US China Relations Leave Canada Australia Adrift

Weakness in equities spread to Europe yesterday, and into Asia this morning. People are concerned about the recent rally looking tired as we have been forecasting, and that China is continuing to slow.

China commercial bond rates were reduced 10 points across the one and five year today. A little less than the market was anticipating. This shows there will be enough support to ensure a soft landing in the current growth pullback from the out of lockdowns mini-boom, though perhaps not enough will be done to trigger any kind of fresh growth boom period.

It must be said however, that China’s slow-down is likely to stabilise very soon. It was always our forecast that there would not be a return to previous rates of growth, but instead a significantly lower sustained growth path going forward. The 2% to 5% GDP range has remained our consistent forecast as a a guide for what people should be expecting from China over the next one to three decades.

This ensures secure demand for commodities from the rest of the world. Especially supporting Brazil, Canada and Australia. Though Brazil is likely to continue to increase its share of that demand, and Russia too. Canada and Australia have generated significant ill-will within China of late, and the demand of one fifth of the world’s population will continue to look away from these two commodity exporters. This has been made clear by Chinese officials.

Secretary of State Blinken’s visit was cordial enough for him to be granted a brief meeting with President Xi. There is no doubt China and the USA need each other, and their relationship to be back on a more secure footing for mutually beneficial commercial reasons. As well as reducing the risk of actual conflict.

Neither Canada nor Australia enjoy quite the same level of mutual dependence with China as the USA. China’s exports to these two nations is far less than for the US. This is why it can prove problematic for Canada and Australia to join the aggressive style of rhetoric against China, that the USA may more easily be able to unwind.

Brazil and Russia are far better positioned diplomatically and likely to increasingly replace Canadian and Australian exports. While the Australian and Canadian dollars have enjoyed significant strength recently on the back of the China re-opening theme. This support for these smaller dollars may be reduced going forward in more ways than one.

The United States will enjoy a far quicker repair of relations. It would not be the first time for instance that the USA has picked up previously Australian commodity contracts to China in such circumstances.

The US dollar itself, is very likely in a long term decline, but for the moment both equity markets and the greenback could enjoy some strength. as a result of what seems to have been a far more reasonable diplomatic exchange during Blinken’s visit.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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