This news is ominous for Aussie miners and their supporting industries. And they know it. Already, news of cancelled investment projects are filtering through. A mining industry that stops building new mines is, well, toast.
The latest development is that investors, including companies, have been pulling their money out of China.
The Wall Street Journal has figured out what that’s doing to the Chinese economy:
‘Massive inflows of capital were a key factor behind China’s runaway bank lending, rising asset prices and yuan appreciation. Now, money is flowing in the other direction, contributing to falling prices for everything from real estate to equities and China’s currency.’
But there is a bigger effect. When investors’ money was flowing in, it forced the Chinese to have loose monetary policy to keep their exchange rate peg.
Now that the money is flowing out, China’s monetary policy will, by default, tighten. That means less demand for Australian resources. The faster half of the Australian two speed economy will become the caboose. Resource stocks will tank.
If we’re right, spare a moment of sympathy for Calvin Sheng, who ‘recently shelled out 2.5 million yuan for an apartment in Melbourne, Australia. “I just went to the bank, bought the Australian dollars I needed for the down payment and transferred the funds to Australia,” said Mr. Sheng. “I am going there to study, and you can see it as a balanced investment, in case there is any economic downturn risk in China.”‘ Calvin is trying to hedge a Chinese slowdown by buying a house in Melbourne. Oh boy.
It’s likely the Chinese will revalue their currency downwards in an attempt to stimulate growth. That move would be another salvo fired in the ongoing currency wars. Sound Money. Sound Investments editor Greg Canavan recently hosted the world’s top authority on the subject.
James Rickards told a Sydney audience about his views on what happens next for global currencies, including the Australian dollar.
Nick Hubble
Editor, Money Morning
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