 basis points to 3 percent on Nov. 6, following a quarter-percentage point reduction on Oct. 2. That compares with an 82 percent probability on Oct. 5. If policy makers deliver a rate cut next month, that would be the first back-to-back reduction since June.

Below are the market-implied probability curves for the overnight rate over time, as we move into record low territory (the RBA rates have never been below 3%).

Bloomberg: - Swaps data compiled by Bloomberg show traders see an 81 percent chance the RBA will reduce its key rate from 3.25 percent to 2.75 percent by February, the least in the central bank’s 53-year history.

In spite of the lowest rates in its history, Australian short-term rates are still expected to stay higher than those in the US, the UK, the Eurozone, and Japan.

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Spike in Australian trade deficit points to AUD's vulnerability

In another sign of the Australian dollar's continued susceptibility to a correction (discussed here), the latest economic numbers from down under show a sharply rising trade deficit. The only factor that is keeping AUD from further declines is the expansionary monetary policy in the US.

WSJ: - Data showing that Australia's trade deficit unexpectedly blew out in August sent the Australian dollar to a four-week low Wednesday, with further losses likely as traders ramp up bets on further interest rate cuts.

A slump in prices paid for key commodities, such as iron ore and coal, meant Australia returned a A$2.03 billion deficit in August, its worst performance since March 2008 and much wider than the A$685 million that economists had expected.
...
"The Australian dollar has found very few friends in the currency market over the last few days, except for some bargain hunters thinking the AUD's quick fall from grace has made it a good value proposition at the current levels," said Tim Waterer, a dealer at CMC Markets.

What's particularly troubling is that the forecasters completely missed the size of this deficit number - as shown in the chart below. This may be pointing to greater declines in Australia's trade with China than economists have assumed.

Australia Trade Balance Goods & Services (Bloomberg)

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The Australian dollar is still vulnerable to the downside

The Australian dollar has declined considerably from the recent highs (touching a 6-week low). But given the China slowdown and weakening domestic fundamentals in Australia, it may have room to fall further. Clearly relative to the rest of the developed markets nations, Australian economy is in decent shape, but is it good enough to justify the current AUD levels (1.0247)? Here are some reasons that show risks to the downside for the Australian currency.

1. Australia's sales for have been lackluster recently.

Source: GS

2. Construction seems to be slowing with building approvals down 11% YoY and new home sales down 5.6% for the month.

3. Exports have come under pressure with export growth coming in lower than expected last month.

4. Business and consumer credit growth has weakened somewhat as well.

5. There is also an expectation that the RBA (the central bank) will lower rates this year - which is not great for the currency.

6. The most telling sign of potential further declines for AUD however is the following chart that compares AUD with copper prices. Given Australia's commodity driven boom of recent years, this divergence is quite telling.

AUD vs. copper (Bloomberg)

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AUD below parity points to China-Australia link

China's one-year SHIBOR swap, an instrument that works just like the LIBOR based USD rate swap, provides a window into near term market expectations of rates in that country. And these expectations have adjusted down sharply in the past few days, revisiting the December lows.

1-year SHIBOR swap rate

After a string of weak economic numbers from China, PBoC cut the bank reserve ratio. It is fully expected that the interest rate will be cut as well (as the SHIBOR swap rate shows), but that requires authorization from the central government and takes time. For now PBoC will keep cutting the reserve ratio - possibly quite aggressively.

But there is something familiar about this SHIBOR swap rate chart above. It happens to look similar to the chart below of AUD/USD exchange rate - which just broke parity. And that's not a coincidence.

AUD/USD FX rate

The currency markets are concerned about a material decline in investment growth in China. The resource focused Australia is particularly vulnerable to China's fixed asset investment trends.

The Australian: - The lowest investment growth in China in a decade, reported on Friday, along with other data issued last week showing the weakest industrial production, retail sales and trade growth for more than a year have forcefully brought the Chinese slowdown to the market's attention.

China Fixed Assets Investment (Excluding Rural Households) Cumulative YoY

Some have been refusing to believe that fixed investment growth in China will stall, although this has been expected by a number of economists (see this post on forecast from CS and one from Capital Economics). It was hard to imagine that the good times may end - particularly in Australia, whose economy benefited tremendously from this growth. But now Australians can wake up to read the following the the paper:

The Australian: - " ...China's share of global demand for such commodities as iron, cement and copper is completely disproportionate to its size and almost wholly a function of its very high growth in investment. As investment growth drops sharply, as it must, global demand for non-food commodities will plummet."

This prediction from Peking University's Michael Pettis would so transform the economic outlook for Australia, were it to come to pass, that it bears some reflection.

So what's the solution? China will obviously continue to try stimulating the economy (including lowering rates), but it's not clear just how much effect that would have on investment growth. Instead Australians are suggesting that China open up to foreign investments to allow Australian firms to potentially facilitate more commodity imports into China.

The Australian (different article from the one above): - As fears grow about the sharpness of the slowdown in the Chinese economy, Foreign Minister Bob Carr is pushing for the lifting of restrictions on Australian companies investing in China as he meets with senior leaders, including Premier-elect Li Keqiang, in Beijing this week.

Good effort on the part of Bob Carr, but is unlikely to yield significant results.

To be sure, relative to the rest of the world Australia's economy is still booming. And as AUD weakens, it may in fact provide further stimulus to the nation's near-term growth. The long-term outlook however has now become far less certain.

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